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Retail Finance round-up - 21 January 2016

Retail Finance round-up - 21 January 2016
  • United Kingdom
  • Financial services - Retail finance


There has been a lot of activity from the regulator this week with the PRA publishing a consultation paper on buy-outs of variable remuneration and an occasional consultation paper on proposals to delete rules and guidance in the PRA handbook. The FCA is consulting on minor changes to the implementation of the Mortgage Credit Directive and publishing a Memorandum of Understanding with the Competition and Markets Authority on the use of concurrent consumer protection powers.

The FCA has also been busy updating its website with new pages on applications for permissions, forms relating to improving individual accountability, debt management plans and banking.

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PRA publishes consultation paper on buy-outs of variable remuneration (CP2/16)

On 13 January 2016, the Prudential Regulation Authority (PRA) published a consultation paper on buy-outs of variable remuneration – CP2/16.

The Bank of England has previously sought views on a number of options for addressing the issue of buy-outs, in which a firm compensates a new employee for any unpaid remuneration that is cancelled when they leave their previous firm. This has the potential to undermine the effectiveness of the current remuneration rules, as the employee could evade accountability for their actions.

The proposed changes will amend the Remuneration Part of the PRA Rulebook and will apply to all material risk takers at PRA regulated banks, building societies and designated investment firms. These changes seek to ensure greater alignment between risk and reward, discourage excessive risk-taking and encourage more effective risk management.

The PRA is proposing a model which allows for the possibility of malus (the withholding or reduction of unpaid awards) and clawback (the recouping of paid awards) to be applied to bought-out awards, based on a determination by the old employer.

The deadline for responses to the consultation is 13 April 2016.

FCA consults on minor changes to its rules implementing the MCD

The FCA has published a consultation paper (CP16/2) on minor changes to its rules and guidance in the light of the Mortgage Credit Directive (2014/17/EU) (MCD).

In the consultation paper, the FCA explains that the government intends to lay down draft legislation that will make amendments to legislation including the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544).

In particular, these amendments clarify that where a credit agreement or consumer hire agreement was regulated under the Consumer Credit Act (CCA) before 1 April 2014, it will remain regulated regardless of whether legislative amendments have introduced exemptions for new agreements, and consumers will continue to have the same rights and protections under the CCA and FCA’s consumer credit regime in relation to those agreements. In addition, the proposals ensure that housing associations’ back book of second charge mortgages (unlike other back book second charge mortgages) will not transfer into the new mortgages regime, so will not be subject to MCD-related provisions.

If the legislation is made and comes into force as anticipated, the FCA will need to make changes to its Perimeter Guidance Manual (PERG) and the Handbook Glossary. It is consulting on these changes now, so they can be made before 21 March 2016 when the MCD comes into force. However, it may need to review its proposals once the relevant legislative amendments have been made.

The FCA also proposes some minor changes to its Mortgage and Home Finance: Conduct of Business Sourcebook (MCOB) to implement the MCD. It proposes amendments to MCOB 4.4A on initial disclosure to align more directly with the MCD and also to the MCOB transitional provisions for the ‘topped up’ Key Facts Illustration to ensure the inclusion of the monthly payments figure should interest rates rise to a 20-year high.

The closing date for responses is 15 February 2016. The FCA intends to publish feedback, together with final rules, in a policy statement in the March 2016 Handbook Notice.

Memorandum of Understanding between FCA and CMA on the use of concurrent consumer protection powers

The Competition and Markets Authority (CMA) has recently published a Memorandum of Understanding (MoU) that it has entered into with the FCA on the use of concurrent powers under consumer protection legislation. This MoU replaces the previous MoU entered between the two authorities in June 2014.

The authorities aim to cooperate proactively in matters of common interest and prevent the duplication of work. The MoU sets out the role of each authority and explains their intentions to work together to make financial markets work well for consumers. It also includes working arrangements between the CMA and the FCA in relation to their concurrent powers to enforce the following consumer protection legislation in the UK financial sector:

  • Consumer Rights Act 2015 and the Unfair Terms in Consumer Contracts Regulations 1999.
  • Legislation enforceable under Part 8 of the Enterprise Act 2002 (including the Consumer Protection from Unfair Trading Regulations 2008).

FCA applications – how it assesses firms applying for full permissions

The FCA has published guidance on the steps it takes when assessing applications from firms applying for full permissions.

The process is principally split into stages as follows:

  • Review stage
    • Assessment of whether the application is complete.
    • Review of the firm’s structure, including its resources and management systems, with focus on key people such as controllers and approved persons.
    • Cross-check of information disclosed against various databases and information held by other regulatory agencies.
    • Assessment of the firm’s business model and compliance with the FCA’s Handbook and Consumer Credit Sourcebook.
    • Assessment of how the firm engages with its customers.
    • If necessary, a visit to the firm.
  • The FCA’s authorisation team recommends a decision to grant or refuse the application.
  • The application is referred to the FCA’s Regulatory Transaction Committee for a decision.
  • If the decision is to authorise the firm, it receives written confirmation and a “Scope of Permission” notice, and both the Financial Services Register and Consumer Credit Permissions Register are updated to show that the firm is “fully authorised”.

If the decision is to refuse the application, a Warning Notice is sent to the firm. The firm can contest the decision by making oral/written representations to the Regulatory Decisions Committee (RDC). The FCA will issue a Decision Notice if the firm does not make any representations, or the RDC considers that the application should be refused. Firms may then refer matters to the Upper Tribunal.

PRA publishes occasional consultation paper CP3/16

The PRA has published an occasional consultation paper (CP3/16), which sets out its proposals to delete rules and guidance from the PRA Handbook that have been replaced, or are in the process of being replaced, by rules in the PRA Rulebook or supervisory statements.

The PRA proposes to make the deletions listed below with effect from 7 March 2016. They do not relate to a change in PRA policy. The consultation closes on 12 February 2016.

The proposals relate to deletions in:

  • Schedule 5A to the Supervision manual (SUP). This provides guidance on rules in SUP, contravention of which by an authorised person may be actionable under section 138D of the Financial Services and Markets Act 2000.
  • Chapters 1, 4-9 and 21 of the Senior Management Arrangements, Systems and Controls sourcebook (SYSC). SYSC 4-9 contain a range of rules including those on general organisation requirements, personnel, compliance and audit, risk controls, outsourcing and record-keeping. SYSC 21 contains additional material on risk controls. SYSC 1 contains the application provisions for SYSC, which will be redundant if the remaining parts of SYSC are deleted as proposed.
  • SUP 16. This contains various annexes that have been superseded by rules in the PRA Rulebook or supervisory statements. Table A in CP3/16 lists the remaining annexes in SUP 16 that have yet to be proposed for deletion, the intended location in the PRA Rulebook or supervisory statement, and the consultation paper or policy statement that has proposed or replaced them.
  • Schedules 1-3 and 5 of the Fees manual (FEES). These schedules were created in 2009 as ‘to follow’ guidance with the intention of adding substantive content at a later date. However, they have remained unchanged. The PRA proposes to delete these provisions as the rest of the FEES module will be deleted.

FCA publishes new webpage on forms relating to improving individual accountability

The FCA has published a new webpage that provides information on the new forms for banking sector firms that are subject to the Senior Managers Regime (SMR).

As part of the implementation of the new SMR, a new set of forms for individuals in relevant firms will be introduced. The forms and accompanying guidance notes for the new regime are set out in the Table of Forms detailed in the webpage.

The FCA reminds firms that they have until 8 February 2016 to submit their grandfathering notification.

FCA releases 2014 and 2015 evaluations of FCA board effectiveness

The FCA has updated its transparency webpage to include links to the following external reviews of the effectiveness of its board:

FCA publishes new webpages on debt management plans

The FCA reviewed the debt management market in 2015 and found a variety of issues that caused concern. It is now looking to focus its resources on this sector as it is mindful it includes some of the most vulnerable consumers.

The FCA has recently published a new webpage on its website relating to debt management plans. The regulator is conscious that a number of debt management firms are leaving this sector and as such this may affect consumers with debt management plans. All debt management firms have been contacted and reminded that they must contact the FCA if they are planning on selling their customers’ details or contracts to another debt management firm.

In another new webpage, consumers who need advice on the debt management plans have been signposted to the Money Advice Service.

FCA publishes new webpage on Banking

The FCA has published a new webpage on Banking that contains links to:

  • Consumer’s banking rights in relation to common problems.
  • Packaged bank accounts, including steps to consider whether a packaged account is suitable.
  • Details regarding interest rate hedging products (IRHP) and the FCA’s involvement with various banks in relation to IRHP (such as the review of IRHP sales, and available redress).
  • Consumer’s rights when making payments in euros within the Single European Payments Area (SEPA).

There are also external links to sources such as the Money Advice Service, Financial Ombudsman Service and the Financial Services Compensation Scheme.

FLA publishes latest figures for consumer credit industry

Recent figures published by the Finance & Leasing Association (FLA) show that:

  • Asset finance new business (primarily leasing and hire purchase) grew by 10% in November 2015, compared with the same month in the previous year.
  • Consumer finance new business grew 17% in November 2015, compared with the same month in the previous year. Retail store and online credit grew by 10% compared with November 2014, while credit card and personal loan new business together increased by 14%. Second charge mortgage new business was up 31% by value and 13% by volume over the same period.
  • Point-of-sale consumer new car finance market saw new business growth of 17% by volume and 24% by value in November 2015, compared with the same month in the previous year. The point-of-sale consumer used car finance market also saw strong growth in November, with new business up 18% by volume and 22% by value.

CML publishes lending statistics for November

Recent lending statistics published by the Council of Mortgage Lenders (CML) show that:

  • Home-owner house purchase lending totalled £10.7 billion in November, down 9% on October but up 18% on November 2014.
  • First time buyers borrowed £4.2 billion for home-owner purchase, down 9% on October but up 14% on November last year. This totalled 27,900 loans, down 8% month-on-month but up 10% year-on-year.
  • Home movers took out 32,300 loans, down 10% from October and up 9% compared to November 2014. In total, this was £6.5 billion borrowed, down 10% on October but up 20% year-on-year.
  • Home-owner remortgage activity was down by 9% by volume and 14% by value compared to October. Compared to November 2014, remortgage lending was up 24% by volume and 36% by value.
  • Gross buy-to-let saw month-on-month decreases, down 6% by volume and 8% by value, but the substantial growth year-on-year continued.

Bank of England publishes Credit Conditions Review 2015 Q4

Drawing on the results of its Bank Liabilities Survey and Credit Conditions Survey, the Bank of England has published its Credit Conditions Review 2015 Q4. This comments on the latest developments in bank funding and household and corporate transactions for the last quarter. Q4 highlights in the Consumer Credit sector include:

Secured lending to UK households

  • Mortgage approvals for house purchase remained around 70,000 per month but secured lending continued to pick up.
  • Growth in stock reached 3.5% on a 3 month annualised basis in November, with annual growth at 2.5% (the highest growth rates have been since 2008 and 2009).
  • Gross secured lending was lower than the average pre-crisis.
  • Uncertainty surrounding the outlook for the Buy-To-Let (BTL) sector stemming from factors such as stamp duty. 2016 BTL activity is expected to be broadly flat.
  • A pickup in secured lending due to the increased availability of secured credit on the market.
  • An increase in demand for BTL lending as well as an increase in demand for remortgaging.

Consumer Credit

  • Annual rate of growth in the stock of consumer credit (excluding student loans) picked up to 8.3% in November, with personal loans and overdrafts accounting for the majority of overall net flow (mostly for car finance).
  • Rates on personal loans remain close to historically low levels despite having increased slightly in the quarter.
  • Credit card rates remain largely unchanged but competition remains centred on the interest free period on balance transfers.
  • Availability of unsecured credit (primarily personal loans and overdrafts) increased.

Loan Performance

  • Mortgage arrears and possessions rates were lower in Q3 relative to Q2, with write-offs remaining very low.
  • Consumer credit write-offs were down in the year, remaining at historically low levels.
  • Rate of personal insolvency remained broadly flat.

FSCS publishes its Plan and Budget: 2016/17

The Financial Services Compensation Scheme (FSCS) has published its Plan and Budget: 2016/17.

For the second year in succession FSCS has budgeted for management expenses to be lower than the previous year. Operating costs are falling by nearly £2 million for the second year. The indicative 2016/17 annual levy amounts to £363 million. This compares to the £319 million final levy raised in 2015/16. The increases are in the deposits and general insurance provision and intermediation sectors. The FSCS will review and confirm the final levies for each class in April.

One of FSCS’s key imperatives is modernising its services to consumers and upgrading the claims handling system is central to this. Significant steps have already been taken to speed up payments to savers in failed banks, building societies or credit unions. An online portal, where customers can submit claims, is currently being tested. FSCS believes this system will provide a more efficient service that enhances the customer experience.