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Retail Finance round-up - 4 February 2016

Retail Finance round-up - 4 February 2016
  • United Kingdom
  • Financial services - Retail finance


Welcome to our retail finance briefing which is designed to keep you up to date with the latest legal, regulatory and industry developments affecting the retail finance sector.

One of the key developments this week is the announcement from the FCA that it intends to consult on the pros and cons of capturing individuals with overall responsibility for a regulated firm’s legal function within the new Senior Managers Regime. The announcement comes shortly before the date on which the regime is due to commence (7 March 2016) and could have the effect of bringing lawyers at regulated firms within the scope of the new regime.

The regulator has also been the subject of some attention this week. There was a House of Commons debate on the FCA, tabled by a backbencher on 1 February and the Treasury Committee has issued a number of letters to the FCA on recommendations to prevent IT failings and a letter in response to the appointment of Andrew Bailey as new Chief Executive of the FCA.

Regulatory updates

Legislation and case law

Industry news

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House of Commons debate on FCA's fitness for purpose

On 1 February 2016 the House of Commons held a debate on whether the FCA is fit for purpose in its current form. Mr Guto Bebb who led the debate, referred to the decision by the FCA to cancel its review into banking culture, amongst other issues, to seek to demonstrate that the FCA is not fit for purpose.   Whilst allocated only 15 minutes, the debate lasted over two hours. The debate did not conclude before close of business in the House of Commons so no vote was taken on the motion. The debate ends with the comment by Mr Bebb, noting that, of the 13 backbenchers who spoke in the debate, only two were supportive of how the FCA is operating. He goes onto suggest that he hopes the new Chief Executive will be a “fresh brush within the FCA”, but that he has a lot of work to do to rebuild confidence in the regulator.

FCA publishes statement on legal function under the Senior Managers Regime

The FCA has issued a statement on individuals with overall responsibility for the legal function within the Senior Managers regime. This follows the publication of its final rules on the Senior Manager regime in the Consultation Paper CP15/22.

The FCA has realised that there is industry uncertainty as to whether an individual in charge of a firm’s legal function requires approval under the Senior Managers regime. The FCA therefore plans to consult in this area and also makes clear that firms that have sought to make decisions in good faith about whether or not approval is needed for this function, on the basis of its published rules and other communications, should not need to change their approach in the interim.

For further information on this development, see our briefing: FCA Update - The Legal Function under the Senior Managers Regime.

PRA reminds firms of deadline to submit their grandfathering forms

With the deadline for submitting Form K grandfathering notifications fast approaching, the Prudential Regulation Authority (PRA) has issued a reminder to firms to submit their forms by 8 February 2016.

The PRA has found that some firms are having to resubmit their application where they have not allocated the prescribed responsibilities and/or mandatory functions and encourages firms to check their notification thoroughly before submitting. The PRA will begin contacting firms this week (week commencing 1 February) to check on progress, and is encouraging firms to contact them with any issues which may impact upon the firm’s ability to make a submission.

FCA publishes advice to consumers on self-certified mortgages

The FCA has released advice to consumers following concerns about an overseas firm offering self-certified mortgages to the UK from abroad and relying on the European Electronic Commerce Directive (ECD).   This Directive falls outside the UK’s mortgage regime protections contained in the Mortgage Credit Directive (MCD).

Under the MCD, all firms offering mortgages in the UK will be required to conduct a thorough affordability assessment based on information verified by the lender.

Any customer who takes out a mortgage outside of the UK under the ECD, will lose important consumer protections, such as the right to refer complaints to FOS and the right to be treated fairly when facing payment difficulties.

Among other things, the FCA recommends that before making any decisions, consumers should find an FCA regulated mortgage adviser to advise on the mortgage products offered from lenders in the UK.

CMA expects to extend retail banking market investigation

The Competition and Markets Authority (CMA) has published a press release confirming that it expects to extend the timetable for its investigation into the retail banking market. The CMA will decide on the extension and its length by early March 2016, when it will set out the timetable for publication of the final report and key milestones, including the provisional decision on remedies.

Additionally, a working paper on the bank levy and corporation tax surcharge will be published by the end of February, with an addendum to its provisional findings on capital requirements following shortly after. The provisional findings identified a number of competition problems in both personal current account and small and medium-sized enterprise banking, and so the extension is said to be necessary to allow more time for analysis and consultation.

FCA publishes Handbook Notice 29

The FCA has published its Handbook Notice 29.  This Notice provides information on legislative changes to the FCA Handbook in the instruments listed below:

  • Individual Accountability (Extension of Scope) and Whistleblowing (Amendment) Instrument 2016.
  • Individual Accountability (Swiss General Insurers) Instrument 2016.
  • UCITS V Directive Instrument 2016.
  • Credit Unions Sourcebook (Amendment No 8) Instrument 2016.
  • Listing Rules and Disclosure and Transparency Rules (Miscellaneous Amendments) Instrument 2016.
  • Individual Accountability (Regulatory References) (Interim Requirements) Instrument 2016.

Of particular interest is the instrument on regulatory references.  This instrument makes final rules and guidance to implement an interim referencing requirement for the Approved Persons and Senior Managers regimes.  These rules will:

  • require relevant authorised firms (banks, building societies, credit unions and PRA investment firms) to give a reference when another firm wants to appoint someone to a pre-approved role.
  • confirm that firms that are not relevant authorised persons are obliged to give a reference when a relevant authorised person wishes to appoint someone to a preapproved role under the Senior Managers regime.

This is an interim position in advance of the final referencing regime being implemented post-commencement of the Senior Managers regime.  This instrument comes into force on 7 March 2016.  For further information on the regulatory references regime, see our article What's in the pipeline for employment and financial services in 2016?

Another item of interest is the consequential amendments to the whistleblowing rules in SYSC as a result of the final rules on foreign branches.  The changes confirm that the whistleblowing rules are not applied to foreign branches.  Part of this instrument comes into force on 7 March 2016 and the remainder on 7 September 2016. For further information on the whistleblowing regime, see our article New whistleblowing rules for the financial services sector.

Treasury Committee letters to PRA and FCA on recommendations to prevent IT failings

Following recent IT failures at UK banks, the Treasury Committee has published letters to the PRA and FCA.  These letters state that IT risks should be accorded the same status as credit, financial and conduct risk, on the grounds that they are an equally serious threat to consumers and overall financial stability.  He calls for:

  • Greater IT experience in the banks at board levels.
  • Greater resources to be devoted to modernising, managing and securing banks’ IT infrastructures.  The Treasury suggests systems should be simplified to a degree that makes them easier to manage.
  • Legal, regulatory, structural and cultural changes to the way that banks manage their cyber-security risks.  In particular, the Treasury calls for formation of a group, presumably composed of representatives of the PRA, FCA, other government bodies and external auditors, with the primary task of ensuring banks develop more resilient IT systems.  This group should make regular reports to the Chancellor and to Parliament.  The Treasury suggests that the PRA may be best suited to lead this group.

FCA publishes responses to Freedom of Information Requests

 On 1 February 2016, the FCA published its latest responses to requests under the Freedom of Information 2000 Act.  Items of interest include:

  • Information on the number of investigations opened in the past two years as a result of failures to comply with confirmations made in an attestation by the firm.  The FCA confirmed that for the financial years 2014/14 and 2014/15 there were no such investigations.  There was however one responsive investigation opened in the financial year 2012/13.  This investigation did not result in enforcement action.
  • Information on national marketing campaigns undertaken in the last 5 years by the FCA and the cost of these campaigns.
  • Information on the number of mystery shopping exercises the FCA has undertaken in the last two years.  The FCA confirmed there were three mystery shopping exercises carried out in these years.  These were in the mortgages, investment and retail banking areas.

New public disclosure of ultimate owners and controllers of UK companies and LLPs

From 6 April 2016, a new regime for the disclosure of people with significant control over UK companies and LLPs comes into force.  Most UK companies and LLPs will be required to obtain information on their beneficial owners and controllers (referred to as people with significant control) and hold and maintain that information in a new register, known as the “PSC register.”

Broadly speaking, an individual with significant control will meet at least one of the following five conditions:

  • Has directly or indirectly, more than 25% of the shares.
  • Has directly, or indirectly, more than 25% of the voting rights in the company.
  • Has the right, directly or indirectly, to appoint or remove a majority of the company’s directors.
  • Has the right to exercise, or actually exercises, ‘significant influence or control’ over the company.
  • Has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm, where the trustees of that trust or members of that firm themselves meet one of the specified conditions above or would do if they were individuals.

The PSC register will include information on an individual’s name, date of birth, nationality, address and detail of their interest in the company.  The PSC register will be publicly accessible, both at the company’s registered office and (save for residential addresses) at Companies House.  Firms will be required to maintain a PSC register from 6 April 2016, but the requirement to file the PSC register at Companies House will apply from 30 June 2016.

The new regime is intended to increase transparency regarding those who own and control UK companies, with a view to help combat tax evasion, money laundering and terrorist financing.  The EU has also introduced similar measures in the Fourth Money Laundering Directive which must be implemented by June 2017.

Government to consult on transposition of the Fourth Anti-Money Laundering Directive by early Spring 2016

The Fourth Anti-Money Laundering Directive has been agreed and was formally adopted in June 2015. Member States now have until June 2017 to transpose its requirements into national law.

The Government plans to publish a consultation on transposition of the Directive by early Spring, which will run for a full 12 weeks.  The Government will consult on areas where the Directive gives it options or discretion on how to transpose its provisions, as well as areas where it can improve the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) regime.

Update on the Bank of England and Financial Services Bill

The House of Commons has released two briefing papers on the Bank of England and Financial Services Bill.  These papers highlight the progress of the Bill through the House of Lords and into the House of Commons. Particular attention was given to the abolition of the Oversight Committee, the extent to which the National Audit Office would be allowed to scrutinise the Bank of England’s work and the abolition of the reverse burden of proof within the Senior Managers and Certification Regime.

The papers also highlight the main measures contained in the Bill.  In summary the Bill will make changes to the governance and accountability of the Bank of England and will:

  • Alter the status of the Prudential Regulation Authority (PRA), so that it will no longer be a subsidiary and a new Prudential Regulation Committee will be set up within the Bank of England to exercise the functions of the PRA.
  • Extend the scope of and make changes to the Senior Managers and Certification Scheme.
  • Extend the Government’s Pension wise scheme.
  • Make the Deputy Governor for markets and banking a member of the Bank of England’s court of directors.
  • Abolish the Oversight Committee and transfer its oversight functions to the Bank of England’s full court of directors.
  • Make changes to the rules governing the issuing of banknotes in Scotland and Northern Ireland.

The first reading of the Bill in the House of Commons was on 19 January 2016 and the second reading of the Bill in the House of Commons was on 1 February 2016.  In the second reading, the Economic Secretary, Harriet Baldwin announced that the Government would alter the Bill at Committee Stage to give HM Treasury a power to permit the FCA to collect a levy from consumer credit firms to fund Illegal Money Lending Teams.  These teams have, until recently, been funded by the National Trading Standards Board but this budget has been cut.  The date for the House of Commons’ Committee Stage is yet to be announced.

Treasury Committee response to FCA appointment

Andrew Tyrie (Chairman of the Treasury Committee), in a letter to the Chancellor dated 26 January, has demanded a veto on the hiring of financial regulators following the appointment of Andrew Bailey as the new head of the FCA.

Mr Tyrie warns that the “perception” that financial regulators have become “vulnerable to political pressure” is hindering their work. Believing that the Treasury committee should be given veto over both the FCA and PRA, Mr Tyrie seeks Mr Osborne’s assurance that he will not make decisions on either post without MPs’ approval – mirroring the current process in place for the Office for Budget Responsibility (OBR’s) senior leadership.

Bank of England speech on post-crisis reforms

Andrew Bailey, CEO of the Prudential Regulation Authority, gave a speech to the International Financial Services Forum on 27 January 2016 which detailed the work being conducted in the UK to prevent a repeat of the 2008 financial crash.

Mr Bailey said that by analysing the balance sheets of UK banks, it is possible to see that they increased fourfold between 2000 and 2007, and whilst that may look attractive in isolation, it does not represent a sustainable system. Current comparators to ‘pre-crisis’ figures are therefore invalid, as this period was one of instability in the financial health of the UK.

UK bank’s pre-2008 liabilities were comprised of deposit contracts, non-deposit debt (bonds) and equity contracts. As a result banks had too little equity to absorb losses, and had issued hybrid debt-equity instruments that were supposed to absorb such losses but could only do so if the bank became formally insolvent. In order to stabilise the system, in the UK there are now increased requirements for banks to hold equity capital to absorb loss and hybrid debt-equity instruments have automatic and transparent triggers that do not rely on an insolvency event occurring. In addition, regulators have introduced liquidity regulations to allow banks to withstand the loss of some funding, and requirements on banks to ring-fence qualifying EU customer deposits. In the interests of resiliency, the PRA have invested in stress-testing, and ensuring that – if banks fail – they can be resolved without recourse to public funds through the concept of ‘bail in’.

Andrew Bailey concluded that the objective of the comprehensive financial reform programme is not to return to the unstable pre-crisis years, with insufficient equity and illiquidity within the banking system, but to strengthen the loss absorbency of the system and encourage greater clarity on the bank’s liabilities. In addition, by ensuring that investors know the characteristics of the assets they hold, the UK’s financial markets will be able to deliver and prevent a “too big to fail” situation.

MAS publishes its figures for Q3 2015

The Money Advice Service (MAS) has recently published its third consecutive record breaking quarterly figures for Q3 (October – December 2015). The number of people contacting the MAS has increased from the previous quarter by nearly 33,000. The MAS has reported:

  • Over 12.8 million unique contacts between April and December 2015.
  • Over 11.6 million actions have been taken to improve finances as a result of using the MAS between April and December 2015.
  • 91% would revisit the MAS.

The MAS launched a new campaign called “Survive January” to give people tips about how to get their finances back on track after Christmas. Following the launch there has been a 32% increase in the number of people that have visited the MAS website since last year.

At the end of 2015, the MAS published its 2016/17 Business plan and three year corporate strategy for consultation. The period of this consultation will end on the 15 February 2016.

Bank of England publishes Money and Credit: December 2015

On 1 February 2016, the Bank of England (BOE) published its statistical release on Money and Credit for December 2015. The publication is split into three parts:

  • Part 1 – Broad money and credit.
  • Part 2 – Lending to individuals.
  • Part 3 – Lending to businesses.

Total lending to individuals increased by £4.4 billion in December, compared to the average monthly increase of £4.6 billion over the previous six months. Lending on secured dwellings increased by £3.2 billion, broadly in line with the average monthly increase over the past six months. The number of mortgage approvals for house purchases also increased from 69,462 (average over six months) to 70,837.  Also in December, consumer credit increased by £1.2 billion.

Loans to non-financial businesses decreased by £3.7 billion in December compared to an average monthly decrease of £0.3 billion over the previous six months.

Information Commissioner’s Office warns that company reputation is at risk if data is not kept safe

A recent YouGov poll commissioned by the ICO shows that nearly eight out of ten people would think twice about giving their custom to an online company that had negative press for failing to stop a data security breach. 

The poll shows that 20% of people would definitely stop using a company’s services after hearing news of a data breach, while 57% would certainly consider stopping.  This is evidence that companies that fail to keep personal data safe risk long-lasting reputational damage that could impact on future success.  Perhaps more pertinently, 95% of people polled believe that companies should make it very clear from the outset how personal data is used, and that such data should not be shared with other companies.

Speaking at the Advertising Association’s leadership summit, Christopher Graham, the UK Information Commissioner, comments that people genuinely care about what happens to their personal information.  Getting it right is not only a legal obligation, but should be fundamental to an organisation’s reputation management.

CAP launches Part Two of its eLearning module on misleading advertising

The Committees of Advertising Practice (CAP) has launched part two of its eLearning module on misleading advertising.  The guidance aims to help anyone involved in marketing communications create compliant campaigns that deal fairly with consumers.  It also uses real life Advertising Standards Authority (ASA) rulings to illustrate how the rules apply and to help guide marketers.

In summary the module:

  • Takes an in-depth look at the level and nature of proof that marketers should have to back up their claims.
  • Explains that any qualifying claims should not undermine the overriding message by contradicting the headline claim.
  • Recommends the use of endorsements and testimonials in marketing material.  However, CAP reminds marketers to: 1) ensure they hold evidence to prove a testimonial is genuine; 2) seek permission before featuring it; and 3) not display a trust or quality mark without authorisation.

Chartered Banker Professional Standards Board revised Code of Professional Conduct and Foundation Standard

On 1 February 2016, the Chartered Banker Professional Standards Board (CB:PSB) published revised versions of its Code of Professional Conduct and Foundation Standard for professional bankers.

The Code sets out the ethical and professional values, attitudes and behaviour expected of all professional bankers.  The revised Code lays the foundation for firms’ compliance with the FCA and PRA’s individual conduct rules under the new individuality accountability regime.  It exceeds regulatory requirements by setting out how individuals should follow best practice and demonstrate their personal commitment to professionalism in banking.  The revised Code supersedes the version published in October 2011.

The Foundation Standard sets out the CB:PSB’s expectations of all individuals as regards the professional conduct and professional expertise required by such individuals to apply the Code on a day-to-day basis.  Over 185,000 individual bankers have achieved the Foundation Standard to date.  The revised standard replaces the version that was published in July 2012.

There has been widespread industry support for the revised documents, with members of the FCA, Banking Standards Board and Financial Services Consumer Panel voicing their support and encouragement.

BBA publishes December 2015 figures for the high street banks

The British Bankers Association (BBA) published its latest figures for high street banks which show that:

  • Gross mortgage borrowing increased 24% from the previous year to £12.4 billion (with overall new billing in 2015 higher than the previous year).
  • Mortgage approvals increased 24% from the previous year, along with re-mortgaging up 31% and house purchase up 19%.
  • There were 262 million credit card purchases in December, which represented a decrease in aggregate value from £14.2 billion in December 2014 to £13.7 billion.

Commenting on the figures, Richard Woodhouse, Chief Economist at the BBA, explains how it was a strong year for household borrowing.   In relation to the decline on the amount spent on credit cards, he comments that consumers seemed less reliant on credit cards to fund purchases last month.

Individual insolvencies fall to lowest level since 2005

The Insolvency Service recently published official statistics showing that the number of individual insolvencies in 2015 fell to the lowest annual level for a decade (by 19% to 79,965).

The statistics also show that:

  • This was the fifth successive annual decrease, and has been driven by a decrease in individual voluntary arrangements (IVAs).
  • The number of bankruptcies was the lowest level for 25 years, which has been affected by the introduction of debt relief orders (DROs).

Despite this, Credit Today, notes that some personal insolvency practitioners believe it is important to look at other figures.