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Retail Finance round-up - 17 March 2016

Retail Finance round-up - 17 March 2016
  • United Kingdom
  • Financial services - Retail finance


There are three major developments this week:

  • publication of the final report on the Financial Advice Market Review;
  • issue of a feedback statement on regulatory barriers to innovation in digital and mobile solutions; and
  • publication of the Brady report into the regulation of claims management companies.  

The Financial Advice Market Review was launched in August 2015 in light of concerns that the market for financial advice was not working well for all consumers. The aim of the Review has been to explore ways in which the Government, industry and regulators can take individual and collective steps to stimulate the development of a market which delivers affordable and accessible financial advice and guidance to everyone, at all stages of their lives. The Report makes a series of policy recommendations, which includes the recommendation that the FCA should not introduce a longstop limitation period for referring complaints to the Financial Ombudsman Service.

The feedback statement on regulatory barriers to innovation in digital and mobile solutions puts forward a number of ways in which the FCA intends to move forward using the responses received. This will include addressing issues on communications through a feedback statement to the smarter consumer communications discussions paper (DP15/5).

The final report of the independent review by Carol Brady into the regulation of claims management makes recommendations which complement government’s existing reforms and build on the work of the Claims Management Regulation Unit. The recommendations provide the framework for a much tougher regulatory regime. The government has since announced that it accepts the recommendations and that it intends to transfer responsibility for regulating CMCs to the FCA and that it will consult on implementing recommendations in due course.  

Finally for further information on Brexit, with the referendum fast approaching, see the firm’s new guidance document, ‘Seeing clearly: Making sense of Brexit.’

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FCA and HM Treasury publish final report of their Financial Advice Market Review

HM Treasury and the FCA have published the final report of their Financial Advice Market Review (FAMR).

The final report details measures aimed at developing a market which provides affordable and accessible financial advice and guidance for everyone and contains proposals for increasing consumer engagement with financial advice.

The final report’s recommendations fall into three key areas:

  • Affordability – not all consumers can afford the financial advice they need.  In addition, not everyone wants or needs a comprehensive assessment of all of their financial circumstances and requirements.  The report states that more can be done to allow firms to deliver tailored services which give consumers advice on a more limited basis and also to allow firms to provide guidance which allows consumers to make their own decisions.  The report recommends that the regulatory landscape should be made clearer for firms, a clear framework allowing firms to develop more streamlined services should be created and new technologies should be used to drive down the costs of supplying advice.
  • Accessibility – a lack of consumer engagement holds back the development of the financial advice market.  This lack of engagement may be attributable to unaffordability, uncertainty about how to access advice, consumer mistrust of advisers and/or lack of confidence in engaging with advice.  The report recommends clarification of what financial advice employers can provide to employees without being subject to regulation, improvement of incentives aimed at encouraging employers to support employees financial health and greater flexibility in how long consumers pay for advice.
  • Liabilities and Consumer Redress – in order for consumers to have confidence in financial advice, it is necessary for appropriate redress to be available if they suffer as a result of poor advice.  This needs to be balanced with giving firms confidence they will not be exposed to unquantified costs if advice is professional and suitable.  The report recommends changes to how the Financial Services Compensation Scheme (FSCS) is funded (including risk-based levies, reforming the FSCS funding classes and increasing the use of the FSCS’ credit facility), provides proposals regarding how the Financial Ombudsman Service deals with consumer complaints (to increase clarity and transparency) and confirms that a blanket 15 year limit of liability is not recommended as this would not be in the interest of consumers.

Specifically, the FAMR has recommended that the FCA should establish an ‘Advice Unit’ to help firms develop their automated advice models.  The FCA is considering the impact of this recommendation and how the unit could be developed.  The FCA will issue a statement setting out its plans and proposals for implementing the Advice Unit and engaging with industry to support financial advice models.  

PRA updates approach document on banking supervision

The PRA has published an updated version of its approach document ‘The PRA Approach to Banking Supervision’.  The document sets out how the PRA will advance its objectives in relation to deposit-takers and designated firms, and contains a number of changes reflecting feedback received and other recent developments.

The main changes are:

  • An updated explanation of the PRA’s new secondary objective.  Since 1 March 2014, the PRA has had a secondary obligation, to act, so far as is ‘reasonably possible’ in a way that facilitates effective competition in the markets for services provided by PRA-authorised firms when they carry on regulated activities.
  • The addition of a statement regarding The Bank of England and Financial Services Bill.  The Bill proposes to integrate the PRA into the Bank as one legal entity by transferring the PRA’s functions to the Bank. The document provides details of the PRA’s current governance structure (which will be updated accordingly should the Bill become law).
  • Amendments to the text regarding the new PRA Rulebook.  In 2015 the PRA launched the PRA Rulebook (which sets out the requirements that a firm must meet for its business to be conducted in a safe and sound manner).  The PRA intends to strictly limit the use of guidance material in the Rulebook.  Other relevant types of material will be published separately.
  • Addition of text regarding resolvability.  A firm is considered to be resolvable if, in the event that it failed, its customers would still have the appropriate degree of continuity of access to its critical economic functions, without excessive disruption to the financial system or exposing public funds to losses.  The document outlines how the PRA and the Bank will co-operate closely to improve resolvability.
  • Addition of text regarding the stress testing regime.  The stress testing regime, which was introduced in 2014, examines the potential impact of a hypothetical adverse scenario on the health of the banking system.  The PRA expects higher standards of risk mitigation from firms posing greater risks to the stability of the UK financial system.
  • Amendments to the text regarding capital.  For all firms, the PRA determines a minimum regulatory capital level and buffers on top of this.  The document outlines the framework for this.
  • Addition of text regarding the leverage ratio framework.  The PRA expects firms to consider whether their degree of leverage is appropriate against the internationally agreed measure of leverage on a non-risk weighted basis.  The PRA requires a minimum leverage ratio to be met at all times and expects firms to have regulatory capital that is equal to or greater than any applicable leverage ratio buffers.  The document outlines the framework for this.
  • Amendments to the text regarding liquidity.  This is to reflect EU legislation.
  • Removal of Box 9 ‘Staffing the PRA’.  This is to reduce duplication with other publications.

FCA publishes feedback statement on regulatory barriers to innovation in digital and mobile solutions

On 9 March 2016, the FCA published a feedback statement (FS16/2) following its Call for Input on regulatory barriers to innovation in digital and mobile solutions.

In the Call for Input, the FCA noted that:

  • Digital and mobile solutions can be more convenient for many consumers and offer efficiency and cost benefits to providers.  As a result, digital technology is becoming integrated in all sectors of the economy.
  • Applying digital solutions has become a top priority in the public sector in the UK and in the EU.
  • It would like to understand better the strategic regulatory barriers and enablers, either in the UK or at EU level, that prevent development of digital and mobile solutions.

The Call for Input was positively received.  The majority of respondents recognised the FCA’s work as part of its longer-term commitment to foster innovation and welcomed its engagement on these issues.  Most responses requested greater clarity over regulatory definitions and also generally highlighted a number of perceived barriers that are currently preventing the greater use of all the available technology.

Based on the feedback received, the FCA now intends to:

  • Explore the issues identified in the financial advice market through the Financial Advice Market Review.
  • Address issues in relation to communications through a feedback statement to the smarter consumer communications discussions paper (DP15/5).
  • Seek stakeholder opinion on implementation of the Payment Services Directive ll (PSD2).  This will be done through industry engagement and a consultation on its current PSD Approach Document.
  • Continue to assist with the implementation of the Fourth Money Laundering Directive – focussing on maximising its potential for digital solutions.
  • Address the issues raised on the use of third-party cloud providers through its guidance consultation.

FCA is contacting 16,000 customers of debt management firm, PDHL

The FCA is currently assessing applications for authorisation from all debt management firms with interim permission.  The FCA has previously warned that it considers the debt management sector to be high risk.  In a thematic review, published in June 2015, it found evidence that firms were not meeting the standard expected.  More than 100 firms have left the market since applications closed for debt management authorisation in February 2015.

The FCA is currently writing to 16,000 customers of debt management firm PDHL, which has been refused authorisation and can no longer carry on regulated debt management activities.  In considering PDHL’s application for authorisation, the FCA found evidence that the firm offered poor quality debt advice and uncovered a number of failings, including in relation to:

  • Consumers being advised to enter into debt solutions that were unsuitable for their circumstances.
  • The adequacy of PDHL’s systems and controls regarding management information and effective quality assurance.

The FCA was concerned about the firm’s treatment of its customers.  For example, one customer called PDHL to inform them that they had lost their job.  PDHL did not review the case for two months at which point the firm identified that the customer had a negative disposable income.  However, the customer’s request to reduce their minimum payment was not accepted and the customer agreed to maintain payments at the original level.  This debt management plan failed as the customer stopped making payments to PDHL within three months.

Where the FCA decides to refuse an interim permission firm’s application for authorisation, the regulator is writing to customers of the firm once the interim permission lapses to inform them of that fact and advise them where they can get free, impartial debt advice.  Consumers seeking debt advice should contact the Money Advice Service.

FCA publishes Occasional Paper No.13: Economics for Effective Regulation

The FCA has published Occasional Paper No.13: Economics for Effective Regulation (EFER), which discusses how EFER can help the FCA meet its new challenges and achieve its objective to ‘make the relevant markets work well.’

EFER is a new approach to economic analysis of financial services and has three key stages: 1) problem diagnosis; 2) intervention design; and 3) impact assessment.

The paper describes the above stages, explains how the stages support effective regulation and provides tools for applying the framework in practice. The tools will help regulators identify the underlying problems in the markets and the harm that may arise as a result.  They will also help regulators assess what interventions could best remedy the issues.

BoE publishes letter summarising its assessment of the effects of EU membership on its statutory objectives

Following the ‘new settlement for the United Kingdom within the European Union’ reached by the government on 19 February 2016, the House of Commons Treasury Committee requested the Bank of England’s (BoE) views.

In response, Mark Carney, BoE Governor, published a letter to the House of Commons Treasury Committee Chairman summarising the BoE’s assessment of how EU membership affects its ability to achieve its statutory objectives. These objectives are contained in an ‘October 2015 report: EU membership and the Bank of England’.

Amongst other things, the letter sets out that the new settlement:

  • Addresses important issues to maintaining the BoE’s ability to achieve its objectives (given the likely need for further integration of the euro).
  • Recognises the UK’s need to supervise its financial stability.
  • Makes clear that the UK retains responsibility for supervising its financial stability, financial institutions and markets, as well as maintaining responsibility for resolution of failed institutions.
  • Recognises that EU financial services legislation may need to differentiate banking union member states and non-participating member states like the UK.

In the annex to the letter, it also sets out its views on the effective subsidiarity mechanism and the overall cost of EU regulation.

Outcome of Claims Management Regulation Review published

The government has published the final report of the independent review by Carol Brady into the regulation of claims management.

The report recommends that claims management companies (CMCs) should be re-authorised under a more robust process which would hold managers of CMCs to account for the conduct of their business and that the FCA would be the most effective option for delivering stronger protection for consumers.

The government has announced that it accepts the recommendations and that it intends to transfer responsibility for regulating CMCs to the FCA and that it will consult on implementing recommendations in due course.

FCA publishes list of non-legal corrections and clarifications to its Handbook

The FCA has published a list of non-legal corrections and clarifications to its Handbook, other than those made by Handbook Administration instrument.  The changes are regarded as having no legal effect and none of the changes represent a change in FCA policy.

Some items of interest include:

  • Administrative change to DISP 1, Annex 3.
  • Administrative change to the glossary term ‘relevant authorised person.’
  • The addition of hyperlinks to various forms in SUP 10A, Annex 4.

First Delegated Legislation Committee consider the Draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016

On 7 March 2016, the First Delegated Legislation Committee considered the draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016.

Among other things, the Committee highlighted: 

  • That the Government supported the FCA’s intention to consider whether the remit of the financial services compensation scheme should be expanded to include peer-to-peer lending in 2016.  The Government believes it is important for the industry to be regulated and for consumers to be given clear information when they make such investments.
  • The reason for the timing difference in bringing the regulation of second-charge mortgages into line with that for first-charge mortgages. The Government said with the European mortgage credit directive coming into force in March 2016, it did not want to disrupt firms and customers excessively by predating regulations that are clearly on their way.
  • That, in relation to the provision of advice in relation to the peer-to-peer ISA, the Government will continue to keep this under review in light of developments.

BoE speech: Is there an industrial revolution in financial services?

In a speech given at the London Business School Centre for Corporate Governance, and the Bank of England’s FinTech Revolution Conference, Andy Haldane discussed whether an industrial revolution was occurring in financial services.  The speech discussed the increasing role of disruptive technology in a sharing economy, digital currencies and Big Data and focused on whether these factors were leading to greater awareness of the “FinTech Phenomenon” as a paradigm shift in business finance, particularly for SMEs. 

Regarding payments and lending, the increasing role of peer-to-peer lending was discussed, with the market totalling £3.2 billion in 2015, with increases in both consumer lending, business lending and equity crowd funding.  This will inevitably raise the question of how “alternative” is alternative finance, and also prompt concern regarding the regulation of the sector.

This shift in the importance of FinTech is important for the financial sector due to:

  • The influx of new entrants that may help with diversity and stability.
  • Lower margins and higher volumes that may create higher productivity and a more efficient financial system.
  • Greater access and lower cost that may improve the social value of the financial system.

FLA publishes its latest figures for the industry

The Finance & Leasing Association (FLA) has published its latest figures for the asset finance, consumer finance and motor finance industries.

The figures show that:

  • Asset finance new business (primarily leasing and hire purchase) grew by 3% in January compared with the same month last year – the twenty-eighth consecutive month of growth.  Commercial vehicle finance and car finance grew in January by 6% and 4% respectively, but plant and machinery finance fell by 7% over the same period.
  • Point-of-sale consumer new car finance new business grew 20% by value and 14% by volume in January 2016, compared with the same month last year.  The point-of-sale consumer used car finance market also reported new business growth in January, of 15% by value and 12% by volume.
  • Consumer finance new business grew 11% in January compared with the same month last year.  Credit card and personal loan new business together grew by 9% compared with January 2015, while retail store and online credit increased by 1%.  The second charge mortgage market reported new business up 36% by value and 17% by volume over the same period.

CML publishes statistics on lending in January

The Council of Mortgage Lenders (CML) has published its statistics on lending in January.  In summary the statistics for lending in January show, on an unadjusted basis, that:

  • Home-owners borrowed £8.4 billion for house purchase, down 25% month-on-month but up 12% year-on-year.
  • First-time buyers borrowed £3.3 billion in January, down 27% on December but up 14% on January last year.
  • Home movers borrowed £5.1 billion, down 24% in December but up 11% compared to a year ago.
  • Home-owner remortgagors borrowed £5.8 billion, up 35% on December and 32% compared to a year ago.
  • Landlords borrowed £3.7 billion in January, up 9% month-on-month and 42% year-on-year.

BoE publishes its mortgage lenders and administrators statistics for Q4 2015

The Bank of England (BoE) has published its mortgage lenders and administrators statistics for Q4 2015.  In summary, the statistics show that:

  • The overall value of residential loan amounts outstanding in Q4 2015 increased by 0.7% compared with Q3 2015, and increased by 2.5% over the past four quarters.  Amounts outstanding on regulated loans constituted 79% of the total in Q4 2015.
  • Gross advances of £63.1 billion were recorded in Q4 2015.  This was 1% higher than in Q3 2015 and 22.8% higher than Q4 2014.  The percentage of advances to borrowers with impaired credit history has increased by 6.7 basis points to 0.26% in Q4 2015.  The proportion of balances outstanding to these borrowers is continuing to decrease, to 0.93% in Q4 2015.
  • The overall average interest rate on total amounts outstanding decreased by 4 basis points to 3.07% in Q4 2015, the lowest since the series began in 2007.  This was due to a decrease in the average fixed rate to 3.14% and a decrease in the average variable rate to 3.00%.
  • The proportion of lending for house purchase in Q4 2015 was 69.3%, approximately 0.8 percentage points lower than in Q3 2015.
  • The number of new arrears cases in Q4 2015 was 20,370.  This was almost the same as in Q3 2015 which was the lowest level since the series began in 2007.

Speech by FRC Chairman on behaviour, competence and culture in the banking industry

On 8 March, Sir Win Bischoff, the Chairman of the Financial Reporting Council (FRC), gave a speech at the Financial Times Banking Standards Conference on improving corporate behaviour. 

In his speech, Sir Bischoff explains that the FRC’s mission is to promote high quality corporate governance and reporting in the public interest.  Apart from maintaining codes and standards for corporate governance, investor engagement and corporate reporting, the FRC is also responsible for audit and other forms of assurance, and for actuarial information.  The Chairman believes that embedding a healthy corporate culture is vital to the success of any business.

While codes and standards put forward principles for best practice that make bad behaviour less likely to occur, and reporting can make it harder to conceal such behaviour, it does not completely prevent inappropriate behaviour.  The Chairman states that only people within the business (particularly the leaders) can do that.

To help improve corporate behaviour, the Culture Coalition has been set up.  This is a collaborative effort with a number of organisations and proposes “to assess how effective boards are at establishing company culture and practices, and embedding good corporate behaviour, and to consider whether there is a need for promoting good practice.”

MAS publishes latest figures on problem debt

The latest figures from the Money Advice Service (MAS) show that one in six UK adults are living with problem debt.

According to MAS, figures from a recent study reveal that people who rent a property are twice as likely to be over-indebted and that young adults aged 25-34 are the age group most likely to be living with a debt problem.  The analysis also suggests that single parents are one and a half times more likely to be living with problem debt than two parent families and there is a particularly strong relationship between debt and having three or more children.  The most over-indebted local authority is Sandwell in the West Midlands, where 24.7% of adults are living with debt.

Caroline Siarkiewicz, Head of Debt Advice at MAS, said: “This research breaks new ground, providing us with the most up to date look at levels of problem debt across the UK. We estimate that 8.2 million UK adults suffer with financial worries — with younger adults, larger families and single parents noticeably at higher risk”.

StepChange calls for urgent changes to credit cards

The latest figures from StepChange Debt Charity (StepChange) show that, in the last year, over 200,000 people contacted it for help with a total of £1.7 billion of credit card debt and the average person owing nearly £8,500.   

The charity is calling on the FCA to commit to substantial changes to credit cards amid fears that, despite being designed for short-term lending, they have led to long-term debts for millions of people.

The charity is also calling on the FCA to work with lenders and other stakeholders on a package of measures to make credit cards work better for people who fall into financial difficulty and to help prevent people from falling into difficulty in the first place.  The package includes measures that reform minimum repayments, bring down balances, ensure responsible lending and reduce the number of people struggling with multiple credit cards.

Mike O’Connor, Chief Executive of StepChange, said: “…This is now a real test for the FCA and to succeed, it must commit to direct action that will prevent credit cards from becoming long term debts. With robust measures to tackle how these products work and eradicate the irresponsible lending that leads to multiple maxed-out cards, we can help those in financial difficulty recover and ensure that credit cards are used as the affordable, sustainable, short term products they are meant to be.”

Banking Standards Board publishes first annual review

On 8 March 2016, the Banking Standards Board (BSB) published its first annual review after its initial launch in April 2015.

The annual review looks back over the work of the BSB’s first few months.  Most notably, the BSB carried out its first pilot assessment of ten major firms in 2015.  The assessment analysed a firm’s performance against its objectives on behaviour, competence and culture.

The key themes that emerged from the 2015 assessment, which the BSB will explore further in 2016, include:

  • The alignment of a firm’s purpose, values and culture.
  • The difference between a focus on culture and compliance.
  • Leadership and key person risk.
  • Incentive and reward structures.
  • Fostering challenge and speaking up.
  • Provision, take-up and effectiveness of staff training and support.

The BSB hopes that the annual assessment cycle will build up an evidence-based picture of developments across the sector that will facilitate collective efforts to raise standards, benchmark performance and share good practice.

The annual review also identifies a number of key priorities for the BSB during 2016.  These include:

  • Designing and undertaking the 2016 assessment exercise, building on the 2015 pilot and scaled up to include a wider number of member firms.
  • Promoting professionalism across all parts of the banking sector and at all levels.
  • Exploring the relationship between law, regulation and ethics, and what this means in the specific context of banking and banking culture.
  • Developing voluntary standards that will support a better service for customers and other relevant parties across the sector.