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Retail Finance round-up - 7 April 2016

Retail Finance round-up - 7 April 2016

  • United Kingdom
  • Financial institutions - Retail finance


The key development this week is the FCA’s publication of its Business Plan for 2016/2017. The Business Plan outlines seven priority themes within its Risk Outlook. These seven themes are: pensions, financial crime and anti-money laundering, wholesale financial markets, advice, innovation and technology, firms’ culture and governance, and the treatment of existing customers. We highlight the important developments for the retail finance sector.

Also of interest this week is the FCA’s publication of complaints data for the second half of 2015 reporting that between July and December 2015, financial services firms received 2.11 million new complaints. Overall, there was a decrease of 1.4% in the number of complaints from the January to June 2015 period. This is primarily due to 10% and 15% drops in complaints for current accounts and savings accounts respectively. PPI remains the most complained about product; when PPI is excluded, the number of overall complaints is significantly reduced to 1.17 million.

This week, Eversheds has also launched the BREXIT Hub. Here you can find our publications on Brexit and what it may mean, the issues of interest to businesses and details of our client events programme.

Regulatory updates

Industry news

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FCA publishes its 2016/17 Business Plan

The FCA has published its 2016/17 Business Plan.  This sets out the FCA’s work programme and priorities for the coming year.  The plan also includes its Risk Outlook which identifies trends in the markets and firms it regulates, and risks which the FCA says it needs to respond to.

The Business Plan outlines seven priority themes within its Risk Outlook.  These seven themes are: pensions, financial crime and anti-money laundering, wholesale financial markets, advice, innovation and technology, firms’ culture and governance, and the treatment of existing customers.

Items of particular interest

The FCA notes that it will ensure the effective implementation of the Senior Managers and Certification regime in the banking sector and develop its policy for the extension of the regime across the financial services sector.

On financial crime the FCA states it will take tough action against wrongdoers, working closely with industry and law enforcement and will take steps to help people to protect themselves against crime through its ScamSmart campaign.  The FCA will also explore ways in which technology solutions can help deliver effective and proportionate anti-money laundering outcomes.  Finally, the FCA will roll out its financial crime annual data return and will work closely with HM Treasury on the Fourth Money Laundering Directive 2015.

In relation to innovation and technology, the FCA notes that cyber-attacks are increasing.  Therefore, it plans to communicate expectations relating to effective IT and operational resilience.  The FCA also aims to launch its regulatory sandbox.  The purpose of the sandbox is to create a safe place for businesses to test new ideas to ensure they meet regulatory requirements.

The FCA explains that it will continue to support and drive culture change and will focus on the most significant drivers of good or poor mindsets, such as incentives and remuneration, and the steps firms take to address associated risks.

With regard to the treatment of existing customers, the FCA explains how it has seen poor treatment of back book customers (existing customers who have become inactive).  For example, firms are not informing these customers about other available products, are applying switching or exit fees or are creating other barriers to discourage existing customers from changing providers or products.

In 2015, the FCA issued a consultation paper which proposed setting a deadline for making PPI complaints and also proposed new rules and guidance for firms on handling PPI complaints.  In 2016/17 the FCA will consider the responses to the consultation, decide its final approach and if appropriate, publish a policy statement.

The FCA explains its new approach to supervision.  Previously, the FCA used four categories (C1-C4) for the conduct classification of firms, but it has simplified this approach.  Firms are now classified as either fixed portfolio or flexible portfolio.  Fixed portfolio firms are allocated a named supervisor and are proactively supervised using a continuous assessment approach.  The majority of firms are classed as flexible portfolio.  These firms are not allocated a named supervisor but are instead proactively supervised through a combination of communication, engagement and education activity.

FCA publishes its proposed regulated fees and levies for 2016/17

The FCA has published a consultation paper on its proposed 2016/17 regulatory fees and levies for the FCA, Financial Ombudsman Service (FOS) and the Money Advice Service (MAS).

In relation to consumer credit, firms that moved from interim permission to full authorisation (to undertake consumer credit business) over the past two years have paid the FCA consumer credit minimum fees and variable fee rates, depending on their level of income from these activities.  These fees were based on estimates made at the time of the assumptions that make up their calculation, some of which have changed significantly compared to current estimates.  If the FCA continued to use the 2014 levels of fee rates in 2016/17, it would under recover the required annual funding requirement of £37.7 million by around £12 million.

As a result the FCA is proposing:

  • not to change minimum fees for limited permission and full permission firms.
  • not to change the variable fee for limited permission firms.
  • to increase the 2014 set full permission variable fee of £0.78 to £1.30 (an increase of 68%), payable on each £1,000 of consumer credit income above the first £250,000.

Overall the FCA notes that 98% of consumer credit firms will be paying fees which have not changed since 2014. 

The current levies for FOS and MAS remain unchanged.

FCA responds to European Commission Green Paper on Retail Financial Services

The FCA has responded to the European Commission’s Green Paper on Retail Financial Services.  The Green Paper focuses on increasing transparency and choice for consumers in the retail financial services sector and discusses the growth in digitalisation that the sector is experiencing.  The FCA’s response supports the Green Paper and endorses an approach which takes steps to benefit consumers.

The FCA’s response recognises that some of the issues raised in the Green Paper have already been addressed through various EU measures.  Other issues identified include:

  • current defects in the disclosure process which adversely affects consumer understanding of products available in the retail finance services market.
  • consumer uncertainty surrounding the applicability of rules across the EU which detrimentally affects consumer confidence.
  • the possible risks to consumers that reducing barriers to trade may have.
  • the lack of familiarity consumers in one member state have of products and services available in other member states.

The Green Paper also raised specific issues and the FCA’s response addresses these in detail.  For instance, the Green Paper highlights the need for better products, enhanced choice and greater opportunities for both businesses and consumers.  The FCA’s response states that UK consumers lack trust and confidence in buying cross border products and services and need safeguards in place to protect them, hence collaborative, cross-national research would be useful and could help stimulate competition between firms.  There also needs to be more effort to help consumers buy financial products across borders.  Whilst the European Commission has already taken action in relation to standardised disclosure for products which should support comparability, the FCA’s response states that any future action should be targeted around ‘smarter disclosure’, which would support disclosure measures being developed in accordance with a genuine understanding of consumer behaviour.  In addition, consumers need to understand their rights of redress to ensure that they feel confident and are able to make informed decisions.

Finally, the FCA’s response identifies future priorities for action.  These include further research into consumer diversity and behaviour, a strategy to address large price differences, a review of existing disclosure requirements and opt-in regimes and improving consumer awareness of charges for transactions in foreign currency.

FCA publishes statement on peer-to-peer applications for full authorisation

The FCA has issued a statement on applications for full authorisation to operate peer-to-peer (P2P) platforms.  The statement, published on 31 March 2016, reports that the FCA has received numerous applications from firms seeking permission to operate a P2P platform and that its consideration of whether or not to authorise these requests is set against a backdrop of recent legal changes clarifying how P2P platforms sit with other regulated activities.

As at 30 March 2016, only eight firms have been fully authorised to operate P2P platforms. However, there are 86 firms awaiting a decision, 44 of which have received interim permission.  The FCA states that it is working closely with individual firms to ensure that rigorous statutory standards are met and that firms receive authorisation as quickly as possible.  However, how long it takes to consider an application will depend on numerous factors including the completeness of the application, how complex the business is and the firm demonstrating compliance with regulatory requirements.  The FCA has up to 12 months in which to make a final decision.

The FCA refers to the Innovative Finance ISA, which launched on 6 April 2016 and is expected to further increase consumers’ awareness of P2P platforms.  Only P2P loans on platforms operated by firms that have full authorisation will be eligible for the Innovative Finance ISA.

FCA publishes policy development update - Issue 32

The FCA has published Issue 32 of its policy development update.

This update lists the range of:

  • publications issued (together with the date when the consultation ends or when comments are sought by) such as:
    • the Financial Services Compensation Scheme – Management Expenses Levy Limit 2016/2017
    • the future regulatory treatment of regulated first charge mortgages as designated under the Consumer Credit Act 1974
    • the changes to the FCA Handbook regarding the segregation of client money on loan-based crowd funding platforms
    • the Innovative Finance ISA
    • the regulated activity of peer-to-peer agreements.
  • forthcoming publications and their expected due dates.  Publications of interest include the changes to the Financial Services Compensation Scheme sourcebook as expected in April 2016 and the proposals in response to the CMA’s recommendations on high-cost-short-term credit which is expected in Q2 of 2016.

FCA publishes complaints data for second half of 2015

The FCA has recently published a press release reporting that between July and December 2015, financial services firms received 2.11 million new complaints.

Overall, there was a decrease of 1.4% in the number of complaints from the January to June 2015 period.  This is primarily due to 10% and 15% drops in complaints for current accounts and savings accounts respectively.  PPI remains the most complained about product; when PPI is excluded, the number of overall complaints is significantly reduced to 1.17 million.

Although the total redress paid to consumers fell to £1.97 billion between July and December as opposed to £1.98 billion between January and June, the FCA notes that a further decrease in complaints and greater emphasis on working in the best interests of consumers is still required.

PRA publishes supervisory statement and policy statement on corporate governance

Last week the PRA issued two documents, a supervisory statement (SS5/16) and policy statement (PS13/16), both of which focus on corporate governance and in particular, board responsibilities. Both statements are complimentary to each another.

PS13/16 sets out the PRA’s response to feedback received on Consultation Paper 18/15 ‘Corporate Governance: Board Responsibilities’, which was published in May 2015 and provides a summary of steps taken to date.  PS13/16 also outlines some of the contents of SS5/16 – certain terms have been amended and the PRA has taken on board suggestions from some respondents that the PRA provide further detail on how directors can reconcile their collective and individual responsibilities.

SS5/16 emphasises the responsibilities shared by board members as well as highlighting that good governance is critical to delivering a sound and well-run business. SS5/16 recognises that failures of governance and a failure to manage risks by boards has contributed to financial setbacks in recent years. Consequently, SS5/16 is designed to highlight key issues boards need to consider going forward.  SS5/16 goes into more depth than PS13/16 and states that whilst it is not intended as a comprehensive guide for boards as to what constitutes effective governance, it does suggest that there are certain areas the PRA regard as especially important. They include:

  • setting strategy
  • culture
  • risk appetite, management and interim controls
  • Board composition
  • the respective roles of executive and non-executive directors
  • knowledge and experience of non-executive directors
  • the Board’s time and resources
  • management information and transparency
  • succession planning
  • remuneration
  • subsidiary boards
  • Board committees

PRA publishes policy statement on 2016/17 management expenses levy limited for FSCS

On 31 March 2016, the PRA issued a policy statement (PS12/16) on the Financial Services Compensation Scheme (FSCS) management expenses levy limit (MELL) for 2016/17.   Following feedback to the joint PRA and FCA consultation paper (CP4/16), the MELL for 2016/17 has been set at £72.7 million.  This figure comprises budgeted FSCS management expenses of £67.4 million and a contingency reserve of £5.3 million. 

The Financial Services and Markets Act 2000 require the PRA and FCA to set a limit on the total management expenses to be levied.  The MELL represents the maximum management expenses that the FSCS can incur in that year. The PRA instrument making the amendments to the FSCS Management Expenses Levy Limit and Base Costs Part of the PRA Rulebook is the PRA Rulebook: Non Authorised Persons: FSCS Management Expenses Levy Limit and Base Costs Instrument 2016 (PRA 2016/22).  The instrument came into effect on 1 April 2016.

The FCA published its policy statement on 29 March 2016, confirming the MELL for 2016/17 for the FSCS is £72.7 million.

FCA publishes guidance on voluntary redress schemes under the Competition Act

The FCA has issued the final version of its guidance on voluntary redress schemes under the Competition Act 1998 (CA 1998). The guidance, released on 30 March 2016, has remained mostly unchanged from the draft version consulted on in January 2016 and lays out the legal framework and criteria for approval of redress schemes.  The FCA states that the guidance is “aimed at firms looking to provide compensation under a CA 1998 redress scheme as well as…members of independent boards appointed to determine compensation in relation to such a scheme.”

The Competition Act 1998 (Redress Scheme) Regulations 2015 set out a framework of the processes and schemes that the Competition and Markets Authority (CMA) and FCA can approve.  Rather than adopting the CMA guidance that has already been issued, the FCA has issued its own.

The FCA guidance explains the format that applications for approval of a redress scheme should take and what factors the FCA will take into account in deciding whether or not to grant that approval. The FCA may approve or reject a scheme or approve it subject to conditions, the applicant firm may also be given the opportunity to respond and amend the proposed scheme.

The guidance also clarifies the relationship between the FCA’s powers to approve redress schemes under the CA 1998 and its powers to require firms to pay redress or restitution under the Financial Services and Markets Act 2000.

PRA discussion paper on equity release mortgages

On 31 March 2016, the PRA issued a discussion paper (DP1/16) on equity release mortgages (ERMs). While the discussion paper is mostly relevant to life insurance and reinsurance companies with ERM exposure, it will also be of interest to industry stakeholders (including banks, building societies, other lenders, trade bodies, brokers, credit rating agencies, consultants, actuaries and auditors) and academics.

Items of particular interest in the discussion paper are:

  • ERM valuation - use of relevant market inputs: the PRA is primarily concerned with ‘fair’ value to the extent it impacts prudential requirements for valuation. There are different techniques used to measure ‘fair’ value. The PRA has asked for feedback on how valuation inputs (e.g. prices quoted in active markets) should be classified and which market inputs are most significant.
  • ERM valuation - framework and calibration: In the UK, there is often a guarantee that, on certain forms of repayment, any excess of the accrued loan amount above the (sale) value of the property will be written off or waived by the lender. This is the ‘no negative equity guarantee’ (NNEG). There are several techniques that could be used to value the NNEG.  The PRA has asked for feedback on the framework and calibration of such techniques.
  • Risk management of ERMs: Good risk management of ERMs is central to demonstrating an overall system of control over investments.  Amongst other things, the PRA has asked for feedback on which techniques should be used to identify and monitor emerging risks to ERMs (e.g. changes in flood risk and other environmental issues etc.).

FCA and PRA publish joint policy statement on regulators’ complaints scheme

The FCA and PRA have published a joint policy statement on complaints against the financial services regulators (the Bank of England, FCA and PRA).

Under section 87 of the Financial Services Act 2012, the financial services regulators operate a complaints scheme to investigate complaints against them.  The regulators consulted on amendments to the complaints scheme in February 2016.  The policy statement provides feedback on responses received and contains the final amendments.

Two responses were received to the consultation, neither of which raised objections to the proposals put forward in the consultation paper.  Therefore the final amendments to the complaints scheme do not differ from those consulted on.  The changes to the complaints scheme implement new legislative requirements and can be found in Appendix 2 to the policy statement.

PRA publishes consultation paper on supervising building societies' treasury and lending activities

On 4 April 2016, the PRA published a consultation paper on proposed revisions to its supervisory statement on building societies’ treasury and lending activities (SS20/15).  The consultation paper should be read in conjunction with the PRA Rulebook and sets out the PRA’s approach to supervision of building societies’ and treasury lending activities, along with compliance with the Building Societies Act 1986.

The most significant changes relate to the expansion of areas of activities that have changed since the original publication of the Building Societies Sourcebook and the changes to supervisory approaches, intended to clarify the PRA’s expectations on how building societies should consider the implications of proposed changes to their business models.

The PRA welcomes views on the draft supervisory statement by 4 July 2016.

PRA publishes its regulatory digest for March 2016

The PRA has published its regulatory digest for March 2016.  The digest highlights key regulatory news and publications the PRA has delivered in March.

The key news and publications that the PRA highlights in the digest are:

  • Equity release and mortgages (DP1/16).
  • Underwriting standards for buy-to-let mortgage contracts (CP11/16).
  • The news release, “Financial Policy Committee and Prudential Regulatory Authority publications on Tuesday 29 March 2016.”
  • The news release, “New accountability regime for banks and insurers comes into force.”

BoE publishes record of FPC meeting

The Bank of England (BoE) has published the record of the Financial Policy Committee’s (FPC) meeting held on 23 March 2016.

The record summarises the progress made on implementing the FPC’s recommendations and directions since its previous meeting. 

Among other things, the record states that the FPC:

  • does not consider that any further action is necessary for macro-prudential purposes relating to the buy-to-let market apart from finalising the PRA supervisory statement on underwriting standards for buy-to-let mortgage contracts.  The PRA consulted on a draft version of this supervisory statement in March 2016.  The FPC will continue to closely monitor developments in the buy-to-let mortgage market.
  • will receive an update on its work programme on UK Authorities’ and firms’ cyber-resilience by summer 2016.

The next meeting of the FPC will be held on 28 June 2016 and the formal record of that meeting will be published on 12 July 2016.

ASA Ruling on Crystal Legal Service

The Advertising Standards Agency (ASA) has published the ASA Ruling on Crystal Legal Services Ltd  in relation to a challenge as to whether claims made by Crystal Legal Services Ltd were misleading and if they could be substantiated.  The advertisement in question promoted a PPI refund service stating, “The average from PPI our clients win: £3,516.2**…**Win amount correct from March 2015”.

The ASA investigated the advertisement under CAP Code (Edition 12) rules 3.1 (Misleading advertising) and 3.7 (Substantiation), but ultimately found no breach.  Crystal Legal Services Ltd provided evidence which detailed the individual claims, the organisation the claim was made against and on which product the PPI had been paid, along with the amount won on the claimant’s behalf. The ASA considered that consumers would be likely to understand from the use of the word “average” that the amount they could win might be higher or lower than the £3,516.2 quoted.  Therefore, the ASA ruled that Crystal Legal Services Ltd could substantiate its claim and the advertisement was not misleading.

ASA Ruling on Manchester Claims Ltd t/a MCL Manchester Claims Ltd

On 30 March 2016 the Advertising Standards Authority (ASA) published a ruling, upholding Lloyds Banking Group’s complaint regarding an advert on Manchester Claims Ltd’s (Manchester Claims) website in November 2015.

The advert claimed that Manchester Claims' average PPI refund was £3,000 and that its overall success rate was 90%. Lloyds challenged whether the claims were misleading and could be substantiated.

As Manchester Claims did not respond to the ASA’s enquiries and did not provide any evidence to substantiate its claims, the complaint was upheld.  The ASA was concerned by the lack of response from Manchester Claims and the apparent disregard for the Committee of Advertising Practice Code (CAP Code).  

ASA ruled that the advert must not appear again in its current form and Manchester Claims were told not to make “average pay out” and success rate claims in future if it could not substantiate them. The ASA referred the matter to CAP’s Compliance team.

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