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Retail Finance round-up - 14 April 2016

Retail Finance round-up - 14 April 2016

  • United Kingdom
  • Financial institutions - Retail finance


Innovation is the theme for this week, with the FCA publishing an update on the regulatory sandbox. A regulatory sandbox is a ‘safe place’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question. The FCA will start accepting applications from firms on 9 May 2016. The firms that are successful will then be able to test out their innovative ideas using the sandbox.

Also of interest this week is the publication by the FCA of the results of its survey into customer understanding of transactions. The results reveal that firms generally demonstrate good practice. However, the FCA notes that some firms may not be effectively distinguishing between customer understanding and customer satisfaction. The FCA will continue to monitor this area.

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Update on the regulatory sandbox

On 12 April 2016 the FCA published two documents and a speech by Christopher Woolard, FCA Director of Strategy and Competition, providing further clarity on the FCA’s progression with the regulatory sandbox. A regulatory sandbox is a ‘safe place’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.  The FCA’s original plans for the regulatory sandbox were published in November 2015.   

In the speech delivered by Christopher Woolard on 11 April 2016 at the Innovate Finance Global Summit, he confirms that the FCA will run two cohorts for the first year, allowing room for both the FCA and the firms to mutually learn from the process.  The FCA will ask firms wishing to partake in the regulatory sandbox to submit applications explaining their proposition and how it meets the sandbox eligibility criteria.  The FCA, therefore, encourages firms to submit well developed testing plans, as the FCA will be selecting firms for the first cohorts with the “most doable” test plans.

The two documents published address the following:

  • Sandbox eligibility criteria – This document sets out the criteria implemented by the FCA in establishing whether a firm will be eligible to take part in the regulatory sandbox. The criteria includes questions on whether a firm is intending to deliver ground-breaking innovation in the regulated market to benefit consumers and whether the firm is ready for testing.
  • Default standards for sandbox testing parameters – This document sets out general standards and expectations regarding the duration, number of customers, customer selection and safeguards, disclosure, data and testing plans.

The FCA will start accepting applications from firms on 9 May 2016. The firms that are successful will then be able to test out their innovative ideas using the sandbox.

FCA publishes modification by consent for hybrid lifetime mortgages

On 7 April 2016, the FCA published a modification by consent relating to hybrid lifetime mortgages and the application of a new rule in chapter 9 of the Mortgages and Home Finance Conduct of Business sourcebook (MCOB).

This modification has been made as the FCA no longer considers that an affordability assessment is required where there is no risk of arrears and repossession in the event of missed payments. The modification also makes changes to the product disclosure rules in MCOB 9.4 and the prescribed text of the key facts illustration (KFI) in MCOB 9 Annex 1. As a result, the KFI gives a meaningful description of features and risks – both when interest payments are being made and when they are rolled up. 

The modification is valid until 7 April 2017 (or earlier if any of the rules are amended or revoked) and applies to lifetime mortgage providers and intermediaries.

In order to take advantage of the modification, firms must contact the FCA waivers team. The FCA will respond to confirm that the modification has been granted and publish each modification direction on its website.

FCA publishes results of survey, “Customer Understanding of Transactions”

The FCA has commissioned a survey of 17 retail banks and building societies to review how firms ensure their customers understand the products they have bought. This is in response to one of the Parliamentary Commission on Banking Standards (PCBS) recommendations that firms demonstrate that they are fulfilling a duty of care to their customers, embedded in their approach to designing products, providing understandable information to consumers and dealing with complaints.

The survey has revealed that firms generally demonstrate good practice. Some examples observed in the survey include:

  • The use of customer survey findings by all firms, with many using consumer group discussions as the basis for producing better future products.
  • All the responses included examples of firms finding an innovative solution, a simple solution, or actually changing (simplifying) the product itself, in order to avoid customer confusion.
  • A more personal approach made by some firms, such as 1-to-1 calls with any complainants, leading to better consumer outcomes.
  • The use of education videos available online and in branch to actively demonstrate key features and limitations.

The FCA has reported, however, that some firms may not be effectively distinguishing between customer understanding and customer satisfaction. Firms must continue to check their customer’s understanding on a regular basis whilst also ensuring customers are considered during the end to end life cycle of a product. The FCA will continue to monitor this area and undertake further follow up work in due course.

FCA Acting Chief Executive delivers speech on consumer credit regulation

Tracey McDermott, the Acting Chief Executive at the FCA, delivered a speech at the Credit Summit 2016 on consumer credit regulation and the journey so far.

On 1 April 2014, around 50,000 firms transferred with interim permission from the OFT to the FCA. Since then the FCA has determined over 30,000 applications for authorisation including over 8,000 firms which are new to the consumer credit market.  The FCA has, amongst other things,  completed thematic reviews into the payday lending and high-cost-short-term credit market and has also reported its findings on the quality of debt management advice during this time.

The FCA published its Business Plan 2016/17 last week and the speech explains that a number of the FCA’s priorities highlighted in the plan for the next year are applicable to consumer credit firms.  This includes advice, culture and governance, technology and innovation, treatment of existing customers and financial crime.

The speech covers where the industry is now and what effective future regulation looks like for the sector.  Consumer Credit lending was reported to be £180 million last year. The speech highlights that while the majority of that sum was lent responsibly, there are still poor practices that tarnish the industry.  The FCA is determined to continue to drive up standards and also reminds firms that it wants to hear their views on which of the Consumer Credit Act’s provisions should be reviewed and how best it should engage with firms on this process.

Finally, Ms McDermott explains that the FCA expects firms to promote, embed and enforce the right culture in their business.  A core feature of the FCA regime is to promote effective competition in the interests of consumers and so it plans on pushing for a consumer credit market where firms seek to outdo their peers on value and quality.

PRA Chief Executive Officer announced

Sam Woods has been appointed Deputy Governor of the Bank of England with responsibility for Prudential Regulation.

He will succeed Andrew Bailey on 1 July 2016, who is moving to take up the position of Chief Executive of the FCA. 

Sam Woods has been appointed for a renewable term of five years.  He will continue in his current role at the PRA as Executive Director of Insurance until he takes up his new role.

Tracey McDermott to leave the FCA

Tracey McDermott, Acting Chief Executive of the FCA has announced she is to leave the organisation on 1 July 2016.

On 7 January 2016, Tracey announced that she had decided to withdraw from the process to appoint the permanent Chief Executive of the FCA but would continue as Acting Chief Executive until a permanent replacement was in post.

Andrew Bailey was appointed as the new Chief Executive on 26 January and is due to take up the position on the 1 July 2016.

Exchange of letters between Treasury Committee Chair and Chancellor on tax deductibility of fines imposed by regulators on banks

On 7 April 2016, the House of Commons Treasury Committee published an exchange of letters between Andrew Tyrie, Committee Chair, and George Osborne, Chancellor of the Exchequer, in relation to the tax deductibility of fines imposed by regulators on banks.

In his first letter (dated 5 February 2016), Mr Tyrie states that, in principle, payments imposed by regulators in the UK, and in other countries such as the US, as a result of misconduct or mis-selling, should not be deductible for corporation tax purposes and requests clarification on a number of points from Mr Osborne.

Mr Osborne responded on 15 February 2016, providing the following clarification:

  • General tax treatment of compensation and fines. Financial penalties imposed by regulators are non-deductible for UK corporation tax purposes. Compensation expenditure arising from trading activity is, in principle, deductible. However, the government took steps under the Finance (No 2) Act 2015 to make compensation associated with bank misconduct and mis-selling non-deductible, and to offset the deductibility of administrative costs associated with this compensation through a taxable receipt. Payments made to regulators in respect of their compliance costs are considered to be expenses of doing business and are therefore deductible for corporation tax purposes. However, the changes in the Finance (No 2) Act 2015 are intended to ensure that, by virtue of the taxable receipt, the administrative and regulatory costs associated with banks' misconduct and mis-selling are also disallowed for tax purposes.
  • Tax implications of UK bank agreements with overseas regulators.  If a UK bank reaches an agreement with an overseas regulator that is in effect an alternative to a court imposed fine (for example, in place of threatened legal action for regulatory infringements), any payments under the agreement will be non-deductible for corporation tax purposes.
  • Costs incurred by banks in producing reports under section 166 of the Financial Services and Markets Act 2000 (FSMA).  Costs incurred by a bank in producing a section 166 "skilled persons" report for the FCA are tax deductible for corporation tax purposes and are not directly impacted by the changes in Finance (No 2) Act 2015. In line with the overall policy, administrative costs associated with section 166 reports are only non-deductible where they have resulted in material compensation expenditure and therefore a material breach of regulations has been revealed.

In this second letter (dated 6 April 2016), Mr Tyrie thanks Mr Osborne for the clarification. However, he states that, if he has understood Mr Osborne correctly, it is possible that some payments to regulators might be deemed to be general compensation (to people other than customers) and therefore deductible for corporation tax purposes. If so, "taxpayers are on the hook for some aspects of a bank's misconduct." Mr Tyrie considers this to be "unacceptable" and urges Mr Osborne to "look again at this".

HM Treasury announces that UK's FinTech industry is to be given new government boost

At the 2016 Innovate Finance Global Summit, Harriett Baldwin, the Economic Secretary to the Treasury, revealed three new initiatives to be introduced to the Financial Technology (FinTech) sector, the UK will:

  • Establish a FinTech and delivery support function which will set an overarching strategy for the UK and monitor and drive forward FinTech initiatives.
  • Create a professional services information hub for FinTechs, allowing easier access to legal and accountancy services.
  • Establish ‘FinTech Bridges’ alongside UK Trade and Investment, helping UK FinTechs to expand internationally.

The initiatives have been introduced to ensure that the UK continues to be a global centre of the FinTech market.  The government will continue to work with members of the industry and TechCityUK and will be announcing more policies to support the FinTech sector in due course.

FLA publishes its latest figures for asset, consumer and motor finance industries

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

The statistics show that:

  • Consumer finance new business grew by 22% in February, compared with the same month last year. Credit card and personal loan new business together grew by 23% compared with February last year. The second charge mortgage market saw new business growth of 40% by value and 17% by volume, this being the fifth consecutive month of double-digit volume growth.
  • In the point-of-sale consumer new car finance market, new business grew 27% by value and 22% by volume in February compared with last year. The percentage of private new car sales financed by FLA members through the point-of-sale reached 81.9% in the twelve months up to February 2016, increasing from 81.7% in the twelve months to January. Strong growth was also seen in the point-of-sale consumer used car finance market in February, with new business up 23% by value and 18% by volume.
  • In the asset finance industry, new business (primarily leasing and hire purchase) grew by 9% in February, compared with the same month last year. Finance of commercial vehicles increased in February by 17% compared with the same month in 2015. Business equipment finance and plant and machinery finance also grew by 13% over the same period.

CML members vote in favour of trade body merger

Members of the Council of Mortgage Lenders (CML) have voted in favour of the proposal to form part of the new proposed trade association for financial services firms; incorporating the activities currently undertaken by the CML, the British Bankers’ Association, Payments UK and the UK Cards Association.

If all the trade bodies agree on the process to amalgamate, the Financial Services Trade Association Review team will in due course make further announcements on the operational aspects of the integration.

New research from StepChange on financial indebtedness

The debt charity, StepChange has published two new press releases on financial indebtedness.

The first publication, explains how the number of single parents approaching the charity for help has doubled over the last four years and they are now the fastest growing group among its clients.  The figures show that single parents are more likely to be on lower incomes, in part time work and live in rented accommodation.  Previous research by the charity has highlighted how low incomes and insecure work are increasingly leaving people vulnerable to debt, and such problems appear particularly acute for single parents. 

The second publication, states that new figures from the charity show that people contacting it for debt advice are increasingly likely to work part time rather than full time.  The charity also says that a third of those part time workers now owe money on their essential household bills, including rent or mortgages and Council Tax.

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