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Retail Finance round-up - 21 April 2016

Retail Finance round-up - 21 April 2016

  • United Kingdom
  • Financial institutions - Retail finance

21-04-2016

It has been another busy week with the publication of statistics and data by the Bank of England and the CML. A key development this week is the approval by the European Parliament of the General Data Protection Regulation (GDPR), which sees the replacement of the EU Directive on data protection (Directive 95/46/EL). We summarise the key provisions and timescales for the GDPR below.

The Government has this week published the UK Cyber Security Strategy 2011-2016 Report. The report considers the achievements and impact of the Cyber Security Programme and looks ahead to future developments. The key achievements include the enhancement of the UK’s national capabilities and technologies for tackling cyber-crime. For example, CERT-UK, the UK’s national Computer Emergency Response Team, was launched in 2014. This is a topic which features in the FCA’s Business Plan 2016/17.

Also of interest this week is the Lending Standards Board’s review on customers in vulnerable circumstances. The review highlights that consumer vulnerability remains one of the key areas of focus for regulators, consumer groups, debt charities and providers of consumer credit.  Its research found that whilst most firms are at the beginning of their vulnerability journey, they recognise that vulnerability should be ‘at the forefront of everyone’s minds’ throughout the customer journey, and not something that is confined to debt collection.

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FCA and PRA publish consultation paper on proposed implementation of the Enforcement Review and the Green Report

The FCA and PRA have published proposals aimed at strengthening the transparency and effectiveness of their enforcement decision-making process.  This is in response to recommendations made by HM Treasury in its ‘Review of enforcement decision-making at the financial services regulators’ (published in December 2014) and Andrew Green QC’s ‘Report into the FSA’s enforcement actions following the failure of HBOS (published in November 2015) (the Green Report).

The consultation paper explains the changes that have already been put into practice by the regulators and sets out the recommendations requiring consultation, and the proposals for implementing them.  The PRA notes that it intends to consult separately later in 2016 (once the Bank of England and Financial Services Bill has passed through Parliament) on the recommendations relating to settlement and contested decision-making.  It also intends to publish its enforcement referral framework alongside its implementation of these recommendations.

In chapters 3 and 4, the FCA and PRA consult jointly on how they will co-operate in enforcement investigations, and on subjects’ understanding and representations in joint enforcement investigations.  These proposals address both the HM Treasury Review and Green Report recommendations.

The FCA also proposes in chapters 5 and 6, to amend the Enforcement Guide and the Decision Procedure and Penalties Manual to provide a framework and incentives for partly contested cases.  This will allow enforcement proceedings to be resolved when an individual or firm agrees all relevant facts and the breaches which arise from those facts, but wishes to contest the appropriate regulatory outcome before the Regulatory Decisions Committee.  No changes are proposed to the process for agreeing a full resolution of all issues.

The deadline for responding to the consultation is 14 July 2016. Once comments are reviewed, a Policy Statement will be issued.

CMA publishes addendum to its provisional findings in retail banking market investigation

The Competition and Markets Authority (CMA) has published an addendum to its provisional findings in the retail banking market investigation.  The CMA’s provisional findings found that there are a combination of features of the markets for personal current accounts (PCAs), business current accounts (BCAs) and SME lending that give rise to adverse effects on competition.  These features relate to low levels of customer engagement, barriers to accessing and assessing information, barriers to switching and incumbency advantages, and linkages between PCAs, BCAs and SME lending products.

The regulatory capital requirements regime exists to protect customer deposits, banks’ trading counterparties and the economy from the effect of banks becoming insolvent.  It does this by requiring banks to hold a minimum amount of capital against their assets to protect against credit, market and operational risks.  The provisional findings report identified, among other things, that there are significant disparities in the risk weights for credit risk on residential mortgages applied to different banks depending on the approach they are authorised to adopt to calculate their risk weight under this regime. These disparities have the potential to distort competition and to act as a barrier to entry and expansion as some banks have to hold significantly more capital on certain loan-to-value (LTV) residential mortgages than other banks. The CMA has undertaken further analysis to understand the impact of the regulatory capital requirements regime on competition between banks in the provision of PCAs, BCAs and lending to SMEs and more widely across banks' retail banking businesses.

The CMA has provisionally found that the capital requirements regime places banks on the standardised approach to calculating risk weights at a competitive disadvantage in lower LTV mortgages than banks on the internal ratings-based approach. The majority of the CMA inquiry group considered that further evidence was needed in order to be sufficiently confident about the scale of the impact on banks' costs and returns. The group, however does not intend to undertake further analysis to determine whether the disadvantage in lower LTV mortgages gives rise to a barrier to entry and/or expansion in retail banking.

The CMA invites interested parties to submit reasons in writing as to why the addendum to the provisional findings should not become final (or, as the case may be, should be varied), by 6 May 2016. The CMA is planning to publish its provisional decision on remedies in May 2016 and to publish the final report in July/August 2016.

HM Treasury publishes speech by the Economic Secretary on the future of financial advice

Harriett Baldwin delivered a speech at an industry forum on the Financial Advice Market Review (FAMR) on 13 April 2016.  Ms Baldwin highlighted some of the issues facing the advice market, namely that it currently only serves wealthier customers, but those without significant wealth have an ‘advice gap.’ 

The FAMR published its final report last month and set out a new approach to financial advice through 28 recommendations. These include:

  • Simplifying the definition of financial advice so that it reflects the EU definition of “personal recommendation.”
  • Streamlining the advice regime to enable advisers to give affordable advice focussed on specific needs.
  • The FCA providing regulatory support for high quality robo-advice propositions through a new ‘advice unit.’
  • Replacing the Money Advice Service with a new, slimmed down money guidance body.

In order to ensure these reforms are embedded, a Financial Advice Working Group, drawing members from the FAMR Expert Advisory Panel and the FCA Consumer and Practitioner Panels, will take an active role in implementing some of the recommendations from the FAMR report.

EU Parliament approves the General Data Protection Regulation

On 14 April 2016, the EU Parliament approved the General Data Protection Regulation (GDPR).  The GDPR will replace the Directive 95/46/EC, when it comes into force, which is likely to be summer 2018. The GDPR will not require local implementation.  In the UK, it will automatically replace the current Data Protection Act 1998 which implements Directive 95/46/EC. 

Whilst many of the core obligations in the Directive will remain, for example, it will remain necessary to process personal data fairly and lawfully, to impose controls on data processors, and to keep personal data secure,  there will be several new additions to the data privacy architecture, including:

  • Tightened rules around consent and transfers of personal data outside the European Economic Area.
  • Express requirements on encryption and pseudonymisation (as part of data security).
  • Mandatory security breach reporting to the supervisory authority (currently the ICO) within 72 hours of awareness.
  • Obligations in respect of data protection impact assessments.
  • Extra territoriality of application.
  • Direct obligations on data processors.
  • Enhanced rights for data subjects, including:
  • A right in respect of transparency.
  • A right to rectification of inaccurate personal data and the right to erasure (‘right to be forgotten’).
  • A right to portability of personal data from one data controller to another.
  • A right to object to the use of personal data for the purposes of certain types of 'profiling.'

The GDPR requires a risk-based approach to be taken whereby data controllers can implement measures according to the risk involved in their respective data processing operations: the higher the risk, the more rigorous the obligations. The GDPR also requires a designated data protection officer (DPO) to be appointed within certain companies and public authorities carrying out personal data processing with a certain level of risk.

The consequences of non-compliance are also heightened and there are certain GDPR risks which apply directly to data processors.  Infringement of certain provisions will risk a maximum fine of up to €10 million or 2% of the total annual turnover in the preceding year (whichever is higher).  Certain other infringements will risk up to €20 million or 4% of total worldwide annual turnover.  Currently, the ICO can fine up to £500,000 (in addition, outside of the data privacy regime, the FCA’s own fines are relevant to financial institutions where personal data breaches compromise customer information).  The risk of compensation claims from affected data subjects remains.

Following the European Parliament’s approval, the GDPR is expected to be translated and then published in the Official Journal (in approximately two to three months’ time). Twenty days from the date of publication, the GDPR will be formally adopted. There will then be a two year lead time before the GDPR comes into force.

Bank of England and Financial Services Bill: Report on committee stages in House of Commons published

On 15 April 2016, the House of Commons Library published a briefing paper on the House of Commons committee stages of the Bank of England and Financial Services Bill 2015-16 (the Bill).  The Bill amends the governance and accountability of the Bank of England and includes changes to the PRA.

The paper summarises the committee stage proceedings in the House of Commons, with details of the debates and the amendments made to the Bill.  Most of the time in Committee was spent looking at the Senior Managers and Certification Regime, in particular the issue of the ‘reverse burden of proof.’  Several new clauses were also introduced and approved.  Items of interest include: 

Clause 19 was inserted as a new clause to promote the ideal of diversity within the financial services industry.

Clause 18 formalises the issuance of ‘remit letters’ between the regulators and the Treasury.  ‘Remit letters’ are often used by the Treasury to make recommendations to the FCA about aspects of the Government’s economic policy to which the FCA should have regard.  The clause was one of several Government new clauses introduced during the Lords report stage and so had not been discussed in the Lords committee stage.  At Commons’ committee stage this clause was discussed. While amendments had been suggested, these were rejected and the clause was ultimately approved with no amendments.

A new clause was inserted to, among other things, permit the FCA to collect a levy from consumer credit firms to fund the Illegal Money Lending Teams.  The purpose of these teams is to take action against illegal money lending.

The Bill completed its committee stage in the House of Commons on 23 February 2016.  According to the webpage for the Bill, the Bill is currently being considered at the House of Commons reports stage and third reading.

Government publishes the UK Cyber Security Strategy 2011-2016 Annual Report

On 14 April 2016, the Government published the UK Cyber Security Strategy 2011-2016 final Annual Report.

The report considers the achievements and impact of the Cyber Security Programme and looks ahead to future developments.

The Cyber Security Programme aimed to:

  • tackle cyber-crime and make the UK one of the most secure places in the world to do business in cyberspace
  • make the UK more resilient to cyber-attack and better able to protect its interests in cyberspace
  • help shape an open, vibrant and stable cyberspace that supports open societies
  • build the UK’s cyber security knowledge, skills and capability.

Among other things, the report lists the following achievements:

  • The UK’s national capabilities and technologies for tackling cyber-crime have been significantly enhanced. For example, CERT-UK, the UK’s national Computer Emergency Response Team, was launched in 2014.
  • Businesses of all sectors and sizes now have unprecedented levels of expert guidance and training available to help them manage their cyber risks. For example, there is now best practice cyber security guidance available to businesses, together with free online training for employees and small business owners, as well as specific training for a range of professions.
  • Government digital services are more secure than ever. For example, Government departments, local authorities and councils now use the Public Services Network, which enables secure collaboration between them.
  • Police forces are actively tackling serious cyber-crime, both at home and internationally. For example, the National Cyber Crime Unit was established in 2013 as the national lead for serious and organised cyber-crime.

The Government also announced that it will substantially increase investment in protecting the UK from cyber-attacks to £1.9 billion.  This year will see the launch of the UK’s second National Cyber Security Strategy, which will define the Government’s vision and ambition for the next five years.

Bank of England publishes Bank Liabilities Survey

On 13 April 2016, the Bank of England published the results of its Bank Liabilities Survey for 2016 Q1.

The aim of this quarterly survey of banks and building society lenders is to improve the understanding of the role of lenders' liabilities and capital in driving credit and monetary conditions. The survey covers: 1) developments in the volume and price of bank funding; 2) developments in the loss-absorbing capacity of banks as determined by their capital positions; and 3) developments in the internal price charged to business units within individual banks to fund the flow of new loans.

In particular the survey found:

  • Funding: UK banks and building societies reported that their total funding volumes had increased significantly in the three months to mid-March 2016. In addition, investor demand for wholesale debt fell significantly in 2016 Q1 for the first time since the survey began in 2012 Q4.
  • Capital: Lenders reported that their total capital levels decreased in 2016 Q1, having increased in most quarters since the survey began. Capital levels are expected to remain unchanged in Q2. Lenders also reported that their average cost of capital increased significantly in 2016 Q1, but is expected to decrease in Q2.
  • Transfer pricing: Lenders reported that the internal price charged to business units to fund the flow of new loans (the 'transfer price') increased in 2016 Q1, driven by significantly higher long-term wholesale funding spreads. Lenders reported that swaps or other reference rates had pushed 'transfer prices' downwards significantly.

Basel Committee on Banking Supervision consults on guidelines on definitions of non-performing exposures and forbearance

On 14 April 2016, the Basel Committee on Banking Supervision (BCBS) published a consultation document on guidelines on the prudential treatment of problem assets and definitions of non-performing exposures and forbearance.

There are currently no consistent international standards for categorising problem loans.  Accordingly, the BCBS has proposed two definitions to promote consistency in supervisory reporting and disclosures by banks.  The proposed definitions are intended to complement the existing accounting and regulatory framework relating to asset categorisation.

The BCBS has asked for views on definitions of the following key terms:

  • Non-performing exposures: The BCBS proposes a definition based on criteria for categorising loans and debt securities that are centred around delinquency status (90 days past due) or the unlikeliness of repayment. It also clarifies the consideration of collateral in categorising assets as non-performing and introduces rules on the upgrading of an exposure from "non-performing" to "performing" as well as for the interaction between non-performing status and forbearance.
  • Forbearance: The BCBS proposes a definition which sets out criteria for when a forborne exposure can cease being identified as such and that emphasises the need to ensure a borrower's soundness before the discontinuation.

The consultation will close on 15 July 2016.

CML publishes lending statistics for February 2016

On 13 April, the Council of Mortgage Lenders (CML) published its lending statistics for February 2016.

In summary the statistics for lending in January show, on an unadjusted basis, that:

  • home owners borrowed £8.7bn for house purchases, a total of 48,000 loans, which is up 21% year on year.
  • first time borrowers borrowed £3.4bn (22,000 loans) which is up 11% year on year.
  • home movers borrowed £5.3bn, totalling 26,000 loans, which is up 14% compared to February last year.
  • re-mortgage activity totalled £4.8bn, encompassing 28,400 loans and up 24% compared to last February, but down 17% from January 2016.
  • landlords borrowed £3.7bn in February 2016, totalling 23,700 loans, which is up 47% compared to February 2015.

LSB publishes a standards development review on customers in vulnerable circumstances

The Lending Standards Board (LSB) has published a standards development review into customers in vulnerable circumstances. The review highlights that consumer vulnerability has become one of the key areas of focus for regulators, consumer groups, debt charities and providers of consumer credit.  Its research found that whilst most firms are at the beginning of their vulnerability journey, they recognise that vulnerability should be ‘at the forefront of everyone’s minds’ throughout the customer journey, and not something that is confined to debt collection.

In summary, the LSB found:

  • There is executive level support and accountability for developing a fair approach to customers with vulnerabilities, supported by clear milestones and reporting lines to the executive which ensures vulnerability remains a corporate priority. However, the LSB emphasise that more could be done at a strategic level to ensure a fair and consistent approach to vulnerability.
  • There are a number of best practice guides but more could be done to consolidate guidance and drive consistency across firms.  The LSB recommends that the industry should continue to work together through the sharing of best practice as a customer in a vulnerable circumstance may hold multiple products across a number of different financial services firms, and therefore a consistent approach, industry wide, may help minimise customer detriment.
  • It is accepted that vulnerability can take multiple forms and that the situation and impact may vary in degrees of permanence.  Factors such as low literacy and numeracy skills, mental and physical health, caring responsibilities and life changing events can put anyone in a vulnerable situation, particularly where this affects the customer’s ability to make an informed decision or maintain existing financial commitments.
  • All firms had invested in front line training to identify customers who may require additional support, including referrals to specialist teams, where they exist.
  • Firms should have  mechanisms in place to support customers identified as vulnerable at the point of sale. However, the review stated that as most sales are non-advised it is proving difficult to provide sufficient information to vulnerable customers to make informed decisions without slipping into the realms of implied advice.
  • More customers are transacting digitally, which restricts firms from engaging in face to face or telephone contact.  The LSB found that this generally sits at odds with most firms’ strategies for identifying and dealing with vulnerability which places a reliance on face to face or telephone contact with their front line teams.
  • The fair treatment of customers in vulnerable circumstances is an active consideration at all stages of the customer journey and product lifecycle, though firms could do more to help demonstrate this.

Advice to invest in P2P lending may now be covered by FSCS

On 14 April 2016, the Financial Services Compensation Scheme (FSCS) revealed on its website that it may be able to compensate eligible investors in relation to unsuitable advice they receive in relation to investing in peer-to-peer (P2P) lending via loan-based crowdfunding platforms. 

Up to £50,000 may be available as compensation if all of the following criteria are met:

  • The advice received to buy the investment was given after 6 April 2016.
  • The firm that advised was authorised by the appropriate regulator at that time.
  • Money has been lost as a result of the advice.
  • The firm (or its principals) that gave the advice do not have sufficient assets to meet the compensation claim.

Bank of England publishes Money and Credit statistics for February 2016

The Bank of England has published its Money and Credit statistics for February 2016.  The publication contains data on broad money and credit, lending to individuals and lending to business.

In summary the statistics for lending to individuals are as follows:

  • Total lending to individuals increased by £4.9 billion in February, in line with the average over the previous six months.
  • Lending secured on dwellings increased by £3.6 billion in February, in line with the average over the previous six months.
  • The number of loan approvals for house purchase was 73,871 in February, compared to the average of 70,991 over the previous six months.  The number of approvals for re-mortgaging was broadly in line with the average over the previous six months.  The number of approvals for other purposes was 12,514, compared to the average of 12,103 over the previous six months.
  • Consumer credit increased by £1.3 billion in February, broadly in line with the average monthly increase over the previous six months.  Within consumer credit, credit card lending increased by £0.02 billion in February, compared to the average monthly increase of £0.4 billion over the previous six months.  Other loans and advances increased by £1.1 billion, broadly in line with the average monthly increase over the previous six months.

Bank of England publishes the quarterly Credit Conditions Survey for Q1 2016

On 13 April 2016, the Bank of England published the quarterly Credit Conditions Survey for Q1 2016. The survey covers secured and unsecured lending to households and lending to non-financial corporations, small businesses, and to non-bank financial firms, with the input coming from bank and building society lenders answering a set of questions on the past three months and the oncoming three months.

They key points resulting from the survey are:

  • Supply: Supply for secured and unsecured credit remained unchanged for the most part, with slight increases in secured lending for loans with loan to value (‘LTV’) lower than 75% and other unsecured credit products, such as personal loans. It is expected supply for unsecured credit will increase further in Q2.
  • Demand: Demand for secured lending and buy-to-let (‘BTL’) lending increased. Demand for unsecured lending increased significantly for the third consecutive quarter, whilst demand for credit cards remained unchanged. It is expected that in Q2 demand for secured lending will increase slightly, with demand for BTL decreasing slightly.
  • Loan pricing: Spreads for secured household lending widened significantly, after 13 quarters of narrowing, and are expected to continue widening in Q2. Spreads on credit cards and other unsecured lending also widened in Q1.  Spreads on other unsecured lending products are expected to continue widening in Q2, but credit card spreads are expected to remain unchanged.
  • Default: For 11 consecutive quarters, the default rates on secured loans to households fell and these rates are expected to continue falling in Q2. Default rates on credit card lending to households and other unsecured credit products did not change.

This report details the results of the 2016 Q1 survey and was conducted between 22 February 2016 and 11 March 2016.

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