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Retail Finance round-up - 5 May 2016

Retail Finance round-up - 5 May 2016
  • United Kingdom
  • Financial services - Retail finance


A key development this week is the FCA’s policy statement that implements changes to the Compensation sourcebook.  The new rules change the compensation arrangements available to consumers under the Financial Services Compensation Scheme and came into force on 29 April 2016.

Also of interest this week is the news that a director of three debt management firms has been sentenced to 15 months suspended sentence for fraud by abuse of position.  The news highlights that the FCA will work closely with law enforcement agencies where it suspects there has been criminal activity in the market.

Finally, the FCA has published a report on the findings from its survey of firms providing financial advice and both the Bank of England and the British Bankers’ Association have published their latest lending statistics for March 2016.

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FCA publishes its Policy Statement relating to the FSCS for changes to the Compensation sourcebook including feedback on CP15/40 and final rules

The FCA has published its final rules and feedback on its consultation on Financial Services Compensation Scheme: changes to the Compensation sourcebook, CP15/40. The new rules change the compensation arrangements available to consumers under the Financial Services Compensation Scheme (FSCS). Some key changes to note are:

  • In situations where a successor firm has taken on the liabilities of a predecessor firm, the proposed rule change makes it clear that claims against a successor firm in respect of liabilities arising from the acts or omissions of a predecessor firm fall within the scope of the FSCS.
  • Subject to certain exceptions, directors of a firm in default are not eligible to claim on the FSCS. Companies in the same corporate group as a firm are also not eligible to claim on the FSCS.
  • The FSCS now has flexibility not to pay compensation to a person to whom a claimant has directed the FSCS to pay but instead to pay any compensation to the claimant directly.
  • The rule change provides for a general requirement for firms to cooperate with the FSCS, and not a specific requirement to provide information. Nonetheless, The FCA encourages firms to provide information to the FSCS in a more timely manner where this may not already be the case.

The FCA encourages firms to familiarise themselves with the amended rules.  The changes implemented by this Policy Statement came into force on 29 April 2016.  In terms of issues relating to the FSCS funding, the FCA confirmed this will be dealt with separately under a consultation paper due to be published later this year.

CMA publishes second annual concurrency report

The Competition and Markets Authority (CMA) has published the second annual concurrency report.

Following on from the first annual report on 1 April 2015, the CMA considers the concurrency arrangements between the CMA and sector regulators have been working well, and have extended beyond the general ‘building blocks’ of a new competition enforcement regime to include cooperation on broader policy and markets work.

The report identifies the concrete actions taken by each of the sector regulators under their concurrent powers under the Competition Act 1998 and Enterprise Act 2002.  It also contains descriptions of what is being done more generally to achieve competitive outcomes in each sector.  The report also identifies relevant future work by the regulators.  While the CMA considers significant progress has been made, it considers that more can be done.  In particular in relation to collective recording of decision-making in competition cases and increasing the number of cases opened each year.

In relation to the FCA, the report notes that since April 2015, the FCA has now assembled a competition team of 90 staff and is committed to working with the CMA and other regulators and authorities.  The FCA has opened its first case under the Competition Act 1998.  It has also issued two ‘on notice’ letters and three advisory letters.  The FCA has not opened any market investigations under the Enterprise Act 2002 since 1 April 2015.  However, the FCA has carried out, or is currently carrying out, several market studies using its powers to promote competition under FSMA.   These include (among other things):

  • The cash savings market study, the final results of which were published in January 2015.
  • The credit card market study.  The interim results of this study were published in November 2015 and the final report is expected to be published in Spring 2016.

Other steps the FCA has taken to promote competition include its call for input in relation to competition in the mortgage sector, its work on innovation, including expanding ‘Project Innovate’ and its policy statement on fair, reasonable and non-discriminatory access to regulated benchmarks.

FCA publishes report on findings from its survey of firms providing financial advice

At the end of last year, the FCA surveyed 233 firms active in providing retail investment advice, these included; financial advisers, banks and life insurance companies. The FCA’s questions focussed on the following specific retail investment areas: pension accumulation, retirement income, investments and other advice areas, such as protection products and mortgages.

The FCA has recently issued a report presenting its findings from the survey. The report, published on 28 April 2016, was used to gain a better understanding about the profile of the customers of advice firms, the barriers that firms face in expanding the provision of advice to the mass market, the use of technology in the advice process, and the advice firms’ views on the future of the advice market.

Some of the key findings resulting from the survey are:

  • Most firms use face-to-face meetings or telephone conversations as the primary channel for delivering advice to consumers.
  • The majority of firms (67% or more) reported that they tend to use technology to a significant degree throughout the advice process, primarily for research, analysis and financial planning, risk profiling, customer data management and reporting.
  • Customer-facing technology, such as tools to aid decision-making, were used to a significant degree by 15% of firms.
  • 29% of firms said they expected to increase their use of platforms, and 32% of firms expected to grow their number of advisers over the next year.
  • The majority of firms planned to use more technology, particularly in customer communications and to increase efficiency and reduce the costs of the advice process.
  • A relatively small proportion of firms, 11% or less, expected that, over the next year they would increase their mass-market, low-cost advice proposition or the provision of generic advice.
  • 72% of firms said that customers’ preference for personal interaction with an adviser was a ‘very important’ or ‘important’ barrier to providing automated or technology-supported advice.  Generally, the larger firms viewed it as less of a barrier than smaller firms. 19% or less reported a lack of customer trust in automated propositions, lack of customer ability to access and use online tools, or customer acquisition costs for automated advice being very important barriers.
  • The cost of technology and regulatory obligations and implications were also stated as an important barrier.

The results of the survey were used to inform the financial advice market review (FAMR) and its recommendations.

PRA’s Regulatory Digest for April 2016 and the Bank of England’s proposal for a loan-level data collection for buy-to-let lending

On 3 May 2016, the PRA published its Regulatory Digest for April 2016. The Regulatory Digest summarises the key regulatory news and publications for April 2016. Some of the key relevant developments highlighted are:

Also of interest is the Bank of England’s recent consultation on its proposal for a loan-level data collection for buy-to-let lending.  The Bank of England’s proposed data collection would be built on a data set currently collected by the Council of Mortgage Lenders (CML), but with additional attributes and reporters in order to provide more detail and greater coverage and, for the first time, address the needs of statistical and regulatory data users in one Bank of England collection.

The Bank proposes that firms will report data on a quarterly basis.  It also proposes that all firms with new lending exceeding 20 million pounds annually will be required to report. Firms fulfilling the reporting criteria will be expected to deliver data for the first time in July 2017, relating to 2017 Q2.

The consultation is set to run until 10 June 2016.

FCA publishes its Disclosure Log under the Freedom of Information Act 2000

The FCA has updated its Disclosure Log, listing some of the disclosures made under the Freedom of Information Act 2000, since February 2016.

The FCA has published its responses to Freedom of Information requests.  Items of interest include:

  • The gender split in Controlled Function Holders. The FCA has provided a number of statistics outlining how many men and women hold Controlled Functions.  2680 men and 1022 women hold Controlled Functions 10 and 11.   
  • Data detailing the use of FCA prohibition orders in 2008-2015. The FCA has confirmed that there were 341 prohibition orders in total over that period.  
  • Responses to the FCA’s call for input on financial advice market review (FAMR).  The FCA confirmed that it received 270 responses in total, 27 of which came from financial service providers and 68 came from intermediaries. 
  • The FCA confirmed it received 47 applications from mortgage brokers for second charge permissions under the Mortgage Credit Directive.

Director of debt management firm given 15 months suspended sentence for fraud by abuse of position

The FCA has confirmed that the director of three debt management firms, Debts Reduced Limited, Linked Finance Limited and another firm in the director’s own name, was sentenced for fraud by abuse of position, at Cardiff Crown Court on Friday 8 April 2016. The director was sentenced to 15 months in prison (suspended for two years) and 200 hours of community service. The case was brought by South Wales Police following its own investigation, in liaison with the FCA.

The FCA provided a witness statement setting out the allegations against the director, which included:

  • The director allegedly charged customers £10 per month for an additional product, referred to as a ‘Cover Plan’. The director claimed that this product provided help to customers if their circumstances changed and they were subsequently unable to make payments into their debt management plan, and therefore to creditors.
  • The director was unaware of any contractual basis on which any of the customers consented to this service and was also unaware of any documentation or correspondence initially used to make customers aware they were paying into, or had access to, the service.
  • The director restricted the FCA permissions held and agreed that the firms would cease engaging in new debt management business, as requested by the FCA. The restriction took effect on 21 May 2014.
  • The director also agreed to the FCA's request to wind down the firms in an orderly manner and to focus on returning monies (including those monies accumulated as part of the cover plan) back to the relevant customers.
  • On 20 February 2015, having been satisfied that the director had returned all the monies to the relevant customers, the firms' interim permissions were cancelled.

The FCA has reinforced the fact that on becoming aware of potential criminal activity in the market it regulates, it will work closely with the relevant law enforcement agencies.

European Parliament adopts Benchmark Regulation

On 28 April 2016, the European Parliament published a press release announcing that it had voted in plenary to adopt the proposed Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Regulation).

The Regulation creates 3 categories of benchmarks:

  • Critical benchmarks” which influence financial instruments and contracts with an average value of at least €500 billion.
  • Significant benchmarks” which influence financial instruments or financial contracts having a total average value of at least €50 billion.
  • Non-significant benchmarks” that do not fulfil the conditions set for the ‘significant category’.

The provisional text of the Regulation was published on 29 April 2016. The Regulation is expected to be formally adopted by the Council in May 2016. The official and finalised text will subsequently be published in the Official Journal of the EU and enter into force on the day after publication.

The European Commission publishes a roadmap on the Consumer Rights Directive

On 25 April 2016, the European Commission published a roadmap for its evaluation on the Consumer Rights Directive (the Directive). The Directive had to be transposed into the national laws of members states by December 2013 and a report on its application is due in December 2016. The report on the roadmap will influence other directives, including those relating to unfair contract terms, sales of consumer goods and associated guarantees, unfair business-to-consumer practices, price indication and misleading and comparative advertising.

The Directive is intended to achieve a high level of consumer protection across the EU and assist consumers by harmonising certain laws across member states. The intended effect is to stimulate cross-border competition, reduce administration and provide consumers with a wider range of choice and at a lower price. The Directive’s purpose is also to increase consumer confidence so they can buy cross-border and ascertain a uniform level of protection between member states.

The roadmap in particular will assess how well the Directive performs against criteria like efficiency, coherence, relevance and added value. The roadmap itself will examine certain issues in particular, including the rules on digital content and new rules on delivery and the passing of risk.

It is anticipated that the evaluation is due to be completed in the first quarter of 2017.

ECJ considers further referrals from national courts on whether particular national law provisions are compliant with EU consumer protection laws

On 21 April 2016, the Court of Justice of the European Union (the ECJ) published its decision on Ernst Georg Radlinger and Helena Radlingerová v Finway a.s (C-377/14).  The ECJ confirmed that national courts are under an obligation to assess, on their own motion, compliance with EU rules on consumer protection and consumer credit agreements, despite national law preventing them from doing so under certain circumstances.

This case revolved primarily on a question referred by a Czech regional court to the ECJ, on whether a national law provision preventing the national court to consider unfairness of terms in an insolvency proceedings matter, was in compliance with the EU laws on consumer protection. The ECJ concluded that the Unfair Terms Directive precludes national law from prohibiting a national court to consider of their own motion, compliance with EU laws on consumer protection. 

In its consideration, the ECJ also concluded that:

  • By virtue of the Consumer Credit Agreement Directive, a national court hearing a dispute relating to such an agreement, must also assess of its own motion whether the information relating to the credit has been clearly and concisely set out, as required.
  • National courts are under an obligation to assess the cumulative effect of all terms of a consumer credit agreement, and should a number of these terms be found to be unfair, the national court is to exclude all of the unfair terms, and not merely some of them.

This case marks further development in this legislative area of EU consumer law.

Bank of England publishes latest lending statistics in Money and Credit report

On 29 April 2016, the Bank of England published its latest statistics for March 2016 in its Money and Credit report.  The report contains data on broad money and credit, lending to individuals and lending to businesses.

In summary the statistics on lending to individuals is as follows:

  • Total lending to individuals increased by £9.3 billion in March, compared to an average of £5 billion over the previous six month period.
  • Lending secured on dwellings increased by £7.4 billion, compared with the average of £3.6 billion over the previous six month period.
  • The number of loan approvals for house purchase was 71,357 in March, which is broadly in line with the average over the previous six month period. The number of approvals for remortgaging was 41,347, compared with an average of 40,755 over the previous six month period. The number of approvals for other purposes was stated to be 12,875, compared to the average of 12,267 over the previous six month period.
  • Consumer credit increased by £1.9 billion, compared to an average of £1.4 billion over the previous six month period. Within consumer credit, credit card lending increased by £0.6 billion in March, compared with an average monthly increase of £0.4 billion over the previous six months. Other loans and advances have also increased by £1.2 billion, compared to the average of £1 billion over the previous six month period.

The Bank of England also published its latest statistics relating to effective interest rates for household deposits, mortgages and personal loans. Both the effective rate paid on households’ outstanding time deposits and the rate for households’ new time deposits decreased in March.  Similarly both the effective rate on the stock of outstanding mortgages and the new secured loan rate decreased in March. Finally, the rate on outstanding unsecured personal loans and the new unsecured personal loan rate decreased in this period too.

The Cheque and Clearing Company publishes issue 37 of its Cheque Mate newsletter

Issue 37 of the Cheque and Clearing Company newsletter was published on 28 April 2016.  The newsletter covers a number of issues including the appointment of Heather Benjamin as the new Independent Director and statistics showing that cheque fraud is at its lowest ever level. 

The newsletter also provides details on the new process for clearing cheques known as the Image Clearing System that is to be introduced in the future.  This process will allow cheques to be cleared by the next weekday or sooner.  The system will use a digital image of the cheque rather than the actual paper cheque.  The Government is working on regulations to underpin the new legislation passed in the Small Business, Enterprise and Employment Act 2015 which would enable cheque imaging.  Further details on the timescales applicable to this process are to be published in due course.

BBA publishes March 2016 figures for the high street banks

The British Bankers’ Association (BBA) has published its March 2016 figures for the high street banks.  In summary the figures reveal that:

  • In anticipation of the stamp duty surcharge, there has been a surge in buy-to-let and second home buying. Gross mortgage borrowing in March was up 64% compared to a year ago and the highest borrowing since April 2008.
  • The number of mortgage approvals in March was 20% higher than a year ago, with remortgaging up 25% and house purchase up 14%, whilst unsecured borrowing by households is growing at around 6% per annum reflecting low interest rates and relatively strong household finances.
  • Consumer credit has also increased due to improving customer confidence and low interest rates stimulating personal borrowing demand.

ECB sets total supervisory fees for 2016

The European Central Bank (ECB) has published its decision in which it announces that its total estimated costs for the tasks associated with the prudential supervision of the European banking system for 2016 will be €404 million.  This represents an increase of 23.9% on the amount invoiced in 2015.

Out of the €404 million total, 129 significant banks will pay 88.4% and 3,200 less significant banks will pay 11.6%.  The supervisory fee is set at the highest level of consolidation within Member States participating in the Single Supervisory Mechanism.

Individual fees for each bank will be determined according to the bank’s importance and risk profile, using annual fee factors supplied by all supervised banks with a reference date of 31 December of the preceding year.  Banks will receive their individual invoice notice in October 2016.