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Retail Finance round-up - 12 May 2016

Retail Finance round-up - 12 May 2016
  • United Kingdom
  • Financial services - Retail finance


One of the key developments this week is the opening of applications for the FCA’s regulatory sandbox. The FCA has published a new webpage on how to use this innovative measure which is intended to provide “an environment that enables firms to test their products and services in a virtual space without entering the real market.” Firms have until 8 July 2016 to apply to be in the first cohort of the sandbox. The regulatory sandbox is one of the topics which will be covered at our forthcoming Digital Financial Services event on 16 June.

Also of interest this week is Royal Assent of the Bank of England and Financial Services Act 2016. The Act is the third significant piece of legislation to impact the UK’s financial sector, the first being the Financial Services Act 2012, which placed the Bank of England at the centre of financial regulation and the second being the Banking Reform Act 2013, which implemented a number of banking standards regarding individual accountability and ring-fencing. This new Act will amongst other things, extend the Senior Managers and Certification Regime to all financial services firms and introduce a ‘duty of responsibility’ for senior managers in all authorised firms superseding the reverse burden of proof which would have applied in the banking sector.

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FCA publishes its Policy Development Update Issue 33

The FCA has published Issue 33 of its Policy Development Update.

The development update includes, amongst other things:

  • Publications issued since the last edition and the dates on which relevant consultation periods end. For example the report on the Payment Systems Regulator’s (PSR) regulatory fees for 2016/17.
  • Forthcoming publications of which key documents for the retail finance sector include:
    • Consultation paper on ‘Regulatory fees and levies: rates proposal 2016/17’, which is due in June 2016;
    • Consultation paper headed ‘Proposed Implementation of the Enforcement Review and Green Report’ that is expected in Q3 2016; and
    • Proposals to deal with the CMA’s recommendations on high-cost short-term credit that is expected in Q2 2016.

CMA retail banking market investigation - intention to open second disclosure room

The Competition and Markets Authority (CMA) has published a notice of its intention to hold a second disclosure room in relation to its retail banking market investigation. This follows the publication of its provisional findings on 22 October 2015 and the update on the personal current account (PCA) pricing analysis paper which is due to be published in the week commencing 16 May 2016. The following will be included in the disclosure room:

  • Sample of anonymised current account usage data which was provided on the cost of each PCA for the sample of customers underlying the PCA analysis.
  • Anonymised current account usage data provided by certain banks.
  • Anonymised responses of individual customers to questionnaires.

Deputy Governor of the PRA gives speech on culture in financial services

Andrew Bailey, Deputy Governor of the Prudential Regulation Authority, has given a speech on culture in financial services.  In the speech, Mr Bailey re-emphasises that culture still is, and will remain, of the utmost importance to financial regulators.  Mr Bailey lists some of the factors which influence culture within a firm noting that the tone of a firm’s culture comes from the top: the structure of management and governance; remuneration and incentives; quality and effectiveness of risk management and a firm’s willingness to adopt and adhere to a good culture.

Mr Bailey also took the opportunity to remind the audience that culture has a major influence on the outcomes that matter to regulators and so whilst regulators will not prescribe a test for culture, they will require that systems and processes are put in place which are designed to generate a positive culture in a firm.  As an example, he stated that remuneration must be structured to ensure that individuals have ‘skin in the game’ (meaning that a meaningful amount of past remuneration is retained or deferred and for senior people is at risk should problems then emerge) and that risk management and internal audit functions in firms are effective and act to root out poor incentives and weak controls. 

Ultimately, Mr Bailey was of the view that firms and their management have to want good culture. He explained that while initiatives such as the Senior Managers and Certification Regime can assist with driving up standards and improving culture in firms, there is ‘no magic bullet to change culture.’

PRA publishes details of the new additions to the PRA board

The PRA has published details of its board members. The new additions to the PRA senior management team are:

  • David Rule, Executive Director, Prudential Policy.
  • Lyndon Nelson, Deputy CEO of the PRA and Executive Director for Supervisory Risk Specialists & Regulatory Operations.
  • Megan Butler, Executive Director, International Banks Supervision (on secondment to the FCA).

FCA publishes Skilled Persons Reports and attestations data for Q4 2015/16

The FCA has published its Skilled Persons Reports for Q4 2015/16 with figures correct as at 31 March 2016.

Of the ten reports in total, four related to Banks (including Building Societies) and two related to consumer credit firms. Out of the ten reports commissioned in the quarter, one was under the FCA’s powers introduced in the Financial Services Act 2012, allowing for it to contract directly with a skilled person.

The FCA has also published its attestations figures for Q4 2015/16.  FCA attestations are a supervisory tool used to ensure clear accountability and a focus from senior management on putting things right in regulated firms. By requesting an attestation, the FCA seeks to gain personal commitment from an approved person at a regulated firm that specific action has been taken or will be taken.

The FCA has confirmed that in Q4 2015/16 a total of 12 attestations were requested (6 fixed and 6 flexible). Of these, 2 attestations (fixed) were in retail banking.

CMA publishes its response letter to BIS call for evidence on Terms and Conditions and Consumer Protection Fining Powers

On 6 May 2016, the Competition and Markets Authority (CMA) published its response to the Department for Business Innovation & Skills’ (BIS) consultation on Terms and Conditions and Consumer Protection Fining Powers.

In particular, the CMA responds to the following:

  • Benefits of civil monetary penalties in tackling non-compliance by business:  The CMA believes that the introduction of civil fining powers for breaches of consumer protection law would improve compliance with consumer law and give enforcers more effective and proportionate enforcement tools.
  • Potential design of civil monetary penalty powers:  The CMA notes that there are a number of potential ways in which civil fining powers could be introduced. The CMA would prefer a court-based approach where the civil courts have the power to impose fines alongside other potential remedies.
  • Potential legislative scope of civil fining powers: The CMA believes that there is a strong argument for having a consistent approach and extending civil fining powers to breaches of all consumer protection law, rather than limiting their scope to specific legislation.

FCA opens its regulatory sandbox applications process

On 9 May 2016, the FCA published a press release confirming that its regulatory sandbox is open for application by interested firms. It has also published a new webpage on the regulatory sandbox and the application form for businesses wishing to take part.

The webpage confirms the sandbox is aimed at:

  • Unauthorised businesses. The FCA has set up a tailored authorisation process for unauthorised firms that want to join the sandbox. Successful firms will be granted restricted authorisation that only allows them to test their ideas. These firms will still need to apply for authorisation and meet threshold conditions, but only for the limited purposes of the sandbox test.
  • Authorised businesses. The FCA states that it can assist authorised firms through individual guidance and waivers or modifications.  It may also issue no enforcement action letters.
  • Technology businesses supporting financial services. These businesses can also apply to take part in the sandbox if they need clarity about applicable rules before testing.

Firms have until 8 July 2016 to apply to be in the first cohort of the sandbox.

Upper Tribunal rejects permission to appeal FCA Decision Notice against a debt management firm

In March 2016, the FCA published its Decision Notice refusing authorisation of Money Matcher Limited for debt adjusting and debt counselling activities. Subsequently, the debt management firm appealed to the Upper Tribunal seeking an application for suspension of the FCA notice and an application for privacy relating to the matter.

The Upper Tribunal refused both applications on the basis that, due to lack of evidence, a direction to suspend the effect of the notice may prejudice the interest of the consumers. As the application to suspend the FCA decision was refused, the privacy application was rejected as a natural consequence.

FCA publishes Key Performance Indicators for 2015/2016

The FCA has published its Key Performance Indicators for 2015/2016 in order to further its goals of remaining as transparent as possible, by providing information on regulatory decisions where appropriate.  The figures include (among other things) those relating to authorisation applications, although primarily for those other than for consumer credit activities, and for variations of permission.  The KPIs provide information on the average processing time for applications, how many applications the FCA has determined, and the distribution of all decisions. 

Some of the key points to note for Q4 in relation to firms applying for a Part 4A permission are:

  • The average time taken in weeks to process an application increased in Q4 for the retail sector.  The FCA says that the increased complexity of applications it received increased the time taken to deal with them.
  • The FCA saw a decrease in the volume of determined applications.  A determined application is an application that has been authorised or is authorised subject to conditions being satisfied.  The latter includes applications that may be subsequently withdrawn, having not met the necessary conditions or where the application was subsequently retracted.  The FCA report states that the decrease was due to the more complex nature of applications it received and thus the increased time required to process them, as well as the divergence of resource between dealing with such applications and the training of new staff who have joined the FCA.
  • There were no refusals in Q4 and the percentage of withdrawals decreased.

In relation to applications for variation of permission, the key points to note for Q4 are:

  • The average time taken in weeks to process an application increased in the retail sector due to case complexity returning to normal levels following a surge in case volumes in previous quarters.
  • The FCA saw a decrease in the volume of approved applications in line with a return to normal levels of volume of applications in line with above.
  • There were no refusals in Q4 although the number of withdrawals did increase slightly. 

The Bank of England and Financial Services Act 2016 is passed

Following debates by the House of Lords on the proposed amendments to the Bank of England and Financial Services Bill, all of the House of Commons’ proposed amendments were accepted, resulting in the Bill subsequently being granted royal assent, on 4 May 2016.

The Bank of England and Financial Services Act 2016 (the Act) will assist the Bank of England (the Bank) to oversee the UK’s monetary policy and financial stability. It includes the following measures: 

  • Strengthen co-ordination arrangements between the Treasury and the Bank in protecting taxpayers and the wider economy from bank failures
  • Extend the Senior Managers and Certification Regime to all financial services firms and introduce a ‘duty of responsibility’ for senior managers in all authorised firms superseding the reverse burden of proof which would have applied in the banking sector.  
  • Make changes to the Financial Policy Committee to make it a statutory committee of the Bank.
  • Strengthening the governance and accountability of the Bank by ending the subsidiary status of the Prudential Regulation Authority and allowing the National Audit Office to undertake value for money reviews of the Bank for the first time. 
  • Support the government’s aims to have a robust and proportionate anti-money laundering and counter-terrorist financing regime.

The Act specifies that sections 31, 37 and 39 to 42 came into force on 4 May 2016.  Apart from these provisions that have a commencement date specified in the Act, the other provisions of the Act will come into force (or have come into force) on a day or days to be appointed in commencement orders.  It is expected that the provisions relating to the Senior Managers and Certification Regime being applicable across all financial sectors are due to come into force in 2018.

In relation to the above timescales, the Bank of England and Financial Services Act 2016 (Commencement No. 1) Regulations 2016 were published, confirming that certain provisions of section 25 of the Act came into force on 10 May 2016.

The Act is the third significant piece of legislation to impact the UK’s financial sector, the first being the Financial Services Act 2012, which placed the Bank at the centre of financial regulation and the second being the Banking Reform Act 2013, which implemented a number of banking standards regarding individual accountability and ring-fencing.

Chancellor confirms government position on tax deductibility of payments

The House of Commons Treasury Committee has published a letter from George Osborne, Chancellor of the Exchequer, to Andrew Tyrie, committee chair.

Mr Osborne has written the letter in response to a letter from Mr Tyrie, dated 6 April 2016, regarding the tax deductibility of payments made by banks to regulators.  Mr Tyrie had sought further clarification on whether banks can offset any of the payments they make to regulators against their corporation tax bill.

In the letter, Mr Osborne confirms that payments made to regulators are generally deductible for corporation tax purposes.  This applies to routine payments made by banks operating in the UK to regulatory authorities, to cover the cost of their supervision and oversight.  It also applies to payments that banks make to regulators to cover the costs of specific investigations, such as those carried out under section 166.

Mr Osborne confirms that this is a long-standing general position and reflects the view that regulatory payments are a routine cost of doing business, and are paid by compliant and non-compliant firms. It is also consistent with the treatment of payments made to regulators in other industry sectors, such as law, accounting, oil and gas.

Despite this, Mr Osborne confirms he will keep this area under review as part of the government’s commitment to ensure a fair tax contribution from the baking sector.

In a related press release, Mr Tyrie comments that, provided regulatory payments are made by compliant and non-compliant firms alike, it is reasonable that they should be treated as a cost of doing business and therefore tax deductible. However, in his view, if any such payments were to be due solely from non-compliant firms, they should not be tax deductible since they would be tantamount to fines.

EBA seeks views on the use of consumer data by financial institutions

On 4 May 2016, the European Banking Authority (EBA) published its Discussion Paper on innovative uses of consumer data by financial institutions. The paper identifies risks and benefits in relation to innovation for consumers and financial institutions.

According to the Discussion Paper, potential benefits to consumers include cost reductions and improved product quality, while financial institutions can benefit from new sources of revenue and reductions in costs. The main types of consumer risks identified by the EBA are mostly information asymmetries, data misuse and security.

Risks to financial institutions are identified as deriving from potential misuse of consumer data resulting in reputational risks.  Competitive distortions may also emerge as institutions which are not in a position to process consumer data may not be able to compete with new market entrants specialised in using consumer data.

Feedback received on this Discussion Paper will inform the EBA's decision on which, if any, further actions may be required to mitigate the risks arising from this innovation, while also allowing market participants to harness its benefits.

The deadline for the submission of comments is 4 August 2016 and all contributions received will be published by the EBA after this deadline.

EBA chair extols transparency in the EU financial system

The European Banking Authority (EBA) has recently published a report relating to transparency in the European financial system.

In a lecture for the Official Monetary and Financial Institutions Forum held on 4 May 2016, Andrea Enria, Chair of the EBA, outlined its progress in increasing the quantity and quality of bank disclosures, enhancing the comparability and accessibility of bank data and also better disclosure of authorities’ assessments.

Mr Enria explained that the transparency of bank data is particularly important in the EU, where the lack of comparability of key bank information across countries has been a major hindrance to the functioning of the Single Market and to supervisory co-operation.

The EBA has expressed confidence that a new phase will soon be reached in which any interested party can easily access all relevant bank information, drawn from supervisory reporting on a regular basis, ideally quarterly, and in a single place, for example the EBA website.

This is already happening in the US, and the EBA aims to achieve at least the same results in the Single Market. Mr Enria reinforced that the industry should exploit all the possible synergies between Pillar 3 disclosures and supervisory reporting, thus achieving an integrated set of information, easily available and consistent across banks.

UK Cards Association publishes latest card expenditure statistics

The UK Cards Association has published its latest card expenditure statistics.  According to the data, there were over 60 contactless transactions a second in February 2016.

The average contactless transaction has continued to grow in value to £8.28, reflecting the impact of the increase to £30 of the contactless payment limit. 

The average statistics for contactless in February 2016 were:

  • 159.1 million contactless transactions to pay for low-value purchases.
  • 1.182 billion transactions using cards compared to 1.071 billion in February 2015.

By contrast, the average value of overall transactions, and those made specifically online and in shops, declined. This reflects the changing spending habits which see consumers use their cards as the preferred way to pay for increasingly smaller purchases, in place of cash.

ASA finds comparison advert from money transfer firm to be in breach of the CAP code

The Advertising Standard Authority (ASA) upheld a claim against a money transfer firm, TransferWise Limited, for misleading customers on how much they can save on its platform.

The advert by TransferWise set out a comparison between TransferWise’s and other banks’ fees, which was deemed by the ASA as a comparison with identifiable competitors.

The CAP Code requires that comparisons with identifiable competitors are verifiable. The ASA noted that the advert in question did not contain any information, or a signpost to information, which would allow consumers to understand and check the validity of the claims. Therefore, because the basis of the comparison could not be verified, ASA concluded that the advert breached the Code.