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Retail Finance round-up - 19 May 2016

Retail Finance round-up - 19 May 2016

  • United Kingdom
  • Financial institutions - Retail finance

19-05-2016

It has been a busy week at the regulators. The headline news was the CMA’s publication of the provisional decision on remedies in its retail banking market investigation. This decision includes an outline of proposals to tackle the issues hindering competition in personal current accounts (PCAs) and in banking services for small and medium-sized enterprises (SMEs). The CMA believes these changes could bring benefits to bank customers to a value of £1 billion over five years. Responses to the provisional decision are requested by 7 June 2016.

The FCA published findings from its thematic review on responsible lending and a feedback statement on its call for input on competition in the mortgage sector. The two key conclusions from the thematic review on responsible lending rules, which the FCA introduced in April 2014, were that firms have positively applied the responsible lending requirements, which came into force as part of the Mortgage Market Review (MMR) but there is still room for improvement to enable consumers to make better choices about mortgage deals.

The FCA announced in its call for input that in an attempt to improve competition in the mortgage sector, the FCA will launch a targeted market study in Q4 2016 focusing on consumers’ ability to make effective choices, with a view to improving how competition works in consumers’ best interests. The FCA’s intention is to explore questions relating to the available tools for comparisons, the impact of increased intermediation in the sector on consumer outcomes and the impact of panel and other commercial arrangements between lenders, brokers and other players in the mortgage supply chain.

Also of interest this week are the Financial Services Mis-selling Regulation and Redress report published by the House of Commons Public Accounts Committee and the published letter from the BBA-AFME on the applicability of the Senior Managers Regime to the Head of Legal Function within a Bank.

Finally, the deadline for responses to the FCA’s call for input on the review of the retained provisions of the Consumer Credit Act 1974 was yesterday. We have provided a response to this. If you would like to read this response please contact Jo Owens using the details below.

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FCA publishes findings from its thematic review on responsible lending and a feedback statement on its call for input on competition in the mortgage sector

On 16 May 2016, the FCA published the findings from its thematic review on Embedding the Mortgage Market Review: Responsible Lending Review (TR16/4) and a feedback statement on its call for inputs on competition in the mortgage sector.

The two key conclusions from the thematic review on responsible lending rules, which the FCA introduced in April 2014, were that firms have positively applied the responsible lending requirements, which came into force as part of the Mortgage Market Review (MMR).  Despite this, the FCA found that there is still scope for improving consumers' ability to make better choices about mortgage deals.

More specifically, the FCA highlighted that some firms could be more proactive and consistent in making use of flexibilities and exceptions to the responsible lending requirements for existing customers. The FCA is providing feedback to individual firms which were visited by the FCA as part of the assessment and encourages all lenders to consider the questions set out in Annex 2 of the report when reviewing their responsible lending policies and processes.

The call for input on competition in the mortgage sector brought to the surface four main themes, which were as follows:

  • Consumers face challenges in making effective choices, particularly when it comes to assessing and acting on information about mortgage products, with intermediaries being key to the process.
  • There are opportunities to make more effective use of technology in the provision of information and advice.
  • Commercial relationships between different players in the sector’s supply chain, in particular the use of panels, might give rise to competition concerns.
  • Certain aspects of the regulatory framework might have a negative impact on competition.

In an attempt to improve competition in the mortgage sector, the FCA will launch a targeted market study in Q4 2016 focusing on consumers’ ability to make effective choices, with a view to improving how competition works in consumers’ best interests. The FCA’s intention is to explore questions relating to the available tools for comparisons, the impact of increased intermediation in the sector on consumer outcomes and the impact of panel and other commercial arrangements between lenders, brokers and other players in the mortgage supply chain.

Following the FCA’s publications, the Council of Mortgage Lenders (CML) issued a press release noting the outcome of the FCA’s findings and feedback statement and explaining that the areas identified by the FCA as having scope for improvement, are areas that the CML is proactively addressing as part of its ongoing work on transparency, following the launch of the common mortgage tariff last year.

CMA publishes provisional decision on remedies in its retail banking market investigation

On 17 May 2016, the Competition and Markets Authority (CMA) published its provisional decision on remedies in its retail banking market investigation. This publication includes an outline of proposals to tackle the issues hindering competition in personal current accounts (PCAs) and in banking services for small and medium-sized enterprises (SMEs). 

Some of the key proposals include:

  • New protections for overdraft users with a particular focus on requiring banks to set a monthly charge for unarranged overdrafts on PCAs, and sending alerts when they are going into their unarranged overdraft to give them time to avoid the charges.
  • Encouraging the development of new online comparison tools and improving the current account switch service (CASS) to make switching banks more straightforward and to give customers more awareness of, and confidence in, the process.
  • Requiring banks to move swiftly to introduce an Open API (application programming interface) banking standard to enable personal and SME customers to safely and securely share their unique transaction history with other banks and trusted third parties.
  • Requiring banks to regularly prompt their customers to check that they are getting good value from their banking provider.

The CMA believes these changes could bring benefits to bank customers to a value of £1 billion over five years.

The CMA invites comments on these proposals by 7 June 2016.  The CMA will publish its final report on the retail banking market investigation by 12 August 2016.

FCA Director of Enforcement and Market Oversight delivers speech at Annual Compliance & Risk Summit on the FCA’s objectives for next 12 months

Mark Steward, the FCA’s Director of Enforcement and Market Oversight, delivered a speech at the Thomson Reuters Annual Compliance & Risk Summit on 26 April 2016.  In the speech, Mr Steward highlighted the FCA’s objectives for the next 12 months. These include (among other things) firm culture and governance, advice, treatment of existing customers and innovation and technology.

Mr Steward confirmed that central to improving firm culture and governance is the Senior Managers and Certification Regime (SMCR), which commenced on 7 March 2016, as well as the wider conduct requirement of skill, care and diligence. Mr Steward confirmed that the FCA will not take a punctilious approach to the new SMCR, but will rather focus on real fault elements and real culpability.  

Mr Steward also commented on the FCA’s consultation paper published in response to HM Treasury’s review on enforcement decision making. In its consultation, the FCA proposes that firms and individuals who are involved in FCA enforcement cases and do not dispute their liability but disagree with the penalty imposed by the FCA, will be able to seek a hearing before independent FCA decision makers, without losing any credit for cooperation they might have otherwise gained if they accepted the penalty. Mr Steward confirmed that the FCA are looking at variations of this proposal, where most but not all of the facts have been agreed by the firm or individual, resulting in a considerable narrowing of the dispute.

Mr Steward concluded his speech by emphasising that by detecting and addressing an issue at an early stage, the need for FCA investigation and enforcement should reduce.

FCA updates webpage ‘Improving individual accountability’

The FCA has updated its webpage ‘Improving individual accountability.’  This webpage provides an overview of the policy changes that the FCA and PRA have implemented that are aimed at increasing individual accountability in the banking sector.  These policy changes include the Senior Managers Regime, Certification Regime and the Conduct Rules.  Most of these policy changes came into force on 7 March 2016.

The update explains that the Bank of England and Financial Services Act 2016, includes the extension of the Senior Managers and Certification Regime to all Financial Services and Market Act 2000 (FSMA) authorised firms. The FCA notes that it will consult on the extension of the regime in advance of implementation.

Claims Management Regulator publishes updated enforcement actions information

On 9 May 2016, the Claims Management Regulator (CMR) published information on the recent enforcement actions and investigations carried out against authorised claims management companies (CMCs). 

The CMR confirmed that between January 2016 and March 2016 it had started 13 investigations, cancelled one licence, issued 84 warnings, carried out 75 audits and conducted 299 visits.

In relation to PPI and other financial claims handling, particularly mis-sold PPI and packaged bank accounts, the CMR confirmed that in the same period, it had audited 36 CMCs and issued comprehensive written advice, issued 16 warnings to CMCs, continued investigations into 12 CMCs and commenced three new investigations.

The CMR also confirmed that it has taken action against CMCs in relation to unwanted marketing calls and spam text messages.

European Commission orders public consultation to fitness check EU consumer and marketing law

On 12 May 2016, the European Commission ordered a public consultation for the Fitness Check of EU consumer and marketing law.

The intention behind the fitness check is to assess whether a number of Directives are fit for purpose. The key Directives relevant to retail finance include:

  • Unfair Contract Terms Directive, which prohibits unfair standard terms in contracts.
  • Unfair Commercial Practices Directive, which targets misleading practices by traders during the entire consumer-business transaction e.g. pre and post-sale issues.
  • Injunctions Directive, which is designed to help enforce consumer protection rules in case of infringement at any stage of the consumer-business transaction.

These Directives will be assessed against the criteria of effectiveness, efficiency, coherence, relevance and added value. Outcomes of the fitness check will feed into new policy initiatives as well as influencing other Commission-proposed Directives, in particular those relating to online sales and long distance sale of goods.

The fitness check consists of a questionnaire with multiple choice questions. There are two types of online questionnaires, a short version for consumers (EU citizens) and businesses and a longer version for authorities and associations, although consumers and businesses can elect to complete the longer version if requested. Responses are requested by 2 September 2016.

Reasonable steps provisions - amendments to misconduct rules for approved persons are now in force

On 9 May 2016, the Financial Services (Banking Reform) Act 2013 (Commencement No 11) Order 2016 (SI 2016/568) and the Bank of England and Financial Services Act 2016 (Commencement No 1) Regulations 2016 (SI 2016/569) were published, marking the coming into force of sections 66A and 66B of the Financial Services and Markets Act 2000 (FSMA) in relation to misconduct by approved persons.

Sections 66A and 66B of FSMA were originally introduced by section 32(2) of the Financial Services (Banking Reform) Act 2013. Under these provisions, senior managers were deemed to be guilty of misconduct if there had been a breach of any regulatory requirement in an area for which they were responsible, unless they could prove that they had taken reasonable steps to avoid the breach happening, otherwise known as “presumption of responsibility".

Section 25 of the recent Bank of England and Financial Services Act 2016 amended sections 66A and 66B of FSMA to reverse the presumption of responsibility, so that no senior manager will be guilty of misconduct unless the FCA or the PRA can prove that reasonable steps were not taken by them to avoid the breach occurring or continuing.

Both sections 66A and 66B came into force on 10 May 2016.

House of Commons Public Accounts Committee publish the Financial Services Mis-selling Regulation and Redress report

On 13 May 2016, the House of Commons Public Accounts Committee (PAC) published the Financial services mis-selling regulation and redress report. The report recognises that both the FCA and Financial Ombudsman Service (FOS) have a role to play in assisting the victims of mis-selling.

The PAC made six conclusions and recommendations:

  • The role of Claims Management Companies (CMCs) is to be reduced and HM Treasury and the FCA are to demonstrate what steps they intend to take to achieve this.
  • FOS has a two year back log of PPI claims and has been instructed to prepare a timetable for reducing the back log on PPI matters, which will be publically accessible so as to hold the FCA and FOS to account.
  • The FCA has not adequately addressed the cultural problems that lie behind mis-selling. The key problems being firm culture and sales incentives. Whilst PAC recognised that some steps have been taken to address this, it has required the FCA to outline actions it will take to improve culture in firms.
  • The FCA does not ensure that consumers understand the financial products they buy. Similarly, consumers need to be aware that they may be eligible for compensation when mis-selling occurs. The FCA is to set out what steps it will take to ensure that consumers understand the products they purchase and their right to claim compensation, particularly in regard to vulnerable consumers.
  • The Treasury is unable to evaluate how successful the FCA is in reducing the level of mis-selling as there are no clear measurements. The FCA also does not link outcomes from its regulatory activities to their associated costs, so it is impossible to assess whether the most cost-effective action has been taken. Consequently, the FCA and HM Treasury are to develop real-time indicators of mis-selling.
  • The National Audit Office (NAO) has limited access to information held by the FCA, which means Parliamentary accountability of the FCA is reduced. Consequently, HM Treasury is to prepare a timetable for proposing legislation to give the NAO access to information so that it can carry out full examinations of value for money.

PAC emphasises its disappointment that CMCs have made up to £5 billion from PPI claims, out of compensation that should have been paid to victims of mis-selling by financial services firms. PAC also confirmed, in line with its recommendations, that the FCA and HM Treasury must do more to know how much mis-selling is happening at present, and which regulatory activities work best to prevent it.

HM Treasury issues letter to mortgage lenders following FCA’s thematic review

On 16 May 2016, the Chancellor, George Osborne, issued a letter to mortgage lenders following the FCA’s publication of its thematic review on responsible lending.

In his letter, the Chancellor commended the positive results of the report and highlighted that responsible lending is important from a prudential as well as consumer protection perspective.

The Chancellor emphasised that there should not be barriers for consumers in accessing financial services they need and can afford. In particular, the Chancellor emphasised the need for existing borrowers to be able to make changes to their mortgages to make them more affordable. This is following a meeting which took place on 12 May 2016 between the Chancellor and industry experts, that discussed concerns around the large number of mortgage prisoners, trapped in their mortgage deal, following the Mortgage Market Review (MMR).  

The MMR enabled lenders to waive the need for an affordability check on existing borrowers trapped by the rule, provided no additional borrowing is granted or there is no material impact on affordability. The Mortgage Credit Directive, which came into force on 21 March 2016, requires that affordability checks should be carried out if borrowers are switching from one mortgage lender to another.

The Chancellor reminded lenders of this flexibility and concluded his letter by highlighting the importance of consumers being able to access cheaper deals, making the mortgage market work better for lenders as well as consumers.

PSC register: BIS publishes statutory guidance on the meaning of significant influence or control

The new persons with significant control (PSC) regime, came into effect on 6 April 2016.  This regime requires most companies and all Limited Liability Partnerships (LLPs) to hold, and keep available for inspection, a PSC register.

On 13 May 2016, the Department for Business, Innovation and Skills (BIS) published the final statutory guidance on the meaning of significant influence or control in the context of companies’ PSC registers, and its updated draft statutory guidance on the meaning of that phrase in the context of LLPs’ PSC registers.

The final statutory guidance for companies, issued with effect from 14 April 2016, is broadly the same as the draft that was laid before Parliament and published on 27 January 2016.

The draft statutory guidance for LLPs, dated 14 April 2016, is also broadly the same as the version published on 27 January 2016.  Having now been laid before Parliament, it is due to come into effect on 24 June 2016.

Council of Europe adopts new EU-wide cybersecurity rules

On 17 May 2016, the Council of Europe formally adopted new rules to step up the security of network and information systems across the EU and to increase cooperation between member states on the vital issue of cybersecurity.

The Network and Information Security Directive (the Directive) lays down security obligations for operators of essential services, including finance and also for digital service providers, such as search engines and cloud services. Each EU country will also be required to designate one or more national authorities and to establish a strategy for dealing with cyber threats. 

The Council position at first reading confirmed the agreement reached with the European Parliament in December 2015. The Directive must still be approved by the European Parliament at second reading and is expected to enter into force in August 2016. 

European Commission publishes summary of contributions to its Call for Evidence

On 30 September 2015, the European Commission (the Commission) launched its Call for Evidence: EU regulatory framework for financial services. The consultation closed on 31 January and its results were published by the Commission on 17 May 2016.

The key points to note are:

  • Stakeholders were consulted on the benefits, consistency, gaps in and coherence of the EU regulatory framework for financial services. 288 responses were received across 25 different countries, with the majority of respondents located in the UK and Belgium.
  • The majority of responses came from the financial sector.
  • There were 15 pre-defined topics included in the consultation, with the majority of responses focussing on constraints on financing, proportionality, compliance costs, reporting and disclosure obligations and overlaps and inconsistencies.
  • With regard to investor and consumer protection, respondents suggested that a ‘silo mentality’ to consumer protection rules has led to a lack of clarity for consumers and duplication, with the result being increased compliance costs for the competent authorities. Respondents pointed out that there are inconsistencies across pieces of legislation when it comes to pre-sale disclosure requirements to retail investors. The result of this might be that retail investors may receive differing and multiple disclosures for similar products.
  • With regard to proportionality, stakeholders commented that more proportionality is needed in regulation of smaller firms or those with low risk profiles and that reporting requirements can be particularly burdensome for smaller entities.
  • There is a perceived overlap of regulation creating an unnecessary regulatory burden with tight timelines for implementation and transposition for regulated firms and supervisors. Respondents called for less complexity in the overall regulatory framework.
  • Banking associations and banks highlighted inconsistencies in the reporting burdens imposed by national competent authorities, the Single Supervisory Mechanism, and the European Banking Authority.
  • It was claimed that the complex regulatory frameworks disadvantage smaller companies and impede market entry. Banks showed particular concern that financial technology firms may not be subject to the same regulation even when offering identical services, whereas financial technology firms claimed it was the prudential and market rules that were keeping them out of the market.
  • Several respondents noted that gaps remain in the financial regulatory framework.  Examples given were the need for stricter rules on creditworthiness in the Consumer Credit Directive 2008 and gaps in consumer protection legislation.

Trade associations issue international cyber-security, data and technology principles

The Securities Industry and Financial Markets Association, the Asia Securities Industry and Financial Markets Association, the European Banking Association and the International Swaps and Derivatives Association (the trade associations) published a position paper, on 10 May 2016, setting out principles in relation to international cyber-security, data and technology.  The principles are intended to be a starting point for policy-makers and have been submitted to the Financial Stability Board and the International Organization of Securities Commissions for comment. 

The paper highlights two crucial issues, namely that these are global issues which require global solutions and secondly, that technology is moving far faster than regulation.  Some of the key principles recommended by the trade associations for policy-makers to adhere to are:

  • Support of technological innovation and unrestricted choice of technologies.
  • Encouragement of the development and use of financial technology ecosystems that are open, safe and interoperable.
  • Recognition of the point that to transfer data globally is fundamental to supporting a global financial system.
  • Recognition that there is no one-size-fits-all approach to cyber security, and regulations should be risk-based, threat informed and based on the size, scope, function and business model of the entity being regulated.

The trade associations urged the International Organization of Securities Commissions and Financial Stability Board to take these principles into account when engaging in policymaking, and standard-setting activities. The trade associations also expressed their intention to co-operate further with the two policy-makers and other interested parties.

Chief Information Security Officer for Bank of England gives speech on cyber-risk

Will Brandon, the Chief Information Security Officer for Bank of England, recently gave a speech at the City Week conference, on the approach financial institutions should take on managing cyber-risk.

Mr Brandon argued that understanding cyber-risk and investment in mitigating the risk were ways financial institutions can manage cyber-risk. Mr Brandon also stated that management of cyber-risk requires the same governance approach and strategies as are adopted for other parts of the business.

In order for firms to be able to assess the likelihood and impact of cyber-risk crystallising and to have a better understanding of the controls firms would need to reduce vulnerabilities or to mitigate the impact, Mr Brandon argued that firms can quantify cyber-risk if it is broken down as follows:

  • Threats, differentiating cyber from other risks as cyber is adversarial and the risk derives from the capability and intent of people who might intentionally attack an institution.
  • Vulnerabilities,  allowing weaknesses that can be exploited by attackers, including outdated operating systems, poor patching, untrained staff, unsegregated networks and weak security monitoring. A firm should treat any failings in its ability to respond to a critical incident as a vulnerability.
  • Assets, being the systems or information that underpin a firm’s critical business processes. In line with the increased emphasis on individual responsibility among senior management in the financial sector, Mr Brandon emphasised that the owners of the business processes that these assets support must be accountable for the cyber-risk relating to these assets.

Mr Brandon highlighted that the corporate consequences, including for the careers of senior executives, can be extremely serious as a result of cyber-risk.

Money Advice Service publishes 2016-2017 Business Plan

The Money Advice Service has published its 2016-2017 Business Plan, following a Government review in March 2016, which proposed that the service should be replaced by a new slimmed-down Money Guidance Body.  The Government is currently inviting views to be given on the implementation of the newly proposed service before publishing its final response in Autumn 2016.

As a result of the proposed changes to the delivery of financial advice in the UK, the Business Plan outlines how the service will continue to deliver on its statutory objectives whilst ceasing all marketing and brand building activity, which it says has allowed it to shift investment away from long-term development of its website and redistribute funding elsewhere to frontline activities. 

Over the next two years, the service aims to deliver, amongst other things, the following:

A focus on delivering the ‘what works’ initiative to help improve financial decision making of consumers by funding trials and pilots with a range of organisations across the UK.

An increase in funding for debt advice services such as increased telephone helpline capacity.

A drive forward for financial education collaborations and partnerships with key organisations delivering financial education for children and young people.

Continued delivery of its statutory duty to increase awareness of basic bank accounts and work towards enabling customers to compare fees charged on all payment accounts.

BBA-AFME letter to the FCA on the applicability of the Senior Managers Regime to the Head of Legal Function within a Bank

The British Bankers' Association (BBA) and the Association for Financial Markets in Europe (AFME) (together BBA-AFME) published a joint letter on 10 May 2016, which was issued to the FCA, on the application of the senior managers regime (SMR) to individuals with overall responsibility for the legal function in banks.

Previously, the FCA published a statement on uncertainties that had arisen concerning the application of the SMR to these individuals.

The letter urges the FCA not to include the legal function within the scope of the SMR. BBA-AFME argue that the legislative and regulatory framework underlying the SMR does not contain any requirement that the role of a general counsel (GC) should be designated as a senior management function (SMF). Their view is that the role of a GC and the legal function is an advisory one and not one that involves management of a firm's affairs.

In their letter, the BBA-AFME state the consequences of including the role of GCs in the SMR to be as follows:

The independence of the legal function may be compromised, leading to firms engaging with their legal function less and/or using external counsel more frequently.

GCs would be subject to a complex matrix of conflicting duties arising from their SMR responsibilities and their existing regulatory obligations set by the SRA.

GCs would face a conflict of interest between protecting their own personal position under the SMR and the duty to act in the best interests of their client, including protecting legal advice privilege. The BBA-AFME are concerned that a GC might be required to disclose legally privileged material to comply with their duties in the Code of Conduct sourcebook (COCON).

The FCA has confirmed that it intends to consult on this issue in Summer 2016.

FLA publishes its latest figures

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

The statistics show:

  • Growth of 11% in consumer finance new business in March, compared with the same month last year, and growth of 14% in Q1 2016 overall.  Within consumer finance, credit card and personal loan new business grew by 9% compared with March 2015, while the second charge mortgage market saw new business grow 16% by value but fall 1% by volume over the same period.
  • Growth of 17% by value and 10% by volume in point-of-sale consumer new car finance new business in March, compared with the same month last year.  In Q1 overall, new business was up 19% by value and 13% by volume.  The point-of-sale consumer used car finance market also reported growth in March of 8% by value and 6% by volume.
  • Growth of 10% in asset finance new business (primarily leasing and hire purchase) in March, compared with the same month last year, and by 8% in Q1 2016, compared with the same period in 2015.  IT equipment finance and commercial vehicle finance grew in March by 29% and 5% respectively, but plant and machinery finance fell by 2% over the same period.

Latest statistics on repossessions and arrears published

The Council of Mortgage Lenders (CML) has published its latest statistics on repossessions and arrears.  The statistics show that the number of repossessions in the first quarter of 2016 was 2,100 (1,500 home-owner, 600 buy-to-let), meaning that the repossession rate is the lowest on record. 

Mortgage arrears also continued to fall.  For the first time in more than a decade, the number of mortgages in arrears of 2.5% or more fell below the 100,000 mark, with 96,200 loans in arrears at the end of March, down from 101,700 at the end of December, and 111,200 at the end of the first quarter of 2015.

Similarly, the Finance & Leasing Association (FLA) has published its figures on second-charge mortgage repossessions.  These figures show that the number of second-charge mortgage repossessions in Q1 2016 was 34, down 52.8% on the same quarter in 2015.

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