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Retail Finance round-up - 26 May 2016

Retail Finance round-up - 26 May 2016

  • United Kingdom
  • Financial institutions - Retail finance

26-05-2016

The key development this week is the publication by the FCA of Occasional Paper 17 on Access to Financial Services in the UK. The Occasional Paper acknowledges that the issue of financial exclusion is enormously complex and that the FCA alone cannot address all of the issues.  It has commissioned the paper as a catalyst for debate and dialogue amongst all sides including firms, consumer groups, charities and Government. We review the key points arising from the paper together with the findings from the research report ‘Mind the gap – Consumer research exploring the experiences of financial exclusion across the UK’.

This week’s briefing also includes a new Spotlight section which will highlight key themes for the retail finance sector. In this edition, Chris Busby considers whether tougher regulation of claims management companies is inevitable following a series of reports and a consultation by the CMC Regulator. 

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FCA publishes Occasional Paper No.17: Access to Financial Services in the UK

The FCA has published an Occasional Paper on Access to Financial Services in the UK which includes findings from an independent research report, Mind the gap – Consumer research exploring the experiences of financial exclusion across the UK.

The FCA’s Occasional Paper acknowledges that the issue of financial exclusion is enormously complex and that the FCA alone cannot address all of the issues.  It has commissioned the paper to act as a way of raising issues and acting as a catalyst for debate and dialogue amongst all sides including firms, consumer groups, charities and Government.  The FCA makes clear that the paper should not be seen as necessarily reflecting the view of the FCA, though the FCA may take the content into consideration when discharging its functions.

The paper recognises that consumers do not have an absolute right of access to financial services, that firms do not have an obligation to provide them and that there may be a range of reasons why limiting an individual consumer’s access to financial products and services might be the appropriate approach (for example, to prevent irresponsible lending).  However, it suggests that UK individuals and households can only take responsibility for their own financial well-being and help improve market integrity, competition and economic growth if they have access to financial services that meet their changing needs throughout their lifetime.

The paper describes three themes pervading access issues faced by customers:

  • The maze – complex and bureaucratic processes lead to a lack of transparency.  Certain consumer characteristics and circumstances can make obtaining a suitable product or service at an affordable price difficult or impossible.
  • The fog – financial products are often communicated and marketed in a way which makes them more difficult for consumers to search for and to understand.
  • The void – consumers can get ‘stuck’ or be ‘blocked’ from accessing financial products and services because of physical ability or capability issues.

The research discussed access issues through the lens of five major social and technological trends: digital transformation, especially in banking; compliance and crime prevention, in the form of the anti-money laundering and know-your-customer regulations; automated processes in the credit market; increasingly segmented markets for insurance; and how policies to tackle problems associated with an ageing population impact on people’s access to credit in later life.  Some examples of the problems found in the research include:

  • Consumers with no permanent address or who move often can have problems opening bank accounts and gaining access to credit, as this affects verification of their details.  This particularly affects members of the Armed Forces and people renting privately.
  • Not all consumers have access to digital or online networks which limits their ability to get online (for example, those in rural areas may not have access to fast broadband services).
  • Capability and willingness to engage with financial services in an online environment may lead to some being excluded because they lack the skills to engage digitally or excluding themselves because they are not confident or comfortable engaging digitally or online.
  • Not having a passport or a driving licence causes consumers problems in getting a bank account, as these are the typical standard documents used to verify identity.  The paper considers that it is important that firms are clear and consistent as to what their requirements are when it comes to proof of identity or verification of the source of funds.  In addition, where consumers are unable to meet identification and verification requirements, firms should signpost consumers to where these documents might be obtained or where they can access help and advice.
  • Consumers do not understand how credit scoring works, when it is used, the role of credit reference agencies, who makes the lending decision and how customers can obtain a copy of their credit file.
  • Quotation searches help customers when ‘shopping around’ for credit, but some lenders are reluctant to provide them.
  • A need to prevent customers from taking on unaffordable or unsustainable debt but that equally, older consumers should still be able to access products that meet their needs and circumstances.  Where they are not able to do so they should be given clear explanations as to why they have been declined and signposted to other sources of products or advice.

FCA publishes its Regulation round-up for May 2016

The FCA has published its Regulation round-up for May 2016. The round-up reiterates the FCA’s continued focus on its key priorities as set out in the FCA’s Business Plan 2016/17, with culture and governance being the key focus for May. The FCA wants to see firms managed in a way that actively promotes the right culture and behaviours at all levels.

The round-up also highlights the forthcoming launch of the redesigned FCA website, in June 2016, during which, five new sections will go live: Homepage, About us, Firms, Markets and Consumers. The changes will feature new hub pages for each sector, including the latest news, publications, events, policy information and updates from the FCA.

Other highlights are:

  • Feedback statement on competition in the mortgage sector.
  • The thematic review on how firms are applying the responsible lending rules which were introduced in April 2014 following the Mortgage Market Review (MMR).
  • The Regulatory Sandbox is now open for applications until 8 July 2016.
  • The publication of CP 16/13 Changes to the Decision Procedure and Penalties Manual and the Enforcement Guide.

FCA publishes consultation on wind-down planning

On 23 May 2016, the FCA published its consultation on proposed guidance on wind-down planning (GC16/5). The guidance is aimed at FCA solo-regulated firms, in particular, those that are currently performing related analyses, for example, estimating wind-down costs for capital planning.

In wind-down planning, a firm considers how it could close down its regulated business in an orderly manner, including under stressed conditions.  This consultation has been introduced as a result of regulated firms and professional advisors seeking further clarification on what wind-down planning should cover.

In May 2015, the FCA gave feedback to the wider industry as part of its prudential forum. The FCA now feels that a non-binding document would benefit firms and their advisors. An effective wind-down plan will enable a failing firm to cease its regulated activities and achieve cancellation of permission with minimal adverse impact on its clients, counterparties and the wider market.

The proposed guidance will detail how regulated firms should close down their business in an orderly manner while under stressed conditions. Once finalised, the document will become general guidance in the FCA Handbook under the ‘Regulatory Guides’ section.

The consultation will close on 22 July 2016.

FCA publishes findings from research report on the issue of de-risking

The FCA has released the findings from the research report on Drivers & Impacts of De-risking, which was commissioned by the FCA in line with its objectives for 2016/17 and its long-standing program of work on anti-money laundering (AML). ‘De-risking’ is when banks’ concerns about the money laundering and terrorist financing risks posed by certain types of customer result in them withdrawing or failing to offer banking facilities to customers in greater volumes than before.

What the report demonstrates is that de-risking is the result of a complex set of drivers. The report notes that some potential pathways towards mitigating this issue may lie in balancing costs and risks between banks and high risk sectors, and a better developed understanding of how to measure money laundering and terrorist financing risk on a case by case basis.

The FCA stressed that the outcomes it seeks are that the UK financial system is a hostile sector for money launderers but that the unintended consequences of AML regulation are also minimised. Additionally, the FCA stated that it would explore ways in which technology solutions can help to deliver effective and proportionate AML outcomes, suggesting innovation may hold the key to reducing the costs of AML compliance for banks.

In addition to this, the FCA confirmed it will continue to work with the banking industry to lessen the damaging effects of de-risking without constraining banks’ commercial freedom, by, for example, improving the way in which firms identify money laundering risk and taking steps to foster innovation and reduce costs for AML compliance.

Queen’s Speech 2016: highlights for financial institutions

On 18 May 2016, Her Majesty the Queen, gave her annual speech to both Houses of Parliament setting out the Government’s legislative agenda for the 2016-17 parliamentary session.

In her speech, Her Majesty informed of certain bills to be brought before the Houses of Parliament in 2016-17.  The following are of interest to financial services firms:

  • The Better Markets Bill, the purpose of which is to open up markets, boost competition, give consumers more power and choice, and to make economic regulators work better.  The Bill will contain measures to simplify the way economic regulators operate, in order to cut red tape, whilst also speeding up decisions from the Competition and Markets Authority (CMA) to benefit both businesses and consumers.
  • The Lifetime Savings Bill, which is to enable the Government to create a new Help to Save scheme, which would support those on the lowest incomes, and to create a new Lifetime ISA, providing savers with a bonus on savings that can be used for a first home, or retirement, or both.  As part of a wider package of reforms, the Government is also going to introduce new indicators for measuring life chances, such as family instability, addiction and debt.
  • The Criminal Finances Bill, the purpose of which is to allow the Government to recoup more criminal assets by reforming the law on proceeds of crime, including provisions to strengthen enforcement powers and protect the public.  The Bill will also introduce a criminal offence for corporations who fail to stop their staff facilitating tax evasion and improve the operation of the Suspicious Activity Reports (SARs) regime to encourage better use of public and private sector resources against the highest threats.  It will also target entities that carry out money laundering instead of individual transactions, and provide the National Crime Agency with new powers.

The Government has also published background briefing notes to the speech to provide more detail on the proposed legislative agenda. 

TheCityUK report on making the UK financial and professional services sector more resilient to cyber attack

TheCityUK has published a report on making the UK financial and professional services sector more resilient to cyber attack.  The report states that cyber crime is a real and present danger and financial institutions are on the front line, citing figures claiming that the number of reported cyber incidents worldwide is expected to grow from 14 billion in 2014 to 24 billion by 2019. 

The report makes a number of recommendations to the industry, following a recent Government initiative to create a National Cyber Security Centre, in order to get the UK financial and professional services industry to act collectively, creating a safer system.

The report makes recommendations which apply both as a whole to the industry as well as to individual firms, and include:

  • A company boardroom check-list for Boards to follow in order for them to challenge management on the treatment of cyber risk.
  • The creation of an industry wide cyber-forum compromising a steering group of Board level cyber risk owners and a working group from the Risk or the Chief Information Security Officer community.
  • Firm initiatives such as making cyber risk a standing item on the Board or risk committee agenda and ensuring that it is part of strategy, investment cases, acquisitions and appraisals.
  • Industry recommendations such as collective information and best practice sharing on cyber risk reduction, increased support for the UK cyber security sector in the form of apprenticeships and mentoring opportunities, and making the case for cyber spend to be off-set against industry-specific costs taxes or levies as a way to catalyse private sector investment in raising system security.

CML releases its latest statistics on mortgage lending

The Council of Mortgage Lenders (CML) has recently released its latest statistics on lending.

Some key figures to note in relation to lending in March are:

  • Home-owners borrowed £13.8bn for house purchase in March 2016, up 59% month-on-month and 60% year-on-year.
  • First-time buyers borrowed £4.5bn in March 2016, up 32% on February and up 29% compared to March 2015.
  • Home movers borrowed £9.3bn, up 60% month-on-month and up 58% compared to March 2015.
  • Re-mortgage activity totalled £4.7bn, down 2% month-on-month but up 0.4% compared to March 2015.
  • Landlords borrowed £7.1bn, up 88% compared to February and up 142% compared to March 2015.

The CML has also published its latest statistics on gross mortgage lending.  It estimates that gross mortgage lending reached £18.5 billion in April 2016, making this the highest lending total for an April since 2008 (£25.3 billion).

UK Cards Association publishes latest statistics on contactless card spending

The UK Cards Association has recently published its Card Expenditure Statistics report for March 2016, confirming that, in March 2016, contactless card spending reached a record £1.5 billion spending in one month.

The milestone comes just four months after contactless spending hit £1 billion (November 2015).

The UK Cards Association also confirmed that one in seven of all card transactions are now contactless, compared to one in 16 a year ago. There were a total of 179.6 million contactless purchases in March, with 67 made every second. On the high street, one in six card purchases is now contactless.

Overall, the report confirms that the total payment card spending for March 2016 was £51.9 billion, from a total of 1.18 billion card transactions which took place that month.

Spotlight on... Claims Management Companies - tougher regulation inevitable

Recent reports and a consultation by the Ministry of Justice (MOJ) have pointed in the direction of increased regulation of Claims Management Companies (CMCs). This comes in what could be a critical period if the FCA’s plans to introduce a time bar for PPI claims go ahead. Chris Busby, Head of Retail Finance, examines the developments and considers the implications in what could be a new era for CMC regulation as the FCA will be taking over from the MoJ as regulator of CMCs.

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