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Retail Finance round-up - 28 July 2016

Retail Finance round-up - 28 July 2016

  • United Kingdom
  • Financial institutions - Retail finance

28-07-2016

Welcome to our retail finance briefing which is designed to keep you up to date with the latest legal, regulatory and industry developments affecting the retail finance sector.

A key development this week is the publication of the FCA’s final report on its Credit Card Market Study.  As a result of its findings in the report, the FCA has proposed a number of remedies to address its concerns, including prompts before the end of promotional periods and increasing minimum repayments.  New FCA rules and guidance, together with any further industry remedies will be consulted on later in 2016, with behavioural trials on repayment options to be undertaken in 2017, after which further new rules may be considered.

The FCA has also published a report setting out the findings of a thematic review it has carried out on principals and their appointed representatives in the general insurance sector.  Whilst the report focuses on the general insurance sector, the FCA has emphasised the importance of the findings being noted by all other regulated financial firms who are principals with appointed representatives.  The FCA expects all principals across the regulated financial industry to consider the findings and take appropriate action, where applicable, to address the issues that are relevant to them.

Also of interest this week is the publication of the Standards of Lending Practice (Standards) by the Lending Standards Board (LSB).  The Standards will come into effect on the 1 October 2016 and will replace the LSB’s Lending Code.  Finally, the British Bankers’ Association (BBA) has published a report that shows a dramatic increase in consumers using digital banking and new technologies to manage their money.  By far the biggest rise in digital services is the use of mobile apps, which the report puts down to speed in which people can access their information and make transactions.

Regulatory updates

Government updates, legislation and case law

Industry news

You may have missed…

FCA publishes Credit Card Market Study final report

The FCA has published its final report on its Credit Card Market Study, one of the largest market studies undertaken by the FCA to date. Five years’ worth of accounts from 34 million customers were analysed, as well as in-depth surveys with around 40,000 customers.

The FCA published the Interim Report in November 2015, concluding that competition in the credit card market was working fairly well for most customers but the FCA had significant concerns about the scale of problematic debt for others.  The FCA has undertaken further work and analysis since and as a result, it has refined but not fundamentally altered its views. The final findings are: 

  • Competition is working fairly well for most consumers.
  • Competition is working less well for higher-risk consumers.
  • Concern about scale, extent and nature of problem credit card debt and firms’ incentives to manage this.

The FCA intends to implement effective and proportionate measures to address its concerns without having a negative impact on the market.  The remedies proposed by the FCA are as follows:

  • Shopping around and switching. The FCA does not intend to undertake additional work in this area to that already being undertaken, such as the Government’s MiData project for personal current accounts and the development of Application Programming Interfaces (APIs), which will make the process of sharing account usage data simpler.
  • Clearer standards for price comparison websites (PCWs). Whilst the FCA does not intend to implement similar rules for PCWs as those that apply to High Cost Short Term Credit, currently being implemented, the FCA will instead feed into the CMA’s market investigation of PCWs, which will begin later in 2016/17. 
  • Prompts before the end of promotional periods. This is intended to encourage customers to (a) be aware of the interest rate they may incur and (b) to consider if the card still meets their needs and, if not, to shop around and switch.
  • Promoting and facilitating the use of quotation searches. The FCA wants to see consumers being able to get an indication of their eligibility for specific products and the price they are likely to be offered if they apply. 
  • Over-borrowing and selected payment dates. The proposed approach would involve a digital communication being sent to consumers who go over 80% and 95% of their available credit limit, informing them that they are close to their credit limit.  This will include a reminder that they could be charged for exceeding their credit limit. 
  • Credit Limit Increases. The FCA will consult on proposed rules for an ‘opt-in’ system later in 2016.
  • Under-payment. The FCA will carry out further behavioural trials to look at how customers might be encouraged to make better decisions on how much to repay each month. 
  • Increasing minimum repayments. Before implementing this, the FCA will consider how effective ‘nudging’ might be in encouraging consumers to repay at a faster rate when they can afford to. 
  • Earlier forbearance and persistent debt. Later in 2016, the FCA will consult on rules requiring firms to identify early signs of debt problems and to intervene accordingly with these rules expected to be implemented via CONC or industry voluntary agreements.   

New FCA rules and guidance, together with any further industry remedies will be consulted on later in 2016, with behavioural trials on repayment options to be undertaken in 2017, after which further new rules may be considered.  

FCA publishes cash savings market study update

The FCA has published an update on its cash savings market study.

In January 2015, the FCA completed a study into the cash savings market and found that the market is not working well for consumers.  In December 2015, the FCA published a policy statement containing measures intended to improve competition in the cash savings market.

In the recent update, the FCA explained the main findings from the trials and follow-up research it carried out in 2015 to test a number of additional remedies.  More detail can be found in the Occasional Paper 19 that was published alongside the update, however in summary the main findings from the trials were:

  • Digital reminders – this tested the effectiveness of reminders about interest rate changes sent by email and SMS in comparison to letter-based reminders previously tested.  These reminders were effective in encouraging customers to take action.  The results show that the effectiveness of email and SMS reminders can be comparable to letter reminders in certain circumstances.  The findings of this trial supports the guidance that will come into effect in December this year that encourages firms to consider customers’ preferences when choosing the channel used (i.e. letter, email, SMS).  Therefore, no further action is necessary.
  • Return switching form – this tested the effectiveness of a simple ‘tear off’ form and pre-paid envelope enabling a customer to switch to a better paying account offered by their firm more easily.  This form was effective in making it easier for customers to switch to a better rate offered by their existing provider.  It increased internal switching by around 9%.  This additional internal switching appears to have been generated from customers that would not otherwise have taken action (i.e. there was no negative impact on external switching).
  • Switching box -  this was provided periodically to customers to give information on the potential financial gains from shopping around and switching, prompting customers to consider their choice of account and provider.  The results of this trial were mixed.  One trial involving the switching box on the front page of an annual statement led to a modest increase in internal switching but no increase in external switching; the inclusion of information about rates achievable elsewhere in the market in fact led to a small reduction in internal switching.  In a second trial, involving the switching box on the reverse of a letter notifying customers of a rate reduction, no significant impact was found.
  • Auto-renewal of certain fixed term products (including fixed term bonds and ISAs) – research found that consumer detriment from this practice is limited, largely due to the prevalence of cooling off periods after renewal.  The FCA also found that the large majority of providers in the sample that auto-renew customers, do so onto an open account and do not offer existing customers less favourable interest rates.  As a result, the FCA does not intend to take forward proposals requiring firms to obtain explicit consent from customers for their account to auto-renew on maturity. 

The FCA comments that some of the findings demonstrate the difficulties involved in encouraging customers to consider their choice of account and provider. It will consider whether other regulatory tools are needed to achieve more effective competition. It suggests that its options could include alternative disclosure methods or taking action on product design or the switching process. The FCA will report on this further analysis and will bring forward any proposals for consultation.

FCA thematic review report on oversight of appointed representatives in the general insurance sector

The FCA has published a report setting out the findings of a thematic review it has carried out on principals and their appointed representatives (ARs) in the general insurance sector (TR16/6).

Whilst the report focuses on the general insurance sector, the FCA has emphasised the importance of the findings being noted by all other regulated financial firms who are principals with ARs. Overall, the FCA categorised its findings as follows:

  • Business models and risk management. Almost 50% of the principals reviewed could not demonstrate that they had considered and understood the nature, scale and complexity of the risks arising from their ARs' activities and, in particular, the risks these activities presented to customers. This resulted in some ARs conducting activities outside their principal's core areas of expertise, where the principal lacked the ability or resources to provide oversight effectively.
  • Governance and oversight. Over half of the principals reviewed could not consistently demonstrate that they had effective risk management, oversight and control frameworks to identify, monitor and mitigate the risks arising from their ARs' activities. Some of these principal firms did not appear to have understood the full extent of their obligations for ensuring that their ARs complied with relevant regulatory requirements, particularly in relation to their sales activities.
  • Customer outcomes. For many of the principals reviewed, the shortcomings that were apparent in risk management, control and oversight led to risks to customer outcomes, as the principal was not able to ensure its ARs complied with the relevant requirements. In a third of the principal firms, the FCA saw examples of potential mis-selling and customer detriment as a result of ARs’ actions, with most of these issues not previously identified by the principal.

Aside from the early intervention steps that the FCA has taken against five of the principal firms and their ARs who were included in the review, the report also confirmed the next steps the FCA is intending to undertake following the report. Of interest are the following:

  • ‘Dear CEO’ letters to be sent to the chief executive officers of relevant principal firms setting out the FCA’s expectations and what actions it expects them to take to address the issues raised in the report.
  • Plans for the FCA to perform additional work with some of the firms in the wider survey sample who were not included in the more detailed work. This will focus on firms that the FCA believes to be higher risk and those where the FCA had concerns regarding the quality of data provided to it.
  • Consideration of the need for further thematic or supervisory work, and expectations that this will remain an area of supervisory focus.
  • Consideration of the need for other regulatory actions as a result of the findings of this report, including assessing whether there is a need for policy intervention or to adjust the FCA’s approach to authorisations.
  • Active engagement with the sector to discuss how best to take these matters forward, including via engagement with relevant trade bodies.

The FCA expects all principals across the regulated financial industry to consider the findings and take appropriate action, where applicable, to address the issues that are relevant to them.

FCA feedback statement on RegTech

The FCA has published its feedback statement FS16/4 to the call for input on supporting the development and adopters of RegTech.  

Following the launch of the call for input (November 2015) the FCA received more than 100 written responses from financial services firms, technology suppliers and start-ups, hosted bilateral meetings and convened 4 roundtables, which consequently shaped FS16/4. The four key themes which emerged were categorised by the FCA as follows:

  • Efficiency and collaboration - FS16/4 recognises that technology enables information to be shared more efficiently and that it can provide enhanced flexibility for firms to present their regulatory data and reduce the costs and administrative burden of reporting. Cloud computing may also improve access to innovative software.
  • Integration, standards and understanding - FS16/4 concludes that technology can drive efficiencies by reducing the gap between intention and interpretation. For instance, making regulations machine readable would allow enhanced automation and could reduce the cost of change. A more interactive FCA handbook could also facilitate compliance and reporting.
  • Predict, learn and simplify - FS16/4 suggests that technology has the capacity to simplify statistics, for example, advanced analytical solutions can interpret vast amounts of structured and unstructured data.
  • New directions - FS16/4 concludes that technology should allow regulation and compliance processes to be looked at differently and suggests as an example that biometrics, which measure and analyse people’s characteristics, could be used to better verify identities.

FS16/4 also touches on some of the blockers to innovation, which include uncertainty over regulations, the fact that some firms will continue to invest in legacy systems and that some technology is still in its early developmental phase resulting in uncertainty around its use.

FCA speech on firm conduct and culture 

Jonathan Davidson, the FCA Director of Supervision, delivered a speech addressing culture and conduct within a firm and the FCA's role within this.

Key points from the speech include:

  • Mr Davidson’s definition of culture as the typical, habitual behaviours and mindsets that characterise a particular firm and that there should not be a one-size fits all culture for all firms.
  • The fact that culture of regulated firms is and always has been vital in the FCA’s regulation of their conduct. Culture and governance is one of the FCA’s seven priorities, as set out in the 2016/17 Business Plan.  Accordingly, the FCA will be paying very close attention to the culture of firms and what boards and management are doing to shape the culture.
  • The FCA’s ambition that mindsets and incentives will shift to make ‘doing the right thing for consumers and the markets’ the objective that is always considered.
  • The fact that the role of all leaders is to encourage a culture of personal responsibility and to impress upon all staff the value of good culture to the health of the firm and the wider financial services industry. The FCA will be paying close attention to how senior managers discharge their responsibility for ensuring that individuals working at all levels in their areas of responsibility meet appropriate standards of conduct and competence.
  • More firms are forming the view that a strong conduct culture, which builds consumer trust and inspires employees, is in the economic interest of the firms and their shareholders.

FCA’s new authorisation commitments

Following feedback from the industry, the FCA has introduced its new commitments to firms during the authorisation process. The FCA confirmed its new commitments to be as follows:

  • The FCA will tell applicants as soon as their application has been assigned to a case officer. All communications about the application will be handled by the same case officer. If it subsequently proves necessary to assign the application to a different case officer, the applicant will be notified as soon as the change is made.
  • All communications from the applicant will be acknowledged within two working days.
  • A substantive response will be given within 10 working days and, where this is not possible, an update will be sent within the 10 working day period telling the applicant when they should expect to receive a substantive response.
  • The applicant will be given clear deadlines when asked to submit additional information.
  • The applicant will receive an update from the designated case handler on the current status of their case at least once a month.

The FCA hopes that the new commitments will reduce delays and improve communication between applicants and the FCA.

FCA publishes annual reports

On 12 July 2016, the FCA published a number of annual reports for the financial year 2015/16. Of key interest are:

  • The FCA annual report for 2015/16 - The report outlines some of the key pieces of work undertaken by the FCA in 2015/16, including the Credit Card Market Study which is one of the largest studies the FCA has undertaken, consultation on the new PPI rules for complaint handling as well as general work and pooled resources to ensure areas where the ‘risk to consumers is highest’ are tackled. The report also reiterates that the current UK-EU framework, will remain unchanged until the Government and Parliament introduce any alterations to it. 
  • The FCA competition report 2013/16 – This is the first report of its kind to be published by the FCA since it gained a competition objective in 2013 and its concurrent competition powers in 2015. The Competition Report summarises the FCA's work to promote competition over the last three years. It also explains how it identifies concerns and addresses issues. In the report, the FCA stated that it is embedding competition thinking across the wider policy, supervisory and enforcement work that it carries out. Two of the FCA’s main pieces of work in respect of competition in the market includes the Credit Card Market Study and the Mortgage Market Study. The Credit Card Study has recently been reported on, whereas the Mortgage Market Study is still in its early stages. The FCA’s wider competition activities include setting up the Innovation Hub and establishing, with the PRA, the New Bank Start-up Unit (NBSU), both of which are intended to improve competition in order to generate better outcomes for consumers.
  • The FCA enforcement annual performance account for 2015/16 – This is the FCA's assessment of whether it is operating fairly and effectively in investigating suspected misconduct and in bringing criminal, civil and administrative proceedings where it is appropriate to do so. Among other things, the report summarises some of the key outcomes the FCA achieved during 2015/16. Chapters 14 and 15 of the report provide a statistical overview of the FCA's performance. Specific areas covered by the report include, among others, retail conduct, market abuse, confiscation orders, threshold conditions and senior managers regime. The FCA has confirmed it welcomes feedback on the report via email.

CMA updates Payday Lending Market Investigation Order 2015 and publishes notice of intention to conduct qualitative research

The Competition and Markets Authority (CMA) has updated the Payday Lending Market Investigation Order 2015 (the Order) to set the ‘Obligation to Publish Date’ to be the 26 May 2017.  The Order now requires online payday lenders to publish details of their products on at least one price comparison website authorised by the FCA by 26 May 2017.

The CMA has also published a notice of intention to conduct qualitative research as part of its retail banking market investigation.

The retail banking market investigation covers both personal current accounts for individuals and banking for small and medium-sized enterprises including business current accounts and loans. The qualitative research would support the development of two possible remedies after the final report: a) service quality measures and b) maximum monthly charge (MMC) for overdrafts.

For the purposes of the research on MMC’s the CMA is currently seeking suggestions on what standardised term and definition could be used to explain the MMC and any existing research that could help inform the term and definition to use.

The CMA is seeking responses to the notice by 12 noon on Monday 1 August 2016.

Cyber-security Directive published in the EU Official Journal

On 19 July 2016, the text of the Directive concerning measures for a high common level of security of network and information systems across the Union (Cyber-security Directive) was published in the Official Journal of the EU.

Article 1 of the Directive confirms the core objective as the achievement of a high common level of security of network and information systems (SNIS) within the Union. This objective is intended to be achieved through five obligations put forward by the Directive:

  • Member States laying down and adopting a national strategy on SNIS.
  • Creation of a Cooperation Group to facilitate cooperation and exchange of information between Member States.
  • Creation of a Computer Security Incident Response Teams Network (CSIRT).
  • Establishment of security and notification requirements for operators of essential services and for digital service providers.
  • Member States to nominate national competent authorities with tasks relating to security of network and information systems.

The Directive is without prejudice to Member State actions to safeguard national security and imposes a regime of identifying operators (both private and public bodies) of essential services by 2018 (Article 5). The sectors to which this applies include, among others, energy, transport, banking, financial market infrastructures and digital infrastructure.

The Directive will come into force on 8 August 2016.

Select Committee on Financial Exclusion launches call for evidence

The Select Committee on Financial Exclusion (the Committee) has been set-up by the Government to consider financial exclusion in the UK financial services market, which results in people having difficulty accessing or using the mainstream financial services that are necessary to participate in daily economic life and society. 

On 22 July 2016, the Committee published its call for evidence welcoming views and experiences from all interested parties.

The Committee Chairman, Baroness Tyler of Enfield, has stated that the aim of the inquiry is to find a way forward. The Baroness informed that the Committee will look at the role banks and other members of the financial services industry can play in helping those who are currently excluded, including examining the role of charities, government and regulators. The Committee will also look at the quality of financial education in the UK and whether sufficient steps are being taken to ensure the varying generations are able to understand their finances and know where to obtain guidance if needed.

Interested parties have until 14 September 2016 to submit written evidence to the Committee.

HM Treasury publishes response to PAC report on financial services mis-selling

HM Treasury has published treasury minutes that include the government’s response to the House of Commons Public Account Committee’s (PAC) report on financial services mis-selling.

The PAC report was published in May 2016 and formed the view that the FCA, government and the FOS were being too passive in their approach to mis-selling of financial services products.  The report sets out six recommendations to address the issue.

The FCA, government and the FOS have accepted the recommendations made by PAC, with the exception of the recommendation that HM treasury and the FCA should develop ‘real-time’ indicators of the extent of mis-selling, and assess regularly how their actions are in reducing it.  HM Treasury explains that real time indicators are not feasible as it only becomes apparent to the consumer and the supervisor after the mis-selling has taken place. 

The response sets out details of the initiatives taken by the government, the FCA and the FOS to address the PAC’s other recommendations.  These include:

  • The government’s decision to transfer regulatory responsibility for claims management companies to the FCA.
  • The FOS’ publication of a timetable on 1 July 2016 for resolving older PPI cases.
  • The FCA identifying the culture of firms and the provisions of financial advice as priorities in its 2016-17 business plan.
  • The government giving active consideration to making regulations that would give the National Audit Office (NAO) access to any information that it reasonably requires from financial regulators to fulfil its functions.  It will aim to make these regulations by January 2017, if it decides to take this approach.

Lending Standards Board publishes new Standards of Lending Practice

The Lending Standards Board (LSB) has published a new Standards of Lending Practice (Standards). 

The Standards are voluntary and set the benchmark for good lending practice in the UK. The Standards apply to personal customers and cover six main areas:

  • Financial promotions and communications.
  • Product sale.
  • Account maintenance and servicing.
  • Money management.
  • Financial difficulty.
  • Consumer vulnerability.

A separate section covers governance and oversight, setting out the framework firms should have in place to ensure that the Standards are implemented and operate effectively.

The Standards cover loans, credit cards and current account overdrafts.  Although the LSB has confirmed that a wider range of consumer lending products is currently under consideration.

The Standards will come into effect on the 1 October 2016 and will replace the LSB’s Lending Code.

FOS annual report and accounts 2015/16 and its technical note for mortgage consumers in financial difficulty

The FOS has published its annual report and accounts 2015/16 and two technical notes aimed at mortgage consumers on mortgage arrears and charges and mortgage shortfall.

Key points from the annual report include (among others):

  • 75% customer satisfaction level reached for resolved claims and 57% in cases with an outcome which was not desired. In total, 438,802 cases were resolved by FOS - 100,000 more than received.
  • FOS become ADR approved in July 2015, resolving two thirds of all non-PPI claims within three months and increasing transparency by publishing over 35,000 decisions.
  • FOS increased its use of technology, with more than 50,000 people making their complaints online.
  • PPI complaints continued to take up the majority of FOS’ time, with FOS anticipating the number of complaints to increase in the coming year due to the potential time limits that may be imposed for missold PPI complaints.
  • In terms of FOS’ financial performance, FOS saw its operating deficit at £22m, significantly less than the £46m estimate. 

Going forward into 2016/17, FOS’ core aims include continuing to increase customer confidence beyond 75%, aiming to settle 9 out of 10 of non-PPI claims within three months, reducing the costs of support functions and freezing case fees paid by businesses at £550 for the 4th year running. 

The technical notes aimed at mortgage consumers set out the expectations the FOS has concerning mortgage lenders and what mortgage consumers can expect in relevant situations. Of key interest are the following:

  • The mortgage company has a responsibility to respond sympathetically and constructively when a borrower falls in arrears. If a lender has caused unnecessary upset, the FOS can tell them to compensate the borrower.
  • The FOS will not necessarily say that arrears charges are unfair, but the FOS may decide they are unfair if someone has kept to an agreed repayment arrangement. If the FOS decides that the charges have been applied unfairly, it can tell a mortgage company to refund them.
  • If a repossessed property is sold and a shortfall remains to be repaid by the borrowers, the FOS can look into how a mortgage lender has handled the sale of the property and whether the shortfall was a result of the mortgage lender underselling the property. The FOS can also consider the nature and frequency of the communication between the mortgage lender and the borrower, especially in cases where the lender has not taken action to recover the shortfall until months after the sale.

The FOS has also provided a list of varied specific scenarios for mortgage consumers, together with relevant guidance from the FOS.

Money and Mental Health Policy Institute publishes consultation on spending

The Money and Mental Health Policy Institute has published a consultation on regulating spending during periods of poor mental health

The consultation recognises the link between poor mental health and spending habits.  In particular, it sets out ways which mental health can affect spending, including manic spending during a high period of mania, comfort spending to boost a low mood and impulsive spending where no purpose can be attributed to the transaction. 

The consultation found that 93% of people with mental health problems say they spend more in periods of low mental health.

The consultation explores potential policy solutions to the link between spending and poor mental health.  The restrictions which can be placed on an account will vary depending on the user, and the process by which restrictions could be removed could include:

  • A double confirmation by the user.
  • Alerts to a third party.
  • A mandatory cooling off period.
  • A cognitive/mental capacity assessment.
  • Third party sign off.

Responses to the questions raised in the consultation are invited from experts with personal or professional experience.

BBA reveals a consumer-led revolution in digital banking

The British Bankers’ Association (BBA) has published a new report on digital banking.

The report shows a dramatic increase in consumers using digital banking and new technologies to manage their money.  The use of phone, internet and mobile banking have all increased in recent years, with customers having more contact with their banks than ever before.

The report which investigates changing customer habits and major technological advances in banking reveals:

  • Payments using mobile apps in 2015 were 347 million, up 54% or 122 million from the year before.
  • Payments using internet banking were 417 million last year, a 2% increase or 9 million from 2014.
  • The annual use of contactless cards has risen 250%, with £1.1 billion spent in March 2016.
  • Banks issued 15 million cards with contactless technology in 2015, up 54 per cent on the year before.
  • More than 13.8 million apps were downloaded in 2015 – a 25% rise on 2014.

The report suggests the popularity of all forms of digital banking is due to it reducing the stress customers experience around managing their money, as it makes it easier for them to keep track of their finances.

By far the biggest rise in digital services is the use of mobile apps, which the report puts down to speed in which people can access their information and make transactions.  New figures in the report show mobile banking apps are increasingly preferred to banks’ websites, as internet banking logins fell slightly last year.

FSB welcomes feedback to compensation tools and misconduct roundtable discussions

In May 2016 the Financial Stability Board (FSB) hosted a roundtable to share experiences and lessons on compensation tools to address misconduct in banks. The participants included senior executives responsible for risk and remuneration functions at 22 large internationally active banks, together with officials from the FSB's compensation monitoring contact group (CMCG).

The FSB has now published a note summarising the discussions that took place at the roundtable, welcoming feedback on the topics discussed from the wider financial services industry. Some key points to note from the summary include (among others):

  • The discussions make it clear that compensation tools are just part of the toolkit used in reducing the risks of misconduct.
  • Participants indicated that there has already been a significant change in the way firms view compensation as a tool to address misconduct. Firms recognise there is a direct link between compensation and conduct and increasingly look to actively manage conduct through compensation tools, but they also note that these tools should not be over-emphasised.
  • At most firms, codes of conduct set the framework for expected behaviour, and explicit expectations surrounding roles and responsibilities are emphasised. Participants emphasised the importance of "tone from the top".
  • A number of participants noted that they would welcome more guidance from regulators. Supervisors are considered to have an important role to play in identifying better practices and conveying them to the industry, so that firms know whether they are on the right track.

The deadline for feedback on the topics discussed is 21 August 2016.

For more information contact

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