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Retail Finance round-up - 11 February 2016

Retail Finance round-up - 11 February 2016
  • United Kingdom
  • Financial services - Retail finance


This week the FCA has published a policy statement setting out its final rules for extending the new accountability framework for individuals working in banks, building societies and credit unions who perform wholesale market activities. The FCA reminds firms that if they are affected by the Senior Managers and Certification Regime, they will need to ensure they are ready for implementation when the regime comes into force on 7 March 2016. The consultation paper also provides a summary of the key implementation dates.

There has also been some interesting data published by the FCA this week, including the Data Bulletin, which reviews the number of consumer credit authorisations, financial promotions investigations and skilled persons reports. It has also published the consumer credit update, which provides a summary of recent developments, such as an update to the FCA’s unfair terms library.

Finally, from 15 February 2016, the European Commission will make an ODR platform available on its website. From this date firms which sell or provide goods or services online to consumers will need to comply with the requirements of the Consumer Disputes (Amendment) Regulations 2015. Firms should inform consumers of the existence of the ODR platform, the possibility of using the ODR platform for resolving disputes, and they should also provide an email address so that consumers have a first point of contact. Firms are required to provide this information on their website, in the general terms and conditions applicable to online sales and service contracts, and also in electronic communications sent to consumers offering goods or services (where the offer is capable of acceptance by the consumer).

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FCA publishes consultation paper on Handbook changes to reflect the introduction of Innovative Finance ISA and the regulated activity of advising on peer-to-peer agreements

The government is introducing a new Innovative Finance ISA which will be available from 6 April 2016.  This will allow peer-to-peer agreements to be included within an ISA tax wrapper. The FCA published a discussion paper in November 2015 setting out its initial views on changes that would be required within the Handbook. It has now published a consultation paper seeking input on the changes it is planning to make to rules and guidance on disclosure and advice relating to the peer-to-peer agreements.

The government is also planning to amend the Regulated Activities Order to make provision of advice about loan-based crowd funding investments that are peer-to-peer agreements a regulated activity.  See: Draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016 published.

Comments are sought by the 15 February 2016 via an online form.

FCA publishes Policy Development Update – Issue 30

The FCA has released its latest Policy Development Update – Issue 30. The update provides information on the publications issued since the last edition, information about recent changes within the Handbook and a timetable for forthcoming publications.

The following consultation papers have already been published and feedback is requested in February:

  • Consultation Paper 16/5: Handbook changes to reflect the introduction of the Innovative Finance ISA and the regulated activity of advising on peer-to-peer agreements.
  • Consultation Paper 16/4: Loan-based crowdfunding platforms and segregation of client money.
  • Consultation Paper 16/3: Financial Services Compensation Scheme - Management Expenses Levy Limit 2016/2017.
  • Consultation Paper 16/2: Mortgage Credit Directive: Minor changes to our rules and guidance.
  • Proposed guidance on voluntary redress schemes under the Competition Act 1998.

The update also provides information on the expected timetable for forthcoming publications.  The FCA’s proposals in response to the CMA’s recommendations on high-cost-short-term credit are expected in Q2 2016 and the policy statement on future regulatory treatment of CCA regulated first charge mortgages is expected in March 2016.

PRA releases an update on regulatory references

The PRA has published an update on regulatory references.  In October 2015, the PRA and the FCA jointly published a consultation paper entitled “Strengthening accountability in banking and insurance: regulatory references”. This paper proposed requirements relating to the content and format of the employment references for individuals subject to the Senior Managers and Certification Regime, Senior Insurance Managers Regime, key function holders and notified non-executive directors.

The consultation period closed in December 2015 and 30 responses were received by the regulators. The update seeks to provide feedback on the responses received and sets out next steps. Several issues were raised within the responses, some of which included how best to update regulatory references, how to obtain regulatory references from overseas employers and the timeline for the implementation of the regime.

The PRA intends to issue rules in mid-February 2016, which will take effect on 7 March 2016.  Following this, a second set of rules will be released in conjunction with the FCA to cover possible gaps that the consultation feedback highlighted.

FCA publishes consumer credit update

The FCA has published a consumer credit update.  This provides a summary on recent developments such as:

FCA publishes policy statement on fair, reasonable and non-discriminatory access to regulated benchmarks

In June 2015, the FCA published its consultation paper on fair, reasonable and non-discriminatory (FRAND) access to regulated benchmarks. The proposals require regulated benchmark administrators to grant access to and licences to use benchmarks on a fair, reasonable and non-discriminatory basis, including with regards the price.

The requirements used similar language to the Markets in Financial Instruments Regulation (MiFIR) Article 37 which will apply to access to benchmarks by central counterparties and trading venues for  the purposes of clearing and trading. 

The FCA has now published a Policy Statement summarising the responses to the consultation paper.  The Policy Statement also sets out the FCA’s comments on the responses and presents the amended Handbook text that will apply to benchmark administrators.

The Handbook provisions come into force on 1 April 2016.

Article 37 MiFIR, referred to above, is expected to come into force in 2019. The EU also intends to introduce a Benchmark Regulation to create a common framework and consistent approach for financial benchmarks. The FCA notes that it may need to review the benchmark rules, once the EU Benchmarks Regulation has been finalised to determine what may need to be replaced or adapted to reflect the requirements in the EU legislation.

Treasury Committee publishes FCA’s internal audit reports

The Treasury Committee has published the FCA’s internal audit reports for November 2014 covering:

  • Handling of market sensitive information – which reports that significant work has been done to roll out new guidance for what constituted ‘market sensitive information’ and acknowledges that further work needs to be done to embed this within the FCA.  The FCA also notes that similar steps and measures may be needed in respect of other categories of sensitive information, e.g. personal data.
  • Management of crises – which reports a number of independent processes in order to enable the organisation to respond to incidents. The FCA accepts that the overall structure in place does not provide sufficient clarity within the organisation, and would benefit from implementing a single consistent framework.
  • External communications handled by the Communications and International Division (C&ID) – which reports a good level of engagement between C&ID and business areas. The FCA says that several remediating actions are already in place and it will welcome recommendations in relation to how its processes, systems and controls could be enhanced, in particular in relation to adjusting the new sign-off process and knowledge transfer between staff. 

Andrew Tyrie, Chairman of the Treasury Committee, commented that the Committee will continue to keep a close eye on the FCA after the Davis review illustrated some of the regulator’s institutional weaknesses.

FCA publishes policy statement on strengthening accountability in banking

Following its consultations in July and October 2015 on strengthening accountability in banking and insurance, the FCA has published a policy statement.  In this statement the FCA sets out its final rules for extending the new accountability framework for individuals working in banks, building societies and credit unions who perform wholesale market activities.  It also provides initial feedback on its consultation paper CP15/31 as well as its final rules on an interim regime for referencing pending a permanent set of rules for references, including transitional arrangements, which it aims to publish in the summer.

The FCA reminds firms that if they are affected by the Senior Managers and Certification Regime, they will need to ensure they are ready for implementation when the regime comes into force on 7 March 2016.  The FCA provides the following summary of the key implementation dates:

8 February 2016

Firms are required to submit grandfathering notifications for existing approved persons who will be performing senior management functions under the new regime.

7 March 2016

Firms must identify individuals subject to the certification regime and train them in respect of the conduct rules, which will apply when the new regime begins.

7 September 2016

Firms must identify staff under the new client-dealing significant harm function (SHF) or the new algorithmic trading SHF and train them in respect of the conduct rules.

7 March 2017

Firms’ deadline for issuing certificates for individuals under the certification regime.

Draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016 published

On 2 February 2016, the Government published the draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016, together with an explanatory memorandum.

The Order amends legislation (including the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001) concerning the regulation of activities relating to peer-to-peer (P2P) lending, mortgage lending and other credit granted to consumers.  The Order also amends the Small and Medium Sized Business (Finance Platforms) Regulations 2015 so that finance applications made by brokers are out of scope of those Regulations. In summary, the Order seeks to:

  • Extend the scope of the regulated activities relating to the operation of P2P lending by aligning the treatment of P2P loans with other ISA qualifying investments.  The draft Order also makes the provision of advice to lenders on entering into a P2P loan a regulated activity.  The Order extends the scope of the regulated activity of operating an electronic system in relation to lending to ensure that all the relevant activities are included within this, including notably the activity of facilitating the transfer of rights under a peer-to-peer loan between lenders.
  • Provide for a transitional period until 21 March 2016 before first charge mortgages which were entered into before 31 October 2004 and are currently regulated as consumer credit agreements must be regulated as mortgages.  It also ensures that all of the regulated activities applicable to regulated mortgage contracts (including, ‘advising on regulated mortgage contracts’ and ‘arranging regulated mortgage contracts’) apply to mortgages which were entered into before 21 October 2004, and that the promotion of those activities is regulated.
  • Clarify the regulatory position of a consumer credit or consumer hire agreement entered into before 1 April 2014 such that that the regulatory position will be determined by the position existing at the time the agreement was entered into.
  • Supplements the definition of “regulated mortgage contract” such that agreements entered into before 21 March 2016 will only be considered regulated mortgage contracts if they were: (i) regulated when entered into; or (ii) regulated credit agreements which are becoming regulated mortgage contracts pursuant to the Mortgage Credit Directive Order 2015.

The provisions of the Order will come into force on different dates (mostly March 2016), with the remaining provisions coming into force on 6 April 2016.

HM Treasury proposals for FSMA provisions on illegal money lending

Parliament has published its proposed amendments to the Bank of England and Financial Services Bill 2015-16.

Some major amendments, which will be introduced in the House of Commons committee stage for the Bill, include:

  • Amending the Financial Services and Markets Act 2000 (FSMA) to introduce a new part on illegal money lending at new sections 333S and 333T.
  • Under the relevant legislation, “illegal money lending” means entering into a regulated credit agreement as a lender in circumstances that constitute an authorisation offence.
  • Section 333S will grant HM Treasury the power to make grants and loans, and provide other financial assistance, in order to take action against illegal money lending.
  • Section 333T will grant the FCA the power to collect a levy from consumer credit firms, or a specified class of  firms, to recover HM Treasury’s costs relating to illegal money lending.

HM Treasury’s powers would be used to provide financial assistance to National Trading Standard’s illegal money lending teams.

The committee stage of the Bill in the House of Commons will conclude by 23 February 2016.

Firm A v FCA (2016) – Upper Tribunal concludes firm’s interim permission ceased to have effect when decision notice refusing Part 4A permission was given

In this case, the FCA refused a firm’s application for permission to carry on the regulated activities of debt adjusting and debt counselling under Part 4A of the Financial Services and Markets Act (2000) (FSMA).  The applicant referred the matter to the tribunal arguing that, contrary to the FCA’s view, the giving of the decision notice did not have the effect of terminating its interim permission as a consequence of the operation of article 56 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2013.

If the applicant was correct, then it could carry on the business covered by its interim permission until its reference was determined.  However, if the FCA was correct, the applicant’s right to carry on its business would cease with the giving of the decision notice as a consequence of the operation of article 58 of the Order.  In that case, the only way the applicant could continue to carry on its business would be if the tribunal made a direction suspending the effect of the decision notice pending termination of the reference under rule 5(5) of the Tribunal Procedure (Upper Tribunal) Rules 2008

The applicant also made an application (a suspension application) under the Upper Tribunal Rules in case it was unsuccessful regarding interpretation of the provisions of the Order.  To ensure there was no gap between termination of the interim permission and a hearing of the suspension application, the applicant applied to the tribunal, with the FCA’s consent, for a direction to be made under rule 5(5) to cover the limited period between the date of the decision notice and the determination of the suspension application.  The FCA only gave its consent on the basis that the applicant agreed voluntarily to vary its permission to carry on no regulated activity while the direction remained in force.    The tribunal gave a direction under rule 5(5), however, it separately made a decision on 28 January 2016 dismissing the suspension application.

The tribunal concluded that the correct construction of article 58(3)(c) of the Order is that the applicant’s interim permission ceased to have effect when the decision notice was given in respect of the applicant’s application for a Part 4A permission.  The tribunal commented that it would not be immediately obvious that the rule 5(5) process can mitigate the effects of article 58.  As a result, it recommended that, where the FCA proposes to refuse a Part 4A permission application made by a firm that has an interim permission, the warning notice and any decision notice should make reference to that process, so the firm concerned can take steps to preserve the effect of the interim permission pending any application to the tribunal under rule 5(5).

Treasury Committee publishes letter that questions the tax deductibility of fines imposed by regulators on banks

The House of Commons has published a letter from the Treasury Committee Chair, Andrew Tyrie, to Chancellor of the Exchequer, George Osborne.  The letter raises questions on the tax deductibility of fines imposed by regulators on banks.

In the letter, Mr Tyrie explains (amongst other things) that, payments required by UK and foreign regulators as a result of misconduct or misselling should not be deductible for UK corporation tax purposes.  He considers that the July 2015 budget was a “step in the right direction,” however, seeks clarification on the following points:

  • That all fines imposed on banks by regulators other than those excluded by section 133D of the Corporation Tax Act 2009 (as amended), cannot be deemed to be ‘compensatory’ and therefore deductible under current tax legislation, whether they are made to individual customers, to state authorities or to any other bodies.  Mr Tyrie explains that there seems to be some doubt about this as it appears HMRC’s Business Income Manual 42515 suggests that payments made to regulators, rather than customers, as a result of a fine may be deductible in some circumstances.  The letter suggests that this is unacceptable and that it is important taxpayers are not required to bear part of the burden imposed by the FCA or overseas regulators.
  • That the costs banks incur in producing section 166 reports for the FCA should be tax deductible, where the reports do not result in a referral to the FCA’s enforcement department.  The letters explains that these costs can be a significant burden on banks and other institutions, often where there is no proven misconduct.   Mr Tyrie states that the tax position is still unclear and seeks clarification on this point.
  • Whether agreements reached by UK banks with foreign regulatory authorities can, in certain circumstances, be structured as to permit UK tax deductibility.  Mr Tyrie explains that, if this is true, it would appear to breach the spirit of UK tax law that punitive fines are not deductible, as these agreements are an alternative to a court-imposed fine.

FCA publishes Data Bulletin: Issue 5

The FCA published issue 5 of its data bulletin on 3 February 2016. Items to note include: 

  • Consumer credit authorisations - The number of consumer credit firms (excluding representatives) remained static at 39,926. However, 71% of eligible firms applied for authorisation, which included 8,570 who were ‘new to market’. 95% of the determinations resulted in a firm being authorised with the FCA expecting the average time to determine applications to increase over time (due to the complexity of business models).
  • Financial promotions - There were 22 consumer credit cases, which accounted for 65% of financial promotions investigations.
  • Skilled person reports -  In Q2, 13 Skilled Persons Reports were commissioned; of which 3 were in the consumer credit sector.

FCA publishes its quarterly KPIs for Q4 2015 and publishes the number of skilled person reports commissioned in Q3 2015/16

The FCA has published its quarterly KPIs for Q4 2015.  The KPIs provide information on the average processing time for applications, how many applications it determines 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 has increased in Q4 for the retail sector.  The FCA says that the higher volumes it has received has increased the time taken to allocate the applications to case officers which has resulted in higher average processing times.  It is seeking to address this issue through efficiency gains and by applying additional resources to authorisation processes.
  • The FCA has seen an increase 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.
  • There have been no refusals in this quarter and the percentage of withdrawals has decreased.

The FCA has also published another document that details the number of skilled person reports commissioned in Q3 2015/16.  In total there were 4 of these reports commissioned; of which 1 was in the consumer credit sector.

The BCBS expands its guidelines on anti-money laundering and countering terrorist financing with a "General guide to account opening"

On 4 February, the Basel Committee on Banking Supervision issued the final revised version of the General guide to account opening and customer identification (Guide) first published in 2003.

The Guide updates, and has been issued as an Annex (Annex 4) to the guidelines on Sound management of risks related to money laundering and financing of terrorism, which was first published in 2014.

The policies and procedures for account opening that all banks need to establish must accurately reflect the AML/CFT obligations to which they are subject.  The customer information collected and verified at the account opening stage is fundamental in order for banks to fulfil these obligations.  In response to this, the content of the Guide aims to support banks in implementing the Financial Action Task Force (FATF) standards and guidance, which requires the adoption of specific policies and procedures, in particular on account opening.

FCA disclosures in relation to its discontinuance of the thematic review into the culture in banks

Under the Freedom of Information Act 2000, the FCA has made two disclosures in relation to its discontinuance of the thematic review into the culture in banks.

In the first disclosure, the FCA was asked for the relevant emails and minutes which formed its decision to discontinue the review.  It provided:

  • Emails explaining the nature of documents provided to the Treasury Select Committee confirming its decision to close the project, its decision paper and Exco papers.
  • A published paper detailing the rationale for the decision and the wider context of its ongoing focus on culture.

In the second disclosure, the FCA was asked for any evidence to support its decision (to which it provided the same documents), and how the previously perceived need for investigation was obviated.  The documents showed, a focus on culture in banks continued to be a priority. However, it decided the best way to support and drive on-going efforts to improve culture is to engage individually with firms as well as support other initiatives outside of the FCA.

Debt defaults could leave 4.7 million households in arrears by 2020

Arrow Global have carried out research into consumer debt defaults as part of a major report which will be published in full later this year called Debt Britain: The Big Picture. It has forecast that consumer debt defaults will rise by 17% during the next five years, leaving 4.7 million households in arrears by 2020. The impact of interest rates rising faster than the government’s Office for Budget Responsibility prediction will mean that if the bank rate is even 0.5% higher over the whole forecast period, consumer defaults would increase by 24% by 2020, with 5 million households being in default.

The increase will follow a period where lower interest rates have meant that households are £1,300 better off per year and consumer debt has reduced during the past seven years from 145% in 2008 to 120% in 2015.

Arrow’s analysis of its management information reveals that the typical amount owed by its customers who have previously defaulted is relatively stable at around £2,500. This would suggest that while the volume of consumers in default may be set to increase over the next five years, the value of the default may not increase in the same way.

FLA publishes its latest figures

The Finance and Leasing Authority (FLA) has published its latest figures for consumer finance and asset finance.

The data for Consumer Finance includes retail store and online credit, credit cards and personal loans, second charge mortgages and car finance. Overall the figures show an 8% increase in Consumer Finance new business. Credit card and personal loan new business grew by 5% from the previous year.

Consumer Car Finance has grown by 10% as compared to the previous year. The percentage of private new car sales through dealerships increased from 75.9% in 2014, to 81.4% in 2015.

Asset finance includes plant and machinery finance, commercial vehicle finance, IT equipment finance, business equipment finance, car finance and aircraft, ships and rolling stock finance. The data shows that Asset Finance new business grew by 12% in 2015 (a seven-year high), with the value of new business increasing by 18% in December 2015 as compared with December 2014.

BBA introduces Statement of Principles for Letters of Authority for PPI complaints

The British Bankers’ Association (BBA) has introduced a Statement of Principles setting the essential content for a letter of authority (LoA) that claims management companies (CMCs) should obtain from customers when acting in relation to their PPI complaints.

The aim of the Principles is to enable customers’ complaints to be handled more efficiently, as well as give customers a clear understanding of the permission of authority being given. These Principles include:

  • Customer/Representative Details.
  • Authority to review potential grounds for a complaint.
  • Authority to raise a complaint.
  • Validity.
  • Amendments and alterations.
  • Re-opened complaints.

Annexes to the Principles also provide:

  • A list of policies indicating when the LoA is required.
  • A list of policies indicating whether single or all signatures are required on a LoA for complaints from joint accounts.

Members of BBA and the Professional Financial Claims Association (PFCA) members have voluntarily signed up to the Principles, and the PCFA are looking at making them a condition of membership.

Open Data Institute publishes report into an Open Banking Standard

The Open Data Institute has published its report into an Open Banking Standard.  Changes in EU law mean that within the next two years UK banks will have to open up access to their payments capabilities, and to provide services that will enable their customers to receive their data over the internet and easily, safely and securely share it with third parties.  The Open Banking Standard therefore aims to guide how open banking data should be created, shared and used by its owners and those who access it, with a view to protecting privacy and keeping the data secure.

The Open Data Institute explain how there are specific benefits that could come from making it easier to share and open banking data.  For example, customers can look for a mortgage more easily, banks can find customers matched to a new product, and businesses can share data with their accountants.  This, in turn, will improve efficiency and stimulate innovation.