Consumer and Retail Finance – April/May 2018

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Latest from the FCA, including high-cost credit, and unfair contract terms consultation. Other sector news.

Financial Conduct Authority (FCA)

On 9 April 2018, the FCA published its Business Plan 2018/19. Retail lending is one of the FCA’s sector priorities. Details are set out on pages 41 to 43, and include the launch of a credit information market study in Q4 2018. Cross-sector priorities include high-cost credit, firms’ culture and governance, financial crime and anti-money laundering, data security, and treatment of existing customers. The FCA plans to launch an initial discussion paper in summer 2018 on the introduction of a new duty of care provision for firms.

The FCA also published its Sector Views 2018 document, which reports that consumer credit lending has continued to grow significantly, driven primarily by credit cards, motor finance and unsecured personal loans. The chapter on retail lending, including consumer credit, can be found on pages 17 to 23.

On 2 May 2018, FCA Chief Executive Andrew Bailey gave a speech ‘High-cost credit: what next?’, in which he explained that the FCA’s current focus is on overdrafts, rent-to-own, home-collected credit and catalogue credit, because of the particular risks to consumers that the FCA has found in these areas. He said that the FCA’s Financial Lives survey has given the FCA “an important set of insights, which we have married up with an enormous amount of data in our review of high-cost credit. We’ve looked at tens of millions of credit files, conducted randomised trials, surveyed thousands of people and run more than a hundred in-depth interviews and focus groups”.

Mr Bailey said that the FCA has a responsibility to ensure there is a framework of rules that firms comply with which reduces the risk of consumer harm but allows the provision of credit where it is appropriate and affordable: “For many, but not all, users of high-cost credit, access to borrowing is an important feature which can allow sensible smoothing of income flows and the purchase of necessary durable goods. I do not take the view that credit should not be available to this part of the population”.

The FCA is aware that some stakeholders have called for it to introduce price capping in other areas of high-cost credit (other than payday loans), and overdrafts. It is examining a range of potential approaches to address the harm it sees to consumers using these products, and Mr Bailey expects to set out the FCA’s views in the next month. The FCA is also exploring the development and scale of provision of alternatives to high-cost credit.

We reported in the March 2018 edition of the Regulatory round-up that Citizens Advice is calling on the FCA to extend its definition of high-cost short-term credit to include home credit loans (see the press release and Doorway to Debt publication). The issue was raised with the Prime Minister on 9 May 2018.

The FCA has updated the information sheets that consumer credit firms must use to accompany arrears and default notices. The information sheet on high-cost short-term loans has also been updated. The new sheets are effective from 27 July 2018. Firms must continue to use the current versions until then.

The FCA is consulting until 7 September 2018 on proposed new guidance outlining factors financial services firms should consider under the Consumer Rights Act 2015 when drafting and reviewing variation terms in their consumer contracts. It has also updated its pages on unfair contract terms.

On 4 May 2018, the FCA published its mortgages market study interim report. It found that competition in the mortgage market works well for many people, but is calling for more innovation to help consumers find the best deal. See our recent briefing for more details.

The FCA is currently consulting on FCA regulated fees and levies: rates proposals for 2018/19. Comments are requested by 1 June 2018.

The Prudential Regulatory Authority (PRA) and FCA consulted jointly on the Financial Services Compensation Scheme (FSCS) management expenses levy limit. The PRA published a policy statement and final rules. The FCA also published its amendments to the Fees manual, which came into force on 1 April 2018.

The FCA has since made final rules to change how the FSCS is funded, following consultation on reform proposals. It has also made rules to increase the FSCS compensation limit for investment provision, investment intermediation, home finance and debt management claims to £85,000. Both take effect in April 2019.

Handbook Notice 54 includes changes to the Handbook to reflect the FCA’s forthcoming office relocation. These come into effect on 1 July 2018. Firms should note the FCA’s response on pages 9 and 10 of the Notice to the consultation on this matter, regarding communications with customers and the content of credit agreements.

The FCA has issued a warning to the public about the increased threat of loan fee scams, where consumers are asked to hand over a fee when applying for a loan or credit that they never receive.

In the first case brought by the FCA and PRA under the Senior Managers Regime, Barclays Group’s Chief Executive has been fined and special requirements announced regarding whistleblowing systems and controls at Barclays. See the press release for details.

On 26 April 2018, the FCA’s Director of Competition gave a speech on ‘Blockchain: considering the risks to consumers and competition’, in which she discussed the background to the use of cryptocurrencies, other applications for distributed ledger technology, and the promises and risks of new technology-driven developments. The senior adviser on the long-term future of the financial system, recently appointed by the Governor of the Bank of England, will work with colleagues to deepen the Bank’s understanding of the prospects for new financial technologies to better serve UK households and businesses.

The FCA has published the final list of the most representative services linked to a payment account and subject to a fee within the meaning of Regulation 3 of the Payment Accounts Regulations. Payment accounts providers must begin using this standardised terminology from 31 October 2018. They will also need to provide a pre-contractual fee information document (see details here) and an annual statement of fees (see details here).

The FCA published the draft text of a speech delivered in March 2018 by its Director of Retail Banking Supervision, on ‘Payments after PSD2: evolution or revolution’. She discussed, among other things, the opportunities presented by PSD2 (the revised EU Payment Services Directive) and Open Banking. In her conclusion, she commented that PSD2 “is an opportunity for banks to demonstrate their trustworthiness to their customers – and to consumers generally. But trustworthiness is not a matter just for banks. It’s a matter for all players in the payments ecosystem. We all know that perceptions of trustworthiness are determined by actions and words. Perceptions are also shaped by how these new services are portrayed in the media. The payments and retail banking sectors are so inter-linked that where one player’s reputation is compromised, it affects the reputation of the ecosystem as a whole. Every firm in the ecosystem has a vested interest in each other ensuring good customer outcomes and market integrity, and helping educate and inform consumers through consistent and balanced messages”.

Other sector news

The Financial Guidance and Claims Bill, which provides for the creation of a single financial guidance body, received Royal Assent on 10 May 2018. It is now the Financial Guidance and Claims Act 2018. The Act also provides that the Secretary of State must keep under review whether a prohibition on unsolicited direct marketing in relation to consumer financial products and services other than pensions would be appropriate.

The Debt Advice Steering Group (an independent cross-sector group whose mission is to coordinate and improve the debt advice sector), has agreed to back the direction of travel set out by the Wyman Review, the independent review of the funding of debt advice in England, Wales, Scotland and Northern Ireland published earlier this year. See the press release for more details.

The government has decided not to bring forward the Law Commission’s Goods Mortgages Bill, which was intended to replace the existing Victorian legislation on bills of sale to govern the way that individuals can use their existing goods as security. It says that it will continue to work with the FCA as it carries out its high-cost credit review, and then further consider government action on alternatives to high-cost credit in light of the FCA’s review. See the government’s response to the consultation on the Bill, and the Law Commission’s press release, commenting on the announcement.

We reported in the March 2018 edition of the Regulatory round-up that the Financial Inclusion Policy Forum met for the first time on 19 March 2018 (following the government’s announcement earlier in the year that £55 million from dormant bank and building society accounts will fund financial inclusion initiatives). The government recently published a summary of the meeting. One of the key themes of the discussion was “the ambition of the forum to improve access to affordable credit and the importance of working jointly to address this issue”. The next meeting will take place in early autumn 2018.

The Chair of the Treasury Committee responded to a letter from the Chief Ombudsman and Chief Executive at the Financial Ombudsman Service (FOS), setting out the Committee’s expectations of the review which will be carried out following concerns about decision-making and governance at the FOS raised in a recent Channel 4 Dispatches programme. The FOS’ non-executive board will be appointing an independent person to carry out the review. The FOS previously published its plans for 2018/19. It expects to freeze the case fee at £550 for the sixth year (with no fee chargeable for each business’s first 25 complaints) and to freeze the levy at £24.5 million.

The government will spend over £5.5 million to fund the fight against loan sharks, helping to investigate and prosecute illegal lenders, and support their victims. £100,000 of money already seized from loan sharks will also be spent to encourage people in England at risk of being targeted by loan sharks to join a credit union, helping them to access a safer form of finance and get their lives back on track. See the press release for more details.

The University of Bristol Personal Finance Research Centre has published a report on whether data-sharing can improve the support provided to customers in vulnerable situations.

The FSCS announced its final levy for 2018/19 at £407 million.

The Treasury Committee launched a new inquiry into economic crime. It will cover anti-money laundering and the sanctions regime, and consumers and economic crime (including the effectiveness of financial institutions in combatting economic crime, and the security of consumer data).

On 14 May 2018, the Council of the European Union formally adopted the Fifth Money Laundering Directive.

The Sanctions and Anti-Money Laundering Bill received Royal Assent on 23 May 2018. It is now the Sanctions and Anti-Money Laundering Act 2018. The Act is intended to ensure that the UK can continue to meet its international obligations and to implement UK sanctions and anti-money laundering measures after the UK leaves the EU.

Line by line examination of the Creditworthiness Assessment Bill took place in the House of Lords on 11 May 2018. The Bill seeks to impose a requirement on the FCA to make rules to ensure that firms carrying on credit-related regulated activities and connected activities, and those entering into or varying a regulated mortgage contract or home purchase plan, take into account rental payment history and council tax payment history when assessing a borrower’s creditworthiness.

The Advertising Standards Authority has upheld a complaint against Intelligent Lending Ltd t/a Ocean Finance, in relation to a radio ad for Ocean credit cards. It ruled that the ad included claims that triggered the requirement in the Consumer Credit Sourcebook to include a representative APR.

The Payment Systems Regulator (PSR) wrote to LINK setting out in detail its expectations of LINK’s monitoring and reporting activity. Concerns were raised previously regarding LINK’s consultation on proposals for the future level of its interchange fee, which funds the UK’s free-to-use ATM network. LINK addressed the PSR’s key requirements to ensure that consumers continue to have widespread free access to cash, but the PSR has said that it will continue to actively monitor developments. It also published a one-page factsheet explaining what LINK must report to the PSR on a monthly basis.

The Electronic Money Association, Financial Data and Technology Association, techUK and UK Finance published voluntary guidelines and encouraged market behaviours under PSD2 in the ‘transitional period’. The main aims of the guidelines are to “foster a collaborative and cooperative industry ecosystem around account information services and payment initiation services, and to further boost customer protections”.

HM Treasury has published its response to the consultation on legislation for two measures to support the introduction of the Image Clearing System (ICS) for cheques. The first concerns the use of cheques as evidence of payment, and the second concerns compensation for customers in the event that they suffer a loss. The stated aim is to ensure that the ICS, which will clear all cheques by October 2018, has no detrimental impact on the existing position of cheque users.

UK Finance published a set of Frequently Asked Questions on the General Data Protection Regulation (GDPR), the new data protection regime which comes into force tomorrow.

The European Supervisory Authorities published their latest report on the risks and vulnerabilities in the EU financial system. Cyber risks are identified as a significant and escalating threat. Risks related to virtual currencies are also mentioned.

The European Central Bank published a European framework for testing financial sector resilience to cyber attacks. See the press release for details.

See the Data Protection section of this Regulatory round-up for the latest on GDPR and cyber security.