Consumer and Retail Finance – January/February 2018Print publication
Latest from the Financial Conduct Authority, including review updates and consultation feedback, PSD2 and other sector news.
Financial Conduct Authority (FCA)
On 31 January 2018, the FCA published a high-cost credit review update. This follows its July 2017 feedback statement which identified keys areas of concern including arranged and unarranged overdrafts, rent-to-own, home-collected credit and catalogue credit. A substantive update will be published in May 2018 setting out the FCA’s analysis and assessment of harm from the high-cost credit products forming the focus of its review. At that stage it also intends to consult on changes that it may propose to improve the operation of those markets. Consultation on a wider package of remedies on overdrafts is expected towards the end of the year. The FCA says that it is “prepared to look at solutions designed to increase the choice and encourage the availability of alternatives to high-cost credit”. A separate update on the rent-to-own sector was also published recently.
On 14 December 2017, the FCA published feedback on its earlier credit card market study consultation on persistent debt and earlier intervention remedies, and opened a further consultation. The new consultation included a revised analysis of the costs to businesses of the proposed remedies and set out how the FCA had changed its thinking on aspects of its persistent debt proposals in light of the feedback received. On 27 February 2018, the FCA published the consultation feedback and final rules. As a result of the responses received, the FCA has amended its proposals to carve out business credit card products from the scope of the rules. The rules do not apply to credit card products promoted solely for the purposes of the customer’s business, but will apply to personal credit cards being used by businesses. The final rules and guidance on persistent debt and earlier intervention are set out in Appendix 1. They come into force on 1 March 2018 but firms have six months until 1 September 2018 to be fully compliant. The FCA issued a press release on the new rules.
Also on 27 February 2018, the FCA published the draft of a speech on ‘The Consumer Credit landscape today’ delivered by FCA Chief Executive Andrew Bailey to the Finance & Leasing Association. The FCA previously published an insight article on the types of borrowers driving recent consumer credit growth – currently ten per cent a year. Based on credit reference agency data for one in ten UK consumers, it concluded that: credit growth has not been driven by subprime borrowers; people without mortgages have mainly driven credit growth; and consumers remain indebted for longer than product-level data implies.
An interim report on the FCA’s review of the retained provisions of the Consumer Credit Act 1974 will be published in summer 2018. There will be a series of roundtable discussions and other stakeholder engagement in the second half of 2018 with a final report due by 1 April 2019.
The FCA has asked for help in reducing the high number of calls from consumers responding to letters, emails or sales literature that they have received from regulated firms. It reminds firms that there is no regulatory requirement to provide the FCA’s telephone number and asks them to review their use of the FCA’s details and remove the number. The FCA also reminded firms that they have a regulatory requirement under the FCA Handbook to keep contact information up to date. They should make sure that email address, telephone number and address details are correct. This can be done via Connect, the FCA’s online system.
An illegal money lender was sentenced to three and a half years’ imprisonment for offences under the Consumer Credit Act 1974 and Financial Services and Markets Act 2000. See the FCA’s press release.
The revised EU Payment Services Directive (or PSD2), introduced in the UK on 13 January 2018, brings in two new regulated payment services – payment initiation services and account information services. The FCA published a webpage for consumers setting out key information on those services. The FCA’s main PSD2 webpage also links to information for firms on applications, passporting and notifications under PSD2. A card surcharge ban also came into effect on 13 January 2018 as a result of PSD2.
The FCA wrote to CEOs asking them to consider, together with UK Finance’s new best practice standards, how their firms are tackling authorised push payment fraud within the context of the Senior Managers and Certification Regime (SM&CR). See our recent briefing on push payment fraud for background and further details. Another dear CEO letter was written to the providers and distributors of contracts for difference products on resolving failings which may cause significant consumer harm.
We reported in the previous edition of the Regulatory round-up that the FCA was: consulting on its approach to supervising and enforcing the SM&CR rules for authorised firms’ unregulated activities, including those covered by industry-written codes of conduct; and starting a discussion and seeking views on extending the application of FCA Principle for Businesses 5 (“A firm must observe proper standards of market conduct”) to unregulated activities. The City of London Law Society responded to the consultation and discussion. Among other things, it believes that: there is a significant risk that the effect of the proposals would be to encourage the proliferation of a multiplicity of codes, all seeking regulatory recognition, presenting significant challenges and increased litigation risk for firms; the proposals may foster over-reliance on the fact of recognition; and the case for extension of the scope of Principle 5, giving the regulator very broad discretion to take enforcement action, has not been made out.
On 20 February 2018, the FCA launched a call for input on the use of technology to achieve smarter regulatory reporting. On the subject of innovation, the FCA has also been consulting on the merits of creating a global regulatory sandbox, given that many aspects of financial markets and FinTech are global.
The FCA and Information Commissioner’s Office (ICO) published a joint update on the EU General Data Protection Regulation (GDPR), the new data protection regime which comes into force on 25 May 2018. Among other things, the FCA says it believes GDPR does not impose requirements which are incompatible with the rules in the FCA Handbook. It will continue to collaborate with the ICO in the coming months to address concerns firms raise and support firms’ preparations for the introduction of GDPR.
We reported in the previous edition of the Regulatory round-up that credit reference agencies Callcredit, Equifax and Experian had launched an industry-wide Credit Reference Agency Information Notice (CRAIN) in preparation for the implementation of GDPR. Customers must be given the opportunity (even if they decide not to take it) to access and read the CRAIN in full at the point of application.
The FCA’s Head of Technology, Resilience & Cyber recently gave a speech on ‘Building cyber resilience’. The FCA wants firms to be “resilient and robust. That means you understand what to protect, how you can swiftly detect an attack, and how you can respond and recover. If you can do these you will have built a successful foundation for resilience. Our challenge to you all is to embrace this effort. Attacks will happen, so be critical of yourselves, learn new behaviours and build resilience”. The FCA’s webpage on cyber resilience can be found here.
See the Data Protection section of this Regulatory round-up for the latest on GDPR and cyber security.
Other sector news
The Prudential Regulation Authority (PRA) sent a letter to the Chairs of relevant firms to communicate the key findings and action points following its review in the first half of 2017 of PRA-regulated firms’ consumer credit lending, covering credit cards, personal loans and motor finance. The PRA’s main finding concerns weaknesses in management information and governance, with other findings covering medium-term economic risk; affordability assessments; and some product specific points on 0% interest credit cards; and on larger or longer-term personal loans and motor finance.
On 12 February 2018, the Lending Standards Board announced a review of the Standards of Lending Practice for personal customers. Responses are requested by 30 March 2018.
The Department for Work and Pensions issued a written statement on the Financial Guidance and Claims Bill which provides for the creation of a single financial guidance body. Subject to parliamentary approval, the intention is to launch the new body in autumn 2018. The Bill is currently working its way through the legislative process.
The Money Advice Service recently published an independent review of the funding of debt advice in England, Wales, Scotland and Northern Ireland. A list of recommendations to provide an effective and transparent framework for the funding of debt advice is set out on page six onwards.
The Financial Services Compensation Scheme published its Plan and Budget for 2018/19, outlining the Scheme’s expected management costs and initial levy forecasts financial services firms will pay next year. See the press release for details and a link through to the document. The PRA and FCA recently consulted jointly on the management expenses levy limit. Policy statements/Handbook notices will be issued so that the final rules are in place by 1 April 2018.
The Financial Ombudsman Service recently consulted on its plans and budget for 2018/19. It says that it expects to see 4,500 more complaints about short-term lending (payday and instalment loans) in the current financial year than previously forecast, and anticipates 20,000 new cases of this sort in 2018/19.
On 2 February 2018, the Competition and Markets Authority (CMA) issued a press release concerning a rule change in force on that date requiring banks to set up an alert system which will help their customers avoid unnecessary charges. The rule change is part of the CMA’s Retail Banking Investigation.
We reported in the previous edition of the Regulatory round-up that the European Parliament and Council reached political agreement on the Commission’s proposal for a directive (which will become the Fifth Money Laundering Directive or MLD5) to amend the Fourth Money Laundering Directive (MLD4). MLD4 was implemented in the UK by the introduction of the new money laundering regulations which came into force on 26 June 2017. The European Parliament is due to consider MLD5 at its 16 to 19 April plenary session.
In the meantime, the House of Commons European Scrutiny Committee has cleared the MLD5 proposal from scrutiny. MLD5 makes substantial changes to the scope and operation of anti-money laundering rules in the UK. Given that the government is seeking a Brexit transitional period, the Committee considers it likely that most, if not all, of MLD5 will have to be transposed in the UK as a matter of law.
On 15 February 2018, the House of Commons Library published a briefing paper on the Sanctions and Anti-Money Laundering Bill which passed second reading in the House of Commons on 20 February 2018. The House of Commons Public Bill Committee is calling on those with relevant expertise and experience or a special interest in the Bill to submit their views in writing.
The Joint Money Laundering Steering Group recently published further amendments to its Guidance.
HM Revenue & Customs published a thematic review of anti-money laundering compliance in the money service business sector. The review is expected to be of particular benefit to businesses engaged in money transmission through networks of agents, and of interest to money service businesses using different operating models, or non-money service businesses operating with an agency model. Among other things, the review sets out findings of good and bad practice, and summarises the steps principals and agents should take to minimise their exposure to money laundering risks.
On 23 January 2018, the European Supervisory Authorities issued an Opinion on the use of innovative solutions by credit and financial institutions in the customer due diligence process. It highlights that, while the move towards a more technologically driven financial services market presents many benefits (including reduced costs, improved customer experience, increased speed of transactions, reduced account opening times and continuous access to services online) firms have to be mindful of the impact these changes might have on their money laundering and terrorist financing risk exposure.
On 22 February 2018, the Treasury Committee launched an inquiry into digital currencies and distributed ledger technology, which will look at: the potential risks that digital currencies could generate for consumers, businesses, and governments (including those relating to volatility, money laundering, and cyber-crime); and examine the potential benefits of cryptocurrencies and the technology underpinning them, how they can create innovative opportunities, and to what extent they could disrupt the economy and replace traditional means of payment.
The Payment Systems Regulator (PSR) published a webpage on the UK’s ATM network. This follows concerns raised by LINK’s consultation on proposals for the future level of its interchange fee, which funds the UK’s free-to-use ATM network. LINK has addressed the PSR’s key requirements to ensure that consumers continue to have widespread free access to cash. The PSR says that it will continue to actively monitor developments. It has also published a reference guide for consumers on protecting free-to-use ATMs.
The European Commission issued new requirements that ensure independence of payment card schemes and processing entities, to enhance competition in the card payment market. It says retailers will be able to choose the most suitable processor for their card transactions, to the benefit of consumers. See the full press release here.
And finally, the European Banking Authority issued its final guidance for the use of cloud service providers by financial institutions.