Consumer and Retail Finance – July/August 2018

Credit Cards Print publication


Latest flurry of activity from the FCA, including final rules and guidance on assessing creditworthiness in consumer credit. Other sector news.

Financial Conduct Authority (FCA)

The summer months have been as busy as ever, with a constant stream of activity from the FCA.

On 1 July 2018, the FCA’s London office moved to 12 Endeavour Square, London, E20 1JN. Firms should ensure that they include the correct address in their communications with customers, and take active steps to replace materials containing the old address.

On 19 July 2018, the FCA published its annual report and accounts, together with separate reports on competition, diversity and anti-money laundering. See the press release which links through to the documents. Among other things, the annual report looks at the work undertaken in relation to the FCA’s cross-sector priorities (including consumer vulnerability and access to financial services), and its sector priorities (including retail banking and retail lending).

On 30 July 2018, the FCA published its long-awaited final rules and guidance on assessing creditworthiness in consumer credit, with a clear focus on affordability risk. The rules and guidance come into force on 1 November 2018 and there are no transitional arrangements. The FCA expects firms to have effective processes in place aimed at eliminating lending that is foreseeably unaffordable. The new rules and guidance do not represent a significant departure from current practice and the FCA has rowed back from some of its original proposals, including in relation to the ability to take household income into account. Our separate briefing considers the final rules and guidance in more detail and what the changes mean for lenders.

At the start of August 2018, the FCA published an interim report on its review of the retained provisions of the Consumer Credit Act 1974 (CCA). When the FCA took over responsibility for regulating consumer credit in 2014, Parliament repealed some CCA provisions and some were replaced by FCA rules. The FCA is required to undertake a review of the remaining provisions and must consider whether repealing them would adversely affect the appropriate degree of protection for consumers. As part of this, it must consider which provisions could be replaced by FCA rules or guidance.

The interim report follows a call for input which was published in February 2016. The FCA says that its objective is the continuing development of an effective and proportionate regulatory regime which ensures appropriate protections for consumers, recognising that some customers in this market may be vulnerable. It includes looking to simplify and modernise the regime where possible and remove unnecessary or disproportionate burdens.

On pages 6 to 8 of the interim report, the FCA summarises its initial assessment for each of the following themes: rights and protections; information requirements; and sanctions. Further details are set out in later chapters. Comments are requested by 2 November 2018 and specific questions are listed in Annex 1. There will also be a series of roundtable meetings with stakeholders in September and October 2018. Finally, the FCA intends to conduct consumer research to better understand how far the CCA provisions meet consumers’ needs. It may also undertake other research, with involvement from firms and other stakeholders. A final report will be presented to HM Treasury before April 2019. Government will ultimately decide about the future of the CCA provisions, but the intention is for the FCA to provide sufficient analysis and evidence in its final report to enable decisions to be made.

On 17 July 2018, the FCA published an Approach to Consumers document and a discussion paper on Duty of Care, which “taken together are intended to ensure there are no gaps in protection for consumers in the financial sector”. See the FCA’s press release and our recent briefing. The discussion paper explores if there is a need for a specific duty of care requirement for firms in financial services. The FCA explains that this follows concerns raised by some stakeholders that the FCA’s regulatory framework, including its Principles, may not be sufficient or applied effectively to prevent harm to consumers and protect them appropriately. Some have said that the introduction of a duty of care could reduce harm by requiring firms to avoid conflicts of interest, as well as supporting longer-term cultural change within firms. Other stakeholders have suggested that existing FCA rules already provide sufficient protections for consumers and impose the same requirements on firms that a duty of care would. Questions are set out on pages 33 and 34 of the paper. Responses and any other comments are requested by 2 November 2018.

The FCA plans to consult early next year on guidance for firms to help them understand more clearly its expectations and requirements for dealing with vulnerable people. It is hosting an event on 18 September 2018 to explore how to make financial services work well for consumers in vulnerable circumstances.

On 4 July 2018, the FCA published near-final rules on the extension of the Senior Managers and Certification Regime (SM&CR) to all FSMA-authorised firms. HM Treasury has decided that the regime for solo-regulated firms will commence on 9 December 2019. The FCA says that firms should also read its guidance document, which is a summary of its rules and guidance on the SM&CR. It gives an overview of how the SM&CR works and how the FCA will move firms and individuals to the new regime. The FCA also published a policy statement setting out how it will apply the Duty of Responsibility when the SM&CR is extended.

The FCA consulted towards the end of 2017 on its approach to the recognition of industry codes of conduct in unregulated markets, for the purposes of the SM&CR. It also published a discussion paper which looked at extending the application of Principle 5, so that authorised firms would be required to observe proper standards of market conduct for their unregulated activities. In July 2018, the FCA published a policy statement on the consultation and discussion paper. It says that it will proceed with establishing a process through which it can recognise certain codes in priority areas, to encourage but not mandate their use. In addition to consulting the FCA’s statutory panels and the Bank of England (BoE) about codes proposed for recognition, the FCA will now also publicly consult on each decision to recognise a code to provide transparency to market participants. In light of the feedback received, it has decided not to consult at this time on extending Principle 5 to wholly unregulated activities.

The FCA is consulting until 5 October 2018 on proposals to introduce ‘the Directory’, a new public register for checking the details of key individuals working in financial services. The changes affect all authorised firms in scope of the SM&CR and their employees. A policy statement is expected in winter 2018.

The FCA, BoE and Prudential Regulation Authority published a joint discussion paper on an approach to improve the operational resilience of firms and financial market infrastructures. It “envisages that boards and senior management can achieve better standards of operational resilience through increased focus on setting, monitoring and testing specific impact tolerances for key business services, which define the amount of disruption that could be tolerated”. Feedback is requested by 5 October 2018.

The FCA published its final 2018/19 regulatory fees and levies, with a link to a fee calculator for firms to calculate their individual fees based on the final rates. A two-month consultation on regulatory fees and levies: policy proposals for 2019/20 is expected to be launched in October 2018, with feedback expected in February 2019.

On 10 July 2018, the FCA published a report setting out the findings of its review into the pawnbroking sector, as part of its ongoing focus on high-cost credit. Firms should consider the findings and take any necessary action.

Later in July, the FCA published ‘Occasional paper No.40: Time to act: A field experiment on overdraft alerts’, which reports on the results of a large field experiment on automatically enrolling consumers into just-in-time arranged overdraft alerts and early warning alerts for overdrafts and unpaid items. At the end of June 2018, the FCA published an update on its wide-ranging review of the retail banking sector, which is also critical to its work on overdrafts.

On 26 July 2018, the FCA published the outcome of a programme of behavioural research which, together with its measures on persistent credit card debt and earlier intervention (which apply from 1 September 2018), forms part of the FCA’s efforts to limit the use of credit cards for longer-term borrowing, while preserving their flexibility for millions of users. See the webpage which sets out the key findings and next steps. The FCA is considering consulting on changes to its rules and guidance to mandate the removal of the minimum repayment anchor.

New rules came into force on 15 August 2018, giving consumers and small businesses better information about the services offered by current account providers. See the webpage for details. From November 2018, providers have undertaken to publish in a common form information highlighting the support they offer customers who have one of the four main characteristics of potential vulnerability outlined in the FCA’s Approach to Consumers paper (referred to above); and from 1 February 2019, the FCA will also require providers to publish information quarterly on how long it takes them to open a current account, and how long it takes them to replace a debit card.

On 11 July 2018, the Chair of the FCA and Payment Systems Regulator delivered a speech ‘How can we ensure that Big Data does not make us prisoners of technology?’, in which he spoke about Big Data, artificial intelligence and machine learning, and behavioural science, in the context of technological innovation in financial services: “It’s an important topic, given the UK’s global leadership in both technological innovation and financial services. If we can combine these skills with fair standards and with public trust, we can maximise the opportunities for the UK finance industry to succeed in the global market. And we can revolutionise the quality, price and accessibility of financial services for consumers”.

The FCA recently revealed the fourth round of successful firms in its regulatory sandbox, which allows firms to test innovative products, services or business models in a live market environment, while ensuring that appropriate protections are in place.

In other FinTech news, the FCA announced the creation of a Global Financial Innovation Network, following on from an initial consultation earlier this year on the idea of a ‘global sandbox’. The FCA’s Executive Director of Strategy and Competition said that the network is “an important next step for organisations like ours who are actively engaged in understanding and harnessing the benefits of innovation in financial services for consumers, while managing the potential harm”. The network involves regulators from around the world, and comments on a series of consultation questions on its role are requested by 14 October 2018.

In relation to payment services, the FCA published an updated version of its approach document on payment services and electronic money, showing the changes since it was first published in September 2017. The changes include new guidance on operational and security risks under the revised Payment Services Directive (PSD2). The FCA has also updated its REP018 form on operational risk reporting (see the webpage).

Previously, the FCA made a statement on the European Banking Authority’s draft PSD2 guidelines and opinion on the regulatory technical standards on strong customer authentication and common and secure communication. The FCA said that it planned to consult “during the summer” on changes to its guidance and rules to reflect these.

Separately, the FCA is consulting until 1 November 2018 on rules and guidance to improve conduct standards and communications in the payment services and electronic money sectors.

The FCA has updated its Guidance for firms outsourcing to the ‘cloud’ and other third party IT services.

And finally, since the previous edition of the Regulatory round-up went to press, the FCA issued a consultation on proposed changes to complaint handling rules to help victims of authorised push payment fraud.

Other sector news

John Govett has been appointed as the first CEO of the new Single Financial Guidance Body, which is expected to be established as a legal entity in October 2018 and launched officially in January 2019 (see the press release for details). The new body will replace the Money Advice Service, the Pensions Advisory Service and Pension Wise and will have five core functions: pensions guidance; money guidance; debt advice; consumer protection; and a strategic function (to work with others to develop a national strategy to improve the financial capability of members of the public, their ability to manage debt, and the provision of financial education to children and young people). It will also help provide advice to the Secretary of State on establishment of a debt respite scheme. As we reported in the previous edition of the Regulatory round-up, the government will outline a policy proposal for consultation “later in the summer” and intends to lay regulations to establish the scheme during 2019.

The report of the independent review of the Financial Ombudsman Service was published on 12 July 2018. The review was carried out following concerns about decision-making and governance raised in a Channel 4 Dispatches programme earlier this year. A summary of the specific issues raised in Dispatches can be found on page 5 of the report. A summary of recommendations on wider matters starts on page 6.

The European Commission has decided to carry out an evaluation of the functioning of the Consumer Credit Directive. It recently published an evaluation roadmap setting out the context, purpose and scope of the evaluation, which is due to conclude by Q4 2019. Feedback on the roadmap was requested by 27 July 2018. Consultations are expected to be launched by the end of 2018, with a synopsis report due around spring 2019. The Directive will no longer apply in the UK after Brexit, but it will be interesting to see what comes out of the evaluation.

UK Finance reports that 59 authorised lenders representing 93 per cent of the UK’s residential mortgage market have agreed common standards to help existing borrowers on reversion rates who are up-to-date with repayments but, because of stricter affordability criteria, are currently ineligible to move to an alternative product provided by their lender. This follows on from publication of the FCA’s mortgages market study interim report. See the press release for details.

On 3 July 2018, the European Banking Authority published the first products of its ‘FinTech Roadmap’, including a thematic report on the prudential risks and opportunities arising for institutions from FinTech. See the press release for details.

The Law Commission is consulting until 5 October 2018 on proposals to make the consent regime under UK anti-money laundering laws more effective. It is hoped that the proposals “will help banks and businesses provide better information to law enforcement agencies and help refocus attention on the most suspicious activity”.

On 11 July 2018, HM Treasury published an updated advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions.

The European Data Protection Board responded to a letter from a Member of the European Parliament on certain data protection issues in relation to PSD2, and the Financial Stability Board has been consulting on a draft cyber lexicon comprising a set of 50 core terms related to cyber security and cyber resilience in the financial sector.