Consumer and Retail Finance – June 2018

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Latest from the FCA, including high-cost credit consultations. Other sector news, including FOS annual review findings.

Financial Conduct Authority (FCA)

On 31 May 2018, the FCA published the much-anticipated findings and proposals from its 18-month high-cost credit review. They focus on rent-to-own, home-collected credit, catalogue credit, store cards and overdrafts – areas presenting particular risks to consumers. As part of its wider consumer credit work, the FCA has already introduced: a high-cost short-term credit (HCSTC) price cap; rules to tackle persistent credit card debt; and guidance on staff incentives, remuneration and performance management. The two high-cost credit consultation papers can be accessed here. Responses to the questions on rent-to-own pricing are requested by 13 July 2018. All other responses are requested by 31 August 2018. Final rules are not expected to apply before 2019. The proposals aim to give high-cost credit users greater control and protection:

  • In relation to home-collected credit, the FCA is not currently planning a price cap, as its concerns centre on the risks of repeat borrowing, in particular the costs of refinancing. This decision has disappointed campaigners, who have been calling on the FCA to extend its definition of HCSTC to include home credit loans. The FCA is consulting on information requirements for refinancing and further borrowing. The proposals will require customers to be provided with full information on the costs of refinancing compared to taking a concurrent loan where both options are available. The FCA is also consulting on guidance on its interpretation of section 49 of the Consumer Credit Act 1974, which prohibits the canvassing of cash loans off trade premises. The industry currently operates on the basis that a customer’s written Request to Call (RTC) to discuss a new loan can be valid for a period and cover multiple loans. The FCA disagrees and wants to see a fresh RTC for every visit where a new loan is discussed. Whilst acknowledging that only the courts can give a definitive view, the FCA will consult on guidance to support its view. It will be interesting to see whether the home credit sector is prepared to push this issue to a judicial determination.
  • Issues with rent-to-own pricing have convinced the FCA to consider a potential price cap. Applying a cap in this sector will be problematic; not least as there is currently no legal definition of rent-to-own and the FCA’s proposal (that it should cover all hire purchase and conditional sale agreements where consumers make payments more often than monthly, excluding motor finance), is easy to circumvent. Unsurprisingly, the FCA acknowledges that significant additional analysis is required on the structure of a possible cap and requests suggestions for alternative solutions. It is consulting now on rules to ban the sale of extended warranties alongside rent-to-own agreements at the point of sale.
  • A package of proposed rules on catalogue credit and store cards aims to address concerns surrounding credit offers, consumer choice and control over credit limit increases, treatment of consumers at risk of financial difficulty, and potential problem debt. This includes intervention for persistent debt cases as well as clearer warnings about how ‘buy now pay later’ offers work and the costs incurred if customers don’t repay within the period.
  • FCA research shows that overdrafts are poorly understood, with low consumer engagement and weak competition. The high level of unarranged overdraft charges is a particular concern. The FCA is consulting on a package of remedies to encourage competition through increasing consumer awareness. It is also discussing more direct interventionist measures to address the complexity of overdrafts, high level of fees and repeat overdraft use. This includes a ban on fixed fees and a backstop price cap on overdraft charges. The FCA will undertake further analysis to model the impact of these measures, including drawing on the work from its review of retail banking business models. It aims to consult on any specific proposals later in 2018. Again, campaigners have expressed disappointment that the FCA’s immediate plans do not go far enough.

See the press releases from debt charity StepChange, Citizens Advice and consumer group Which?, commenting on the FCA’s high-cost credit proposals. In a recent letter to the FCA, signed by 84 MPs, Which? demanded urgent action on restricting unarranged overdraft charges to the same level as arranged overdrafts. New research conducted by Which? found that the most expensive overdraft fees cost seven times as much as a payday loan.

On 20 June 2018, the FCA published the latest analysis from its Financial Lives survey, which highlights the different financial services experiences of consumers in rural and urban areas, including the use of high-cost loans.

The FCA has published the draft text of a number of recent speeches: its Director of Supervision (Retail and Authorisations) gave a speech on ‘Building Societies and the Future of Retail Banking’; its Executive Director of Strategy and Competition gave a speech on the FCA’s approach to competition and innovation, including Fintech and Open Banking, and a separate speech on ‘Technology and global ties: turning the tide on financial crime’; its Director of Enforcement and Market Oversight gave a speech which looked at whether the banking industry has improved ten years on from the start of the financial crisis; and its Executive Director of Supervision (Investment, Wholesale and Specialists) gave a speech on ‘Turning technology against criminals’.

Following on from the publication in March 2018 of its discussion paper on transforming culture in financial services, the FCA recently published a summary of the issues discussed at its Transforming Culture Conference which took place on 19 March 2018. The document also sets out the FCA’s next steps in this area.

The FCA and Bank of England released the latest mortgage lending statistics, covering the period to the end of Q1 2018. Among other things, they show a decrease in mortgage lending activity compared with the previous quarter.

The FCA published a report setting out the findings of research to identify the most effective messages for a series of ‘prompts’ (messages designed to encourage greater account engagement and encourage customers to consider switching) and ‘alerts’ (messages designed to increase awareness of overdraft use and encourage people to take action to avoid incurring charges). This work follows on from the Competition and Markets Authority’s retail banking investigation. The report sets out, starting at the end of page 4, a number of key prompt and alert design features that could potentially act as guidance for banks.

On 11 June 2018, the FCA wrote a Dear CEO letter on good practice regarding how banks handle the financial crime risks posed by cryptoassets. The UK’s new Cryptoassets Taskforce met for the first time on 21 May 2018.

And finally, the FCA has published a guide on the basics of network security. See the Data Protection section of this Regulatory round-up for the latest on cybersecurity.

Other sector news

The government announced that Sir Hector Sants, current chairman of StepChange and a former CEO of the Financial Services Authority, has been appointed chair of the new single financial guidance body, for a five-year term starting on 3 October 2018. The CEO of the Money Advice Service recently gave a speech ‘Investing in quality – the future of debt advice’, in which he discussed the value of debt advice, the work of the single financial guidance body, and the recommendations from the independent review of the funding of debt advice, which was published earlier this year.

The Financial Ombudsman Service (FOS) published its annual review for 2017/2018. Vulnerability is a key theme. In 2017/2018, the FOS saw a 146% increase year-on-year in complaints about home credit. There was a 40% increase in complaints about consumer credit products and services, and a 64% increase in relation to payday loans. The FOS says that it has seen an increasing number of complaints over the last couple of years involving instalment loans, including high-cost instalment loans which are taken out as a way of refinancing unaffordable payday loans. In some cases, the use of instalment loans has led to mounting and unsustainable debt, with lenders offering loans which people could never have afforded.

On 18 June 2018, the government published the response to its October 2017 call for evidence seeking further insight from the debt advice sector and creditors on how best to design a six-week breathing space scheme for individuals in debt. 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 government has appointed four “industry champions” to expand the dormant assets scheme across their respective sectors. See the press release.

The Bank of England has responded to HM Treasury’s March 2018 call for evidence on ‘Cash and digital payments in the new economy’. Among other things, it says that the usage of cash is evolving, but there is, and is likely to remain for the foreseeable future, a significant public demand for banknotes.

On 12 June 2018, the European Commission published a report to the Parliament and Council on the findings of a study and public consultation on restrictions on cash payments, to help the fight against terrorism financing and money laundering. It concludes that cash restrictions would not significantly address the problem of terrorism financing, but preliminary findings indicate that a prohibition on high value payments in cash could have a positive impact on the fight against money laundering. The report notes that restrictions on cash payments is a sensitive issue for European citizens. Many of them view the possibility to pay in cash as a fundamental freedom, which should not be disproportionally restricted.

The European Central Bank published a speech delivered on 6 June 2018 by a member of its Supervisory Board, on the digitalisation of the banking sector, and whether we should feel threatened or excited by the rise of technology.

The Bank of England, in conjunction with the New Payment System Operator and the Payment Systems Regulator (PSR), is consulting until 18 July 2018 on the adoption of a global standard to modernise UK payments. See the press release for details.

The PSR recently published a discussion paper on how data is used in payment systems. It wants to understand what role it might play to make sure new uses of data work well for the people and businesses that use payment systems – through removing barriers to setting up new services, or through mitigating risks associated with them. Comments are requested by 3 September 2018.

On 21 June 2018, the PSR published a document setting out brief details of a range of ongoing and upcoming initiatives to combat authorised push payment scams, where a fraudster somehow persuades a consumer to organise a transfer from the consumer’s account to the fraudster’s account.

The Fifth Money Laundering Directive (MLD5), which was formally adopted by the Council of the European Union on 14 May 2018, has now been published in the Official Journal of the EU. Member States will be required to bring into force the laws, regulations and administrative provisions necessary to comply with MLD5 by 10 January 2020. In light of the Brexit transitional period and ongoing negotiations, it is unclear at this stage to what extent MLD5 will have to be transposed into UK law.

Still on the subject of money laundering, the European Commission has welcomed an agreement reached by the European Parliament and Member States on stronger rules criminalising money laundering.