Consumer and Retail Finance – June/July 2019

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Latest from the FCA, including high-cost credit reforms and draft vulnerability guidance; other sector news.

Financial Conduct Authority (FCA)

We have seen another flurry of FCA activity over the past few months.

On 23 July 2019, the FCA launched its long-awaited consultation on proposed guidance for firms on the fair treatment of vulnerable customers. The guidance is set out in Annex 1 of the consultation paper and “aims to make it clear to firms what they should do to embed doing the right thing for vulnerable consumers into their culture, so that it permeates across the organisation from the Board through to frontline staff”. Paragraphs 3.4 and 3.5 on pages 15 and 16 briefly explain the content. Figure 10 on pages 58 and 59 sets out what firms should do to treat vulnerable customers fairly.

The FCA says that it wants to see firms use and apply the guidance as an aid to how they comply with the Principles in their treatment of vulnerable consumers. The guidance will not create additional obligations on firms and does not prescribe the processes they need to use as the FCA does not think that would lead to the outcomes it wants to see. Firms should take this responsibility themselves. They will need to take a sensible approach in determining what the guidance means for them and the FCA recognises that it will be different for different firms. The guidance will be a tool for supervisors to use in their discussions with firms about how they are ensuring they treat vulnerable consumers fairly, and the FCA will adopt a proportionate approach to applying the guidance. The consultation will be in two stages and comments on this first stage are requested by 4 October 2019.

In its press release commenting on the draft guidance, StepChange Debt Charity said that it particularly welcomed section 4 of the guidance which emphasises the steps that firms need to consider when designing their products and services – requiring an upfront consideration of where vulnerability might trigger harm within the product.

In related news, the FCA published an update on its work to ensure that markets provide fair outcomes for longstanding and vulnerable consumers, following an update by the Competition and Markets Authority on progress made against its recommendations in relation to the Citizens Advice supercomplaint on the loyalty penalty.

On 22 July 2019, the FCA published a report setting out actions and recommendations to improve the availability and awareness of alternatives to high-cost credit. It says that it has built up a detailed picture of the consumer need for and availability of lower cost credit and other alternatives that may meet some consumers’ underlying needs. Consideration of access to alternatives to high‑cost credit will become an integral part of the FCA’s overall work in the credit sector, reflecting the part alternatives can play in improving consumer outcomes. Annex 1 of the report provides a helpful overview of the actions the FCA will take and the recommendations it is making to others.

On 7 June 2019, as part of its high-cost credit review, the FCA introduced reforms described as “the biggest shake-up to the overdraft market for a generation”. The changes are designed to address harm from high prices for unarranged overdrafts, complex pricing structures, low consumer awareness and the repeat use of overdrafts.

The FCA is: stopping firms from charging higher prices for unarranged overdrafts than for arranged overdrafts; banning fixed fees for borrowing through an overdraft; requiring firms to price by a simple annual interest rate; extending the ban on fixed fees to include overdraft facility fees; requiring firms to advertise arranged overdraft prices in a standard way; issuing new guidance to reiterate that refused payment fees should reasonably correspond to the cost of refusing payments; and requiring firms to do more to identify customers who are showing signs of financial strain or are in financial difficulty and develop and implement a strategy to reduce repeat overdraft use.

See the press release with links through to the various documents. The guidance on refused payment fees took effect immediately. The repeat use remedies will come into force on 18 December 2019 and the remaining rules will come into force by 6 April 2020.

The FCA is also consulting until 7 August 2019 on proposals requiring firms to publish a range of overdraft prices and fees along with their quarterly service metrics.

On 12 June 2019, also as part of its high-cost credit review, the FCA published final rules on Buy Now Pay Later (BNPL) products which mean that firms: cannot charge backdated interest on amounts of money that have been repaid by the consumer during the BNPL offer period; have to provide better information to consumers about BNPL offers; and must give prompts to consumers, to remind them when the offer period is about to end, so that they are more likely to repay the credit before they incur interest. Firms will need to comply with the disclosure rules and guidance by 12 September 2019 and the rule preventing backdated interest from being charged on repaid amounts by 12 November 2019. See the press release.

On 27 June 2019, the FCA published the terms of reference of its Credit Information Market Study, following identified concerns about the coverage and quality of credit information, the effectiveness of competition between credit reference agencies, and the extent of consumer engagement. See our recent briefing for details.

In its response to the House of Commons Treasury Select Committee’s report on consumers’ access to financial services, the FCA said that, while it was supportive of the broad aims of the Creditworthiness Assessment Bill, it thought that the Bill as currently drafted would have negative unintended consequences and potentially harm those it is intended to help. In particular, it is not convinced that requiring firms to take rental data into account is the right way to improve access to credit.

On 9 July 2019, the FCA published its annual report and accounts 2018/19, looking back at key pieces of work from the past year. In relation to high-cost credit, the FCA says that it plans to review the high-cost short-term credit price cap again in 2020.

On 26 July 2019, the FCA published its final rules on the extension of the Senior Managers and Certification Regime (SMCR) to FCA solo-regulated firms on 9 December 2019. The FCA recently updated its webpage for solo-regulated firms. Other resources include checklists for solo-regulated firms implementing SMCR. The FCA’s webinar from 3 June 2019 on how firms should prepare for SMCR is available to view on demand. Watch out for our series of practical briefings on different aspects of SMCR as the commencement date draws nearer.

On 27 June 2019, the FCA published a link to a webinar in which the panel discuss the key skills and capabilities needed to drive healthy cultures. In his speech delivered at the FCA’s annual public meeting, FCA Chief Executive Andrew Bailey said that, beyond SMCR, culture continues to be an issue of the highest importance for the FCA: “It is a central consideration for our supervisors, who look at drivers of behaviour, staff incentives and governance arrangements in their day-to-day interactions with firms”.

On 11 June 2019, the FCA published the mortgage lending statistics for Q1 2019.

On 1 July 2019, the FCA published its policy statement on FCA regulated fees and levies 2019/20.

On 16 July 2019, the FCA’s Executive Director of Strategy and Competition gave a speech on artificial intelligence and its application to financial services. The FCA’s call for input, to expand and deepen the discussions on whether a cross-sectoral sandbox or similar mechanism is needed to ensure a consistent and efficient approach to emerging technologies, closes on 30 August 2019.

In relation to payments, the FCA recently published an updated version of its approach document for payment services and electronic money. On 4 July 2019, it published the key findings of a multi-firm review of safeguarding arrangements of non-bank payment service providers and sent a Dear CEO letter requiring all electronic money institutions and authorised payment institutions to review their safeguarding arrangements.

The FCA also responded to an opinion from the European Banking Authority on Strong Customer Authentication (SCA) under the revised Payment Services Directive. While the legal deadline for complying with the regulatory technical standards on SCA remains 14 September 2019, the FCA says that it recognises the challenges in meeting this deadline and has been working with the industry to develop a plan to migrate the industry to implement SCA for card payments in e-commerce as soon as possible after this.

The FCA is consulting until 13 September 2019 on the purpose of “adequate financial resources”, what it looks for from firms, and its expectations as to the practices firms should adopt within their assessments of adequate financial resources.

Finally, the FCA is seeking views from users of its Gabriel system on a new platform to replace Gabriel and improve the way the FCA collects data from firms. See the press release.

Other sector news

On 19 June 2019, HM Treasury published its response to its policy proposal for a ‘breathing space’ and statutory debt repayment plan. See our recent briefing for details. ‘Breathing space’ will give someone in problem debt the right to legal protections from creditor action while they receive debt advice in order to enter an appropriate debt solution; the statutory debt repayment plan will enable someone in problem debt to enter a statutory agreement to repay their debts to a manageable timetable. Individuals entering a plan would receive legal protections from creditor action for the duration of their plan. The government intends to implement ‘breathing space’ in early 2021. The plan will be developed to a longer timetable.

On 11 July 2019, the House of Commons Treasury Select Committee published the government’s response to the Committee’s report on consumers’ access to financial services. It has also published the response of the Payment Systems Regulator (PSR), which focuses on the provision of ATMs and access to cash.

In his 2019 Mansion House speech delivered on 20 June 2019, the former Chancellor announced a Treasury-led review of the payments landscape “bringing together policymakers and regulators to make sure that our regulation and infrastructure keeps pace with the dizzying array of new payments models”.

The PSR published its annual report and accounts 2018/2019, which looks at key areas of focus and achievements over the past year. On 24 July 2019, it published its latest paper on access to cash, asking for responses and supporting evidence by 6 September 2019.

Research by UK Finance reveals that UK consumers are taking a ‘pick n mix’ approach to how they make payments, with mobile banking, mobile payments and contactless all becoming increasingly popular. See the press release.

The Financial Ombudsman Service (FOS) is consulting until 13 August 2019 on its future funding system. Key proposals include rebalancing the proportion of income the FOS gets from its levy compared with case fees, and changing the number of “free” cases from 25 to 10 per firm.

In its recently published annual report and accounts, the FOS said that for short-term lending (payday and instalment loans) it ended the year having received nearly double the volume of complaints it budgeted for. Short-term lending is now the third largest area of its work about a single type of product after PPI and current accounts.

On 5 June 2019, the Money & Pensions Service published a report introducing the pressing financial capability challenges facing the UK population and why this should be a priority for retail banking providers.

New research from StepChange Debt Charity found that people who had experienced a life event in the last two years were three times as likely to be in problem debt than those who had not. StepChange says that this marks the first stage of a major project designed to unpick the nature of the financial coping mechanisms that people try to use when unexpected life events happen, understand why they are not necessarily effective in helping people avoid problem debt, and constructively identify what needs to change. It says that the findings raise obvious questions about the effectiveness of the welfare system as a safety net, but also suggest that businesses, creditors and employers all need to do more to build in more financial resilience to their products and processes. See the press release for details.

UK Finance published a set of principles to improve how banks communicate with customers when they cannot offer, or continue to provide, banking facilities.

HM Treasury issued an updated advisory notice on money laundering and terrorist financing controls in overseas jurisdictions, following two statements recently published by the Financial Action Task Force.

The Law Commission published its final report following its review of aspects of the anti-money laundering and counter-terrorism financing regimes. The Commission makes 19 recommendations, which it says will ensure a more proportionate and user-friendly regime, clarify the scope of reporting, reduce the burden of compliance and processing, and produce better quality intelligence for law enforcement. It is now for the government to review and consider the recommendations.

The government and UK Finance published the Economic Crime Plan 2019-22, which sets out for the first time how the public and private sectors will work together to tackle economic crime. There are 52 agreed actions, set out on pages 18 to 21, including transposition of the Fifth Money Laundering Directive by January 2020 and reform of Companies House in relation to transparency of ownership.