Consumer and Retail Finance – March 2019

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Latest flurry of FCA activity, including rent-to-own price cap, high cost lending Dear CEO letter; other sector news.Walker Morris risk series stamp

Financial Conduct Authority (FCA)

March 2019 saw another flurry of FCA activity on a wide range of topics relevant to consumer and retail finance firms.

A price cap for the rent-to-own sector comes into force today, to address harm from high prices paid by vulnerable consumers. The FCA announced the cap, which it estimates will save consumers up to £22.7 million a year, on 5 March 2019. See our recent briefing for details.

On 6 March 2019, the FCA issued a Dear CEO letter to firms providing what the FCA consider to be high cost lending products, setting out its view of the key risks that high cost lenders pose to their consumers or the markets they operate in. The FCA says that CEOs should consider the degree to which their firm presents such risks and their strategies for mitigating them. As part of the FCA’s new approach to supervision, it has put all the firms it supervises into different ‘portfolios’. The FCA says that, while not all of the findings may apply to every firm, it has seen a number of specific causes of harm across the firms in this portfolio. It therefore encourages CEOs to read and reflect on the entire letter and expects them to be able to explain what they did in response to it (should they have contact with the FCA in the future). Key points are:

  • Firms are reminded of their obligations to treat customers fairly and appropriately. They should also ensure that they take an appropriate approach to creditworthiness assessment and treat customers in default, or in arrears, with forbearance and due consideration.
  • Firms are reminded of their obligations to identify and manage any risks arising from their remuneration or performance management practices.
  • The two key ways in which consumers may be harmed across this portfolio are: a high volume of relending, which may be symptomatic of unsustainable lending patterns; and firms’ affordability checks may be insufficient, leading to loans that customers may not be able to afford.
  • The FCA will prioritise its supervisory work in these areas: relending; affordability; complaints; buying/selling existing loan portfolios; changes to business models and compliance with new rules and guidance.
  • On relending, the FCA says that it will proactively engage with home-collected credit firms to ensure that they understand its expectations. It will also discuss any changes to their processes as a result of the new rules and guidance on relending issued in December 2018. The FCA aims to carry out diagnostic work across the portfolio so that it can better understand the motivation for, and impact of, relending on both consumers and firms. That work will examine aspects of relending such as customers’ borrowing journeys, firms’ marketing strategies for offering additional credit, and the costs of relending for consumers.
  • On guarantor lending, there will be an additional focus on payments made by guarantor. In addition to its broad portfolio-wide work on relending, the FCA will start a piece of complementary work on guarantor lending to establish whether potential guarantors have enough information to understand the likelihood and implications of the guarantee being enforced.
  • The FCA’s supervision strategy for high cost lenders covers the period to January 2021 and it will write to CEOs again at that time to give its updated view on the key risks and its supervision plans.

The letter was referred to during a recent speech delivered by the FCA’s Executive Director of Supervision (Retail and Authorisations) on what the consumer credit sector can expect from the FCA. His top tip was “to keep ahead of the rules, you can invest in expensive tick box compliance or you can get on top of your culture. A healthy purposeful culture will be the best way to deliver value for you, your clients and your business”.

On 5 March 2019, the FCA wrote to all credit card firms to highlight the findings of its multi-firm review of fees and charges in prime and sub-prime credit card products and firms. See the press release.

The day before, the FCA published the final report of its work on motor finance. It is considering changes to the way in which commission works in the motor finance sector after uncovering serious concerns about the way in which lenders are choosing to reward car retailers and other credit brokers. The FCA says that all firms acting as lenders or brokers in the motor finance sector should read the report and consider whether they need to review or amend their policies and procedures and associated systems and controls.

On 7 March 2019, the FCA published the results of consumer research carried out to better understand the potential harms of cryptoassets. The findings are set out in this press release.

On 8 March 2019, the FCA announced the final rules on the ‘Directory’, which is a new public register that enables consumers, firms and other stakeholders to find information on key individuals working in financial services. The final rules require firms to report timely and accurate information about their Directory individuals. Firms will need to take all necessary action to gather the required information and ensure its accuracy prior to submission. Banking firms and insurers can start submitting data around September 2019. All other firms can start doing so from 9 December 2019, when the Senior Managers and Certification Regime (SM&CR) commences for solo-regulated firms.

On the same day, the FCA published finalised guidance to help all FCA firms clearly set out Senior Managers’ responsibilities through Statements of Responsibilities (SoR). Under the SM&CR, all Senior Managers must have an SoR, and all enhanced firms must also have a Responsibilities Map.

On 15 March 2019, the FCA published its second thematic review of the debt management sector. It found that, whilst firms’ identification and treatment of vulnerable consumers is generally better than at the time of the first review, two thirds of the firms that the FCA looked at still needed to make improvements in this area.

Moving on to the most recent developments, on 25 March 2019 the FCA submitted to HM Treasury its final report on the review of the retained provisions of the Consumer Credit Act 1974.

The following day, the FCA published the final report of its Mortgages Market Study, which confirmed the FCA’s earlier findings that “the mortgage market is working well in many respects but falls short of the FCA’s vision in some specific ways”. Earlier in the month, the FCA published the latest mortgage lending statistics.

On 27 March 2019, the FCA updated its webpage on ‘Preparing your firm for Brexit’.

The FCA is exploring how technology could make it easier for firms to meet their regulatory reporting requirements and improve the quality of information they provide. See this webpage for more details and a video link explaining this ‘Digital Regulatory Reporting’ project.

The FCA confirmed during March 2019 that the current £150,000 Financial Ombudsman Service (FOS) award limit will increase from 1 April 2019 (today) to £350,000 for complaints about actions by firms on or after that date. For complaints about actions before 1 April 2019 that are referred to the FOS after that date, the limit will rise to £160,000.

Other recent FCA publications include an industry insights publication on cyber security. The insights stem from cyber coordination groups which the FCA runs with industry to help improve cyber security practices amongst members of the groups and their sectors. It is hoped that the practices and experiences set out in the publication will help other firms when considering where to prioritise their efforts in increasing cyber resilience. See the press release.

And finally, during an oral evidence session which took place just before the last edition of the Regulatory round-up went to press, as part of the House of Commons Treasury Select Committee’s inquiry into consumers’ access to financial services, the FCA’s director of consumer and retail policy talked about the FCA’s upcoming guidance on identifying vulnerable consumers, which will be published in the next few months. Guidance will cover the customer journey from identification, through to fair treatment, through to redress and recourse in the treatment of consumers. The FCA will be working with the Information Commissioner’s Office to try to give greater guidance on how firms can balance their responsibilities to protect data and gather it as well to identify vulnerable customers. There will be guidance on training of frontline staff, “because that is a key part of identifying vulnerability, but also how firms need to embed the right culture in their organisations”.

Other sector news

The Access to Cash Review published its final report, calling on the government, regulators and banks to “act now or risk leaving millions behind”. See the press release. The FCA welcomed the report, and it was also the subject of a recent speech delivered by the FCA’s Chair. Among other things, he said that “the declining use of cash plays into a much broader debate about financial inclusion which includes the future of communities in a digital age, the way a range of public services are delivered and consumer education. We need to discuss not just who should pay for the cash system, but also what action government and local authorities should take to support people to adapt to a world where cash may not be accepted. And in the meantime, whether we should see cash as a public good, part of a fair society as well as a back up payment system if IT systems fail, the cost of which should be socialised; or whether the cost of cash should be borne by the (sometimes vulnerable) people who continue to use it”.

In related news, on 25 March 2019 HM Treasury and the Department for Work and Pensions published their first annual financial inclusion report. The executive summary can be found on pages 4 to 6.

Regulations have been made to name the single financial guidance body the ‘Money and Pensions Service’. They come into force on 6 April 2019.

On 20 March 2019, the National Audit Office published a report ‘Regulating to protect consumers: Utilities, communications and financial services markets’. It found that the four main regulators, including the FCA, understand the significant difficulties facing consumers across utilities, communications and financial services markets, but cannot prove if they are effectively responding to consumer concerns or offering enough protection for those who need it. See this press release with a link through to the report, which was welcomed by the FCA.

The Authorised Push Payment (APP) Scams Steering Group has agreed a voluntary code of good practice which aims to better protect customers and reduce the occurrence of APP fraud. See the press release and our recent spring update on this topic.

In a new report, the House of Commons Treasury Select Committee warns that the UK’s fragmented anti-money laundering system needs re-ordering. See the press release. In related news, the Co-Chairs of the All-Party Parliamentary Group on Fair Business Banking (APPG) and other signatories wrote to the Prime Minister, urging the government to take steps on reforming the UK’s corporate liability regime.

We reported in the previous edition of the Regulatory round-up that the European Commission had adopted a new list of 23 third countries with strategic deficiencies in their anti-money laundering and counter-terrorist financing frameworks. In a press release on 7 March 2019, the Council of the European Union explained that it had unanimously decided to reject the list put forward by the Commission.

On 8 March 2019, the Bank of England (BoE) announced that it has decided to use its statutory powers to direct Visa Europe to fully implement the recommendations of the independent review conducted following an incident in June 2018 when there was a partial service disruption of Visa Europe’s card authorisations system.

The day before, the European Payments Council Board decided to approve the UK Finance application for the continued participation of UK payment service providers in the Single Euro Payment Area schemes after 29 March 2019 in the event of a no deal Brexit. See the press release.

On 18 March 2019, the European Banking Authority (EBA) launched its central electronic register of payment and electronic money institutions under the Payment Services Directive (PSD2). Earlier in the month, the EBA published clarifications to the first set of issues raised by its working group on application programming interfaces under PSD2.

On 22 March 2019, the BoE published its first quarterly bulletin of 2019, on ‘Embracing the promise of fintech’. In related news, Innovate Finance launched its ‘FinTech for Schools Initiative’ and TheCityUK published a report titled ‘Fuelling FinTech: attracting the UK’s future tech talent into financial services’.

The APPG recently announced that it has accepted a place on UK Finance’s Dispute Resolution Service Implementation Steering Group, which will design and implement a historic compensation scheme and a new dispute resolution mechanism for disputes between businesses and financial institutions. Earlier in the month, the APPG reported that, in a recent survey by the Institute of Directors, 7 out of 10 members expressed their strong and explicit support for proposals for a Financial Services Tribunal.

The APPG is also building support for a new campaign to gather evidence of potential signature forgery by banks against their customers. See the press release.

And finally, on 12 March 2019, HM Treasury published updated guidance on banking, insurance and other financial services if there is no Brexit deal, for UK residents and businesses, people living in the European Economic Area, and financial services institutions.