Financial Services Regulation Update 16 July 2008

Updated July 2008

Note these items are presented as news bulletins only. If you want advice or more information please contact Suzanne MacDonald.

1. Council of Mortgage Lenders (CML): Housebuilders must disclose buyers' incentives

Under new rules to be introduced by the CML from 1 September 2008, developers will be required to declare buyers' incentives to ensure that lenders are able to offer mortgages that reflect the true value of a property.
Conveyancers will be required to be in receipt of a 'CML Declaration of Incentives Form' on new build transactions before they can submit the Certificate of Title to the Lender. Section 6.3 of Part II of the Lenders' Handbook will be amended to reflect this requirement. The CML will make the necessary changes automatically unless informed by any lender that they wish to opt out of the process.
 

2. Short selling

2.1. New disclosure regime for significant short positions in companies conducting rights issues
The Financial Services Authority (FSA) has introduced new provisions in the Code of Market Conduct (MAR), which will require the disclosure of significant short positions in stocks admitted to trading on prescribed markets which are undertaking rights issues. These new requirements, introduced by way of the Short Selling Instrument 2008, came into effect on 20 June 2008.

The FSA accepts that short selling in itself is not an abuse of the market, and is a legitimate technique to assist liquidity. However, it has decided to introduce these new provisions as a result of the increased potential for market abuse through short selling during rights issues in the current market conditions. Non-disclosure of significant short positions gives the market a false and misleading impression of the supply and demand in the relevant securities. The FSA believes that improved transparency of significant short selling is a good means of preventing market abuse.

Under the new provisions, a 'disclosable short position' is a short position which represents an economic interest of one quarter of one percent of the issued capital of a company. The new provisions will require the disclosure of positions exceeding this threshold to the market by 3.30pm the following business day.

2.2. FSA: FAQs on new short selling disclosure requirements Following the announcement of the new provisions in the FSA Code of Market Conduct (see 2.1 above) the FSA has received several queries asking how the disclosure regime will operate in practice. In response the FSA has produced a set of FAQs.

The FAQs are not intended to be exhaustive and the FSA reminds firms that they will need to consider how the requirements apply to their particular circumstances, taking into account their purpose, which is to prevent potentially abusive behaviour.

Under the new regime, disclosure must be made by means of an announcement via a Regulatory Information Service. Firms making a disclosure can use the FSA's TR3 form or may choose another format. However, a firm that chooses another format for disclosure must ensure that it provides all the information required by the TR3 form.

TLT can help companies understand the new regime and reporting requirements to the FSA.

3. Bank charges test case: Office of Fair Trading (OFT) publishes order

The OFT has published a sealed order of the High Court in relation to the future progress of a test case brought before the High Court. The case related to the application of the unfairness rules of the Unfair Terms in Consumer Contract Regulations (UTCCR) to the level of unauthorised overdraft charges charged by banks. The order sets out declarations following the judgment of 24 April 2008, which confirmed the OFT's view that the UTCCR unfairness rules can be applied to certain personal current account contractual terms. The contractual terms must be in plain intelligible English and none of the terms are a penalty clause of common law.

The order gives each of the defendant banks leave to appeal the judgment in relation to the non-application of Regulation 6(2) of UTCCR (which excludes terms from a fairness assessment). However, four of the banks have been refused leave to appeal following a finding that certain specific parts of their contractual terms are not in plain and intelligible language.

The second preliminary hearing was held at the High Court on 7-9 July 2008 to determine whether any of the banks other terms and conditions (not covered by the 24 April judgment) are capable of being penalties of common law. It also determined whether charging terms contained in the banks' historic terms and in their basic account and other non-mainstream current account terms can be assessed for fairness under the UTCCR. The judgment has not yet been announced.

4. Retail Distribution Review (RDR): Clarification of 'customer-agreed remuneration'

The FSA has published a new web page which clarifies what it means by 'customer-agreed remuneration' (that is, remuneration determined without input from product providers), in the context of the Retail Distribution Review.

The FSA's discussion paper on the RDR (DP07/1), published in June 2007, suggested the use of customer-agreed remuneration as a way to reduce the distorting influence of product providers on the advice process, and to achieve the desired outcome of remuneration arrangements that allow competitive forces to work in favour of consumers.

Following publication of DP07/1, the FSA has found that people have drawn different conclusions from the use of the phrase "customer-agreed remuneration". As a result, the FSA did not use this phrase when it published the interim review of the RDR in April 2008. However, as this concept remains relevant to the RDR, the FSA has now decided to clarify its meaning.

5. Banking Reform

5.1. Chancellor sets out banking reform proposals in letter to Treasury Select Committee
These proposals would, amongst other things, enhance the role of the Bank of England (BoE) in preserving financial stability. They will be included in the Banking Reform Bill, to be introduced later in 2008.

In broad terms, the proposals (which will be consulted on shortly):

• Provide the BoE with a statutory responsibility for financial stability, alongside its existing role in monetary policy.
• Make changes to the BoE's governance structures, to support the BoE and its Governor in exercising the new responsibilities, including the establishment of a new Financial Stability Committee of Court to oversee BoE performance in relation to financial stability.
• Provide a range of tools and powers for the BoE to carry out its responsibility in this area. This will include improving the framework for the provision of liquidity; formalising the BoE's role in overseeing systemically important payment systems; and providing the BoE with a leading role in the implementation of the new special resolution regime, if it is triggered by the FSA.

In addition, measures will be taken to ensure the BoE is able to:

• request that the FSA obtains firm-specific information on its behalf; and
• make proposals to the FSA on its framework for prudential regulation.

5.2. Tripartite authorities publish second joint consultation on financial stability and depositor protection
HM Treasury, the BoE and the FSA (the Tripartite Authorities) have jointly published a second consultation on financial stability and depositor protection. This consultation builds on, and responds to their January 2008 consultation. Responses to the January 2008 consultation have also been published.
The consultation sets out the Tripartite Authorities' numerous detailed proposals for strengthening financial stability and depositor protection which include:

• Legislation to introduce the 'special resolution regime' for banks and building societies, with the FSA having power to trigger the regime and the BoE responsible for operating it.
• Changes to the Financial Services Compensation Scheme (FSCS) compensation limits for all sectors, which the FSA plans to consult on in autumn 2008. The FSA is expected to propose an increase in the compensation limit for protected depositors to £50,000.
• Clarification of the Tripartite Authorities' responsibilities under their Memorandum of Understanding.

Views on outstanding issues are invited until 15 September 2008. A further consultation providing more detail on the proposed special resolution regime, and containing draft legislation, will be published by the end of July 2008. In addition to changes in FSCS arrangements, the FSA is also expected to consult on a number of other issues later in 2008. The government's intention is to bring forward legislation implementing the proposed reforms later in 2008.

6. Mortgage financial promotion case studies

The FSA has published case studies identifying and explaining some of the key issues for firms producing mortgage financial promotions. The case studies are based on a mock-up of a mortgage advertisement which is presented in a number of different ways in order to identify and offer examples of good and poor practice in relation to the following key issues:

1. Prominence and Annual Percentage Rate (APR).

2. APR and prominence for customers with impaired credit.

3. Ideas for improving promotions for customers with impaired credit.

4. Clearer layout on APR and risk.

5. Dealing with fee disclosure in financial promotions.

6. How to show a representative fee.

7. How to show more than one rate of interest in a promotion.

8. How to present more than one rate of interest in a promotion.

Firms are advised by the FSA not to copy any examples of good practice set out in the case studies, as the relevant rules in the Mortgages: Conduct of Business sourcebook (MCOB) apply to financial promotions on a case-by-case basis and the examples may not be appropriate in all circumstances.

However, the FSA considers the case studies will achieve the following:

• Help firms understand the implications of the MCOB rules.
• Show how the FSA's financial promotion rules for mortgage products and services might operate in practice.
• Cover some of the questions the FSA expects firms to ask themselves in designing promotions.

TLT can help to ensure your financial promotions are compliant.
 

7. Financial Ombudsman Service (FOS)

7.1 Financial Services and Markets Act 2000 (FSMA) does not require the FOS to determine complaints in accordance with common law
In its recent decision in the case of R (on the application of Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service & Simon Lodge [2008] EWCA Civ 642 the Court of Appeal has held that section 228 of the FSMA did not require the FOS to determine a complaint in accordance with the common law.

This case provides useful guidance on the jurisdiction of the FOS, its susceptibility to judicial review and the continuing impact of the Lord Hunt review of the FOS.

7.2 Compensation for distress, inconvenience or other non financial loss
The FOS has issued a technical note setting out its approach to whether it will award compensation where a complaint is wholly or partially upheld in respect of:

• pain and suffering; or
• damage to reputation; or
• distress or inconvenience.

The note examines how these terms should be defined and what the FOS will consider when determining the scale of an award. The FOS confirmed that in most cases financial compensation will be appropriate although it may require a firm to issue an apology. Financial compensation is likely to be modest. However, awards for pain and suffering are likely to be higher. The note sets out case examples to illustrate the FOS's general approach to assessing the level of award and these are grouped into three compensation categories: 'modest ' (less than £300), 'significant' (£300-£999) and 'exceptional' (£1,000 or more).

8. CCA post-contract information requirements

On 28 June 2008, the OFT published a guidance note which provides a brief introduction and overview of the post-contract information requirements under the Consumer Credit Act 1974, as amended by the Consumer Credit Act 2006 ('2006 Act'). The 2006 Act amended existing requirements and introduced new requirements on post-contract transparency which come into force on 1 October 2008.

The guidance note covers the following areas:

• Statements for fixed sum credit agreements, for running account credit agreements and where there are two or more debtors.
• Notices of Variation.
• Arrears notices under fixed sum credit agreements and running account credit agreements.
• Default sum notices.
• Default and enforcement/termination notices.
• Notices of post-judgment interest.
• Information to be provided on request.
• Impact of failing to provide the required information which among other things includes inability of a creditor to enforce the agreement.

The Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 ('the Regulations') prescribe the form of the CCA notices and statements and set out the information and wording to be provided in them, as outlined in the guidance note. The Department for Business, Enterprise and Regulatory Reform (BERR) is proposing to amend the Regulations to clarify and correct some existing requirements. The amending statutory instrument will come into force on 1 October 2008, subject to the usual ministerial and parliamentary approvals.

TLT can help with compliance with the CCA.
 

9. The FSA publishes Treating Customers Fairly (TCF) progress update report: 87% of firms falling short

On 30 June 2008, the FSA published a TCF progress update report.

The report sets out firms' progress against the FSA's March 2008 TCF deadline, when the FSA required them to have in place appropriate management information to test whether they are treating their customers fairly. The FSA's final TCF deadline is December 2008, when firms must demonstrate that they are consistently treating their customers fairly.

The FSA assessed a sample of 96 relationship-managed firms, including most large retail groups and a sample of all other relationship-managed firms with business relevant to the retail market. To help firms consolidate their progress to date and assist them in meeting the final deadline, the report includes examples of good and poor practice in measuring fair customer outcomes.

The FSA found that only 13% of the firms assessed met the March 2008 deadline. However, many firms have made significant efforts to measure TCF and the FSA considers that "with a very substantial continuing effort", approximately 80% of the sample firms are still capable of meeting the December 2008 deadline.

The FSA will continue to focus firms' attention on the forthcoming deadline and will intervene in respect of firms which have failed to meet the March 2008 deadline if it thinks they are unlikely to meet the December 2008 deadline.

Once the final deadline has passed, the FSA will assess a sample of relationship-managed firms in early 2009 and plans to publish the results against the final deadline in September 2009.

10. Charlie McCreevy welcomes agreement to develop European mobile payment services

On 30 June 2008, the Groupe Speciale Mobile Association (GSMA) (the global trade body for the mobile industry) and European Payments Council (EPC) announced that they have entered into an agreement to promote the use of mobile payment services.

The GSMA and EPC will work together to accelerate the deployment of services enabling consumers to pay for goods and services in shops, restaurants and other locations using mobile telephones. The initiative is intended to enable banks to deliver better mobile payments services to their customers, supported by mobile operators' infrastructure.

Charlie McCreevy, European Commissioner for Internal Market and Services has issued a joint statement with Viviane Reding, European Telecoms Commissioner, welcoming the announcement.

Mr McCreevy said: "Bringing more competition to the payment services market has been my aim and agreements such as this show the possibilities that new technologies and innovative approaches offer in this regard. This is exactly what the Payment Services Directive, which comes into force at the end of 2009, is designed to promote." 

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