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Financial services regulation round-up - July 2018

This month in summary

Financial services regulation

Retirement Outcomes Review Final Report

On 28 June 2018 the FCA released the Retirement Outcomes Review final report along with a consultation paper CP18/17, looking for feedback on the proposed changes. The final report sets out the recent relevant developments in the pensions market since the interim report in July 2017, and considers the efficiency of the retirement market since the introduction of pension freedoms.

The FCA has found that consumers continue to use the freedoms, and most of those who have decided to access their pensions pots have done so early, before the age of 65. Many of these consumers have fully withdrawn their pots and drawdown has continued to be much more popular than annuities.

The FCA notes that the retirement income market is still evolving after the fundamental reforms three years ago. It is proposing a package of remedies consisting of rule-based interventions, guidance, coordination with other regulatory bodies and industry cooperation. This package is intended to effectively address the issues that the FCA has identified. Proposed measures include the following:

  • Wake-up packs should be sent earlier, starting from age 50 and every five years until consumers have fully used their retirement savings. These would include a single page summary document and retirement risk warnings.
  • Giving further consideration to how to amend the FCA's rules to ensure that consumers get consistent, high-quality guidance.
  • Requiring providers to offer three ready-made investment pathways within a simple choice architecture.
  • Considering whether there is a case for independent oversight of the appropriateness, quality and charges of investment pathways.
  • Requiring that new consumers accessing drawdown will have to make an active choice to be in cash, meaning that firms will not be able to default consumers into cash.
  • Requiring that firms provide a summary showing key information at the front of the Key Features Illustration (KFI) that consumers receive, including a one-year charge figure in pounds and pence which is comparable across KFIs.
  • Requiring providers to provide information to consumers in drawdown annually, whether or not they are currently drawing an income from their pot. Consumers should be reminded annually of their chosen investment pathway and their ability to switch, to encourage the consumer to consider whether the investment pathway they are in is still appropriate for them.
  • Holding a Pension TechSprint later in the year to encourage innovative solutions to some of the emerging issues, including lack of engagement and shopping around.
  • Improving drawdown information - especially around charges - with clearer, shorter and more succinct disclosure, and improving annual drawdown information provided to clients, even if they have not started taking income.

Alongside the final report, the FCA has published a separate consultation document in which it is seeking views, by 6 September 2018, on its package of proposed remedies.

More information about the Retirement Outcomes Review

Bank of England, PRA and FCA publish a joint discussion paper on operational resilience of UK financial services sector

Following a recent speech by Lyndon Nelson, Deputy CEO of the Bank of England’s Prudential Regulation Authority (PRA), the Bank of England (BoE), PRA and Financial Conduct Authority (FCA), together the supervisory authorities, have published a joint discussion paper on operational resilience in the UK’s financial services sector.

The discussion paper, published on 5 July 2018, sets out the supervisory authorities’ approach to improving the operational resilience of firms and financial market infrastructures (FMIs) in the UK financial services sector. Operational resilience refers to the ability of firms, FMIs and the financial services sector as a whole to prevent, respond to, recover and learn from operational disruptions such as cyber-attacks or technological failures. The supervisory authorities recognise that a lack of operational resilience represents a threat to financial stability and has the potential to harm consumers and market participants.

The supervisory authorities consider that managing operational resilience is most effectively addressed by focusing on business services, rather than on the systems and processes that support those services.  Accordingly, firms and FMIs should frame their discussions on the assumption that individual systems and processes will be disrupted, and therefore focus on back-up plans, responses and recovery options.

Much of the Discussion Paper focuses on the concept of impact tolerances and how they might complement existing requirements on firms to ensure that important business services are made resilient to a wide variety of threats. In setting impact tolerances, the supervisory authorities suggest that firms prioritise those business services which, if disrupted, have the potential to: threaten the firm’s ongoing viability; cause harm to consumers and market participants; or undermine financial stability.

The discussion paper also suggests four broad areas for potential supervisory expectations and assessment: preparation, recovery, communications and governance.

The supervisory authorities invite feedback on several questions in the Discussion Paper from firms, trade associations, and consumer bodies. The deadline to respond is 5 October 2018.

More information and access to the discussion paper

FCA publishes discussion paper on a duty of care and potential alternative approaches

The FCA has published a paper entitled ‘Approach to Consumers’, following a consultation in November 2017, and discussion paper (DP18/5) on a potential duty of care requirement for financial services firms. The 'Approach to Consumers' paper sets out the FCA’s expectations on financial services firms’ treatment of consumers, the circumstances in which the FCA will intervene, its powers to ensure consumer protection, and its vision for well-functioning markets.

The discussion paper focuses on whether firms should be subject to a new 'duty of care' or 'fiduciary duty' when providing services to consumers (the New Duty). The purpose of the discussion paper is to open a wider debate on this issue, with the aim of understanding the outcomes a New Duty might be able to achieve and the ways in which a New Duty might enhance behaviour in the financial services market. The consultation closes on 2 November 2018.

The discussion paper sets out the existing regulatory and legal framework and suggests that the FCA's Principles for Businesses (the Principles), together with the detailed rules and guidance, could be said to address many of the issues that are cited as reasons for introducing a New Duty. In addition to its rules and guidance, the FCA can:

  • enforce breaches of certain consumer protection laws;
  • exercise its powers under the Financial Services and Markets Act 2000 (FSMA) to investigate and where necessary intervene in markets where competition may not be working well for consumers; and
  • investigate and enforce against breaches of the major prohibitions under the Competition Act 1998 in relation to the provision of financial services.

The FCA recognises that firms' culture and governance can either drive or mitigate harm to consumers and markets. The Senior Managers and Certification Regime (SMCR), introduced in March 2016, is a key tool for improving the culture of authorised firms and raising the standard of conduct in financial services. SMCR will apply to insurers from 10 December 2018 and will apply to all other FSMA authorised firms from 9 December 2019.

The discussion paper also sets out and seeks views on a number of different ways that the New Duty could be introduced: whether as a new regulatory rule or statutory duty, through more flexible guidance, by amending the Principles or by way of an extension to the existing 'clients' best interests' rule to cover all regulated activities, as well as non-regulated activity.

The FCA acknowledges that it is not currently possible for private individuals to take court action against firms for breaches of the FCA Principles, and therefore seeks views on whether breach of the Principles or the New Duty should be actionable by consumers. The FCA also seeks understanding on whether, and if so how, a New Duty would mean that consumers would rely less on redress.

More information on the New Duty.

View the discussion paper 

More information on the FCA's approach to consumers and a link to the Approach to Consumers paper 

Speeches and communications

Speech on the FCA’s approach to Brexit: preparations and vision for the future

On 19 July 2018, the FCA published a speech by Nausicaa Delfas, Executive Director of International, on how the FCA is preparing for a smooth transition, what the FCA expects from regulated firms, and its vision for the future. Key points to note in the speech include the following:

  • The FCA, alongside the Bank of England and the government, is planning for a range of scenarios including the possibility of a ‘no-deal’ or ‘hard’ Brexit in March 2019.
  • The changes that need to be made to UK financial services legislation will also mean changes to the FCA Handbook which the FCA intends to consult on in the autumn. In the run up to March 2019, the FCA will limit any other Handbook changes to those that are in line with its Business Plan, or otherwise essential.
  • The temporary permissions regime will allow EEA firms and funds using a UK passport to continue to operate, without needing to apply for authorisation immediately following Brexit.
  • The fact that there is no reciprocal temporary permissions regime from the EU presents a number of challenges both in terms of commercial certainty and business disruption, but the FCA feels that the regime is necessary to provide certainty and smooth the transition; something it stands ready to discuss with its EU counterparts.

The speech also mentions that firms will need to maintain the threshold conditions and the FCA rules throughout Brexit. Some of the areas that the FCA has been discussing with firms so far include:

  • the structures that it puts in place, if it is expanding its presence in Europe, to enable the FCA to supervise the UK business effectively, and ensure that it continues to meet the threshold conditions;
  • the requirement that, whilst firms are making their preparations, they must ensure that their supply chains are similarly prepared;
  • ensuring appropriate senior oversight remains in the UK if a firm is relocating its senior management; and
  • how a firm will continue to service its customers as fully and fairly as the law permits, and communicate with affected customers, in the UK and elsewhere, in a clear and timely fashion, including, for example, what regulatory protections apply to them.

Finally the speech refers to a new FCA web page, Preparing your firm for Brexit, which aims to assist firms in understanding how they will be affected by Brexit.

Read the full speech.

The FCA's ‘Preparing your firm for Brexit’ web page.

Fines and enforcements

FCA bans four former directors of online consumer credit broker for misleading customers

On 25 July 2018, the FCA banned David James Carter Mullins, Edward John Booth, Christopher Paul Brotherton and Mark Robert Kennedy, the former directors and shareholders of Secure My Money Limited (SMM – now dissolved).

Secure My Money Limited took fees of over £7.2 million from approximately 124,000 online customers by duping them into believing they had been approved for short term loans. The FCA found that between November 2013 and July 2014 all four lacked honesty and integrity as they had deliberately misled often vulnerable customers, in relation to fees and services provided through web-based brands i-loansdirect, LoanZoo and the1loan. Customers looking for a loan on these sites were informed on arrival that they had been ‘approved’ and asked to enter their payment card details in order to ‘verify their account’. Customers were not pre-approved for a loan and there was no such account verification, instead they were charged up to £69 plus a monthly membership fee for ‘pre-approved’ loan offers.

The FCA asked SMM to take down the websites in May 2014, and though SMM disabled the homepages, all four individuals knew however that the majority of customers arrived on the sites via other pages, that those pages were still live and that SMM was still taking fees from new customers.

Further, the sale of customers’ personal data to third parties led to some customers receiving multiple marketing calls or texts, and in some instances to customers being charged by more than one credit broker.

Mark Steward, Executive Director of Enforcement and Market Oversight, said:

“These four individuals consistently misled vulnerable customers into paying money for worthless services and into believing SMM had found them a loan, in addition to selling on their data. They showed complete disregard for the consequences of their actions. We have taken the strongest action possible to prevent them from working in financial services again.”

Read more on the FCA's website.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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