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Financial services regulation round-up - May 2018

This month in summary:

Financial services regulation

FCA publishes Consultation Paper reviewing funding of the Financial Services Compensation Scheme (FSCS)

On 1 May 2018, the FCA published a Consultation Paper outlining the final rules changing how the FSCS is funded, and consulting on changes to the Professional Indemnity Insurance (PII) requirements for Personal Investment Firms (PIFs). New rules outlined in the consultation paper will take effect from April 2019.

The FCA's Consultation Paper outlines final rules and guidance aimed at ensuring that the FSCS funding model is sustainable and provides sufficient funding for compensation. These rules cover the following areas:

  1. Changing the FSCS funding classes

    Under these rules the Life and Pensions Intermediation funding class will be merged with the Investment Intermediation funding class, so that the volatility of the total FSCS bill from these firms will decrease as the levy will be shared across a broader range of firms. Further, pure protection intermediation activities will be moved from the Life and Pensions Intermediation funding class to the General Insurance Distribution funding class. This is in order to ensure that these firms are in a class more suited to their risk profile. 

  2. Product provider contributions

    These rules will require product providers to contribute 25% of the funding requirement for the insurance and investment intermediation funding classes, a change that is intended to reflect the fact that these firms benefit from overall confidence in the UK market. 

  3. Retail pool

    This rule requires that all FCA funding classes (except the depositor acceptor class) will contribute to, and benefit from, the retail pool. 

  4. FSCS Funding Limit

Increasing the FSCS compensation limit for investment provision, investment intermediation, home insurance intermediation claims and debt management claims from £50,000 to £85,000.

The Consultation Paper also looked at changes to PII for PIF, and alternative options for PIFs that would ensure more firms pay more of the costs of compensating customers who suffer loss as a result of their actions. The Consultation Paper asks for responses on its proposed approach to ensure that PIFs have PII policies that do not limit claims, where the policyholder or a third party is insolvent, or where a person other than the PIF (e.g. the FSCS) is entitled to make a claim on the policy.

This Consultation Paper will be of interest to all firms, whether they are current or potential contributors to FSCS funding, and to consumers, or consumer groups.  It will be of particular interest to PIFs and to insurers and brokers active in the PII market for PIFs. The consultation closes on 1 August 2018

For more information, and a link to the FCA's website, please click here.

FCA publishes its interim report into the mortgages market

On 4 May 2018, the FCA published its interim report into the mortgage market, finding that competition in the mortgage market is working well for many people. The market study focussed on (i) consumers’ ability to make effective choices given the tools available, and (ii) commercial arrangements between firms leading to possible conflicts of interest. In carrying out the study, the FCA sought to identify opportunities for technology to improve how the market works in the longer term, with proposals in the interim report "particularly aimed at helping customers find the best-priced suitable mortgage deal".

Overall the FCA found a mortgage market working well in some respects, including:

  • a high rate of engagement amongst consumers, with around 75% of consumers switching to a new mortgage deal after six months of moving onto a reversion rate (the interest rate payable once an introductory rate ends);
  • little evidence that current commercial arrangements between firms are associated with material harm for consumers; and
  • a range of products on offer and competition in the mortgage market working well for many people.

The FCA did note, however, that there were a number of ways in which the mortgage market could perform better, particularly with regard to the effectiveness of the tools available to help consumers choose a mortgage.

In order to achieve this vision, the FCA would like:

  • to make it easier for consumers, at an early stage, to identify which mortgage products they qualify for, to assess and compare those products and, ultimately, to take out a mortgage;
  • to remove barriers to innovation in the sale of mortgages, including those due to aspects of FCA rules and guidance;
  • to make it easier for consumers to assess the strengths of different mortgage brokers; and
  • to help certain longstanding borrowers who cannot switch to a better deal.

 The FCA is consulting on its interim findings and proposed remedies. It intends to publish a final report around the end of the year and will consult on any specific changes required to its rules.

For more information, and a link to the FCA's website, please click here.

Speeches and communications

High-cost credit: what next?

On 2 May 2017 Andrew Bailey, the FCA's Chief Executive, gave a speech highlighting the next steps for the regulation of high cost consumer credit, with focus on overdrafts, rent-to-own products, home-collected credit and catalogue credit.

Mr Bailey gave an overview into the FCA's work on other areas of high cost credit. Previous initiatives included the payday loan cap, which restricted the amount of money payday loan providers can recover in fees, and a study of the credit card market. Mr Bailey followed with a breakdown of the average indebtedness of the UK's adult population, with a comparison between different age groups and their relative likelihood of using high cost credit.

The speech also discussed the findings of the FCA's Financial Lives Study in relation to the high cost credit market with Mr Bailey noting, in summary, that:

  • annual revenues from unarranged overdrafts, excluding unpaid item fees, were around 200% of the average amount outstanding in 2016 with around 2% of personal accounts incurring over 50% of unarranged overdraft charges;
  • the debt consumers held on rent-to-own products was over a third of the overall debt they held, and was significantly larger than debts they held on any other types of products;
  • home-collected credit customers have similar characteristics to rent-to-own customers, and appear to hold debt in home-collected credit products for a long time; and
  • debt held on catalogue credit is a smaller share of debt than credit card debts, unsecured personal loans and motor finance. Consumers using catalogue credit differ from rent-to-own and home-collected credit in terms of their median household income and are drawn from a wider socio-economic group. 

In terms of the FCA’s assessment of high-cost credit Mr Bailey highlights four basic principles that the regulator uses to help set its priorities. These are:

  • that the cost of credit matters. When looking at payday loans, the FCA established a measure that linked the cost of interest and charges to the amount borrowed. This measure was however specific to the payday loan market and applies most easily to fixed-term loans;
  • that when looking at revolving credit facilities, the FCA focuses on  whether customers are frequently in long-term persistent debt;
  • a consideration of the complexity of the product and sales practices; and
  • whether lenders are conducting a proper assessment of consumers' affordability.

Mr Bailey acknowledged that credit can "have a socially valuable function” but added that, as the FCA’s payday loan cap demonstrates, “there are consumers for whom their economic welfare improves if they do not have access to credit.”

When concluding his speech Mr Bailey notes that he is “aware that some stakeholders have called for [the FCA] to introduce price capping in other areas of the high-cost credit world, and overdrafts.” He adds that “we are examining a range of potential approaches to address the harm we see to consumers using these products" and expect to set out the FCA's views next month.

For the full speech, and link to the FCA's website, please click here.

Fines and enforcements

FCA and PRA jointly fine Chief Executive £642,430

On 11 May 2018, the FCA and PRA jointly fined James Staley, Chief Executive of Barclays Group (Barclays), a total of £642,430. Mr Staley failed to act with due skill, care and diligence in the way he acted in response to an anonymous letter received by Barclays in June 2016.

Following receipt of the anonymous letter, Mr Staley attempted to identify the author who claimed to be a shareholder. The letter contained various allegations, some of which concerned Mr Staley. Given this conflict of interest; Mr Staley should have maintained an appropriate distance and allowed those with expertise and responsibility for whistleblowing in Barclays to deal with the matter.

This is the first case brought by the FCA and PRA under the Senior Managers Regime. As CEO, Mr Staley should have identified that:

  • He had a conflict of interest in relation to the letter, and needed to take particular care to maintain an appropriate distance from the Group Compliance investigation.
  • There was a risk he would not be able to exercise impartial judgement in relation to how Barclays should respond.
  • Once the complaint was in the hands of the Group Compliance team, it was important that Group Compliance retained control over its investigation process. 

The PRA and FCA imposed identical penalties of £458,000 each on Mr Staley with a 30% discount for settlement.  The PRA and FCA have also agreed special requirements with Barclays whereby Barclays must report annually detailing how it handles whistleblowing, with personal attestations required from those senior managers responsible for the relevant systems and controls.

For more information, and a link to the FCA's website, please click here.

FCA secures confiscation orders totalling £1.69 million against convicted insider dealers

On 11 May 2018, a confiscation order was made in the sum of £1,074,236 against Martyn Dodgson and £624,521 against Andrew Hind.  Their convictions relate to a period between November 2006 and March 2010, during which Dodgson sourced inside information from within the investment banks at which he worked, either through working on transactions himself or through being able to glean what his colleagues were working on.  He passed on this inside information to Hind who then carried out secret dealings for the benefit of Dodgson and himself.

The defendants put in place elaborate strategies designed to prevent the authorities from uncovering their activities. These included the use of unregistered mobile phones, encoded and encrypted records, safety deposit boxes and the transfer of benefit using cash and payments in kind.

In many cases Dodgson or his employer was advising or connected with the company traded or the corporate transaction.  The FCA relied on five acts of insider dealing to prove this conspiracy.  The trading profits were distributed via large cash payments and payments in kind.

The five acts of dealing related to the following companies:

  • Scottish & Newcastle plc in October 2007;
  • Paragon Group of Companies plc in July 2008;
  • Just Retirement plc in October 2008;
  • Legal & General plc in February 2009; and
  • BSkyB plc in March 2010. 

Mark Steward, the FCA’s Executive Director of Enforcement and Market Oversight, said

"This case involved serious offending over a number of years, conducted in a sophisticated way using deliberate techniques to avoid detection. Dodgson was an approved person who was entrusted by his employer with sensitive and valuable information. He betrayed that trust by exploiting the information for his own benefit, conspiring with Hind to deceive the market."

Oliver Higgins, National Crime Agency Branch Commander, said

"The NCA were able to support the FCA by carrying out surveillance and providing niche capabilities, including the deployment and monitoring of a listening device that recorded key conversations."

For more information, and a link to the FCA’s website, please click here.

Contributor: Suliat Ogunyinka

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

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