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Retail Finance Round-Up - November 2016

Retail Finance Round-Up - November 2016
  • United Kingdom
  • Financial services - Retail finance

09-11-2016

Spotlight

Regulatory updates

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Spotlight: SMCR [to be discussed with David Saunders]

FCA publishes its update on Ageing Population Project

Following the FCA’s Discussion Paper on the ageing population and how financial services meet the needs of older customers, published in February 2016, the FCA has now considered the responses received and has published its update on the ageing population project.

Whilst the FCA was encouraged by examples of firms adapting their products and services to meet the needs of older customers, the FCA felt that more can be done.

The FCA has identified 6 supplementary questions that it will explore as part of this work:

  • What happens as the mind ages, and what does this mean in terms of products, services and distribution?
  • Is there more that can be done to help consumers navigate markets where age limits exist?
  • How can we work with our stakeholder to support those who require third-party access?
  • Can older people and their families access regulated advice for long-term care?
  • How can the FCA build on existing industry initiatives to facilitate mortgage lending to older consumers?
  • How can firms help consumers to better engage with products and services in retail banking?

These workstreams will be delivered alongside existing initiatives which may affect older consumers such as the work on access to financial services and vulnerability. The FCA has also indicated that it will taking forward many of the issues raised in connection with older consumers as part of other ongoing FCA work, including pensions, advice and guidance, mortgages, scams and fraud, and smarter consumer communications.

The FCA intends to  publish its Ageing Population Strategy in the Summer of 2017.

What does this mean for you?

The work that the FCA is currently undertaking with regard to this initiative applies across the whole of the financial services industry and adds to the work that has already been done on access and vulnerability.

The FCA wants to help firms to identify the practical steps they can take to improve the experience of older customer and deliver better customer outcomes, as older customers sometimes struggle to use mainstream banking channels. Given that some of the products have age limits, the FCA is intending to look in more detail at markets that restrict access based on age, and explore whether voluntary initiatives on transparency and signposting may help customers to understand the options open to them at every age.  Furthermore, building on the FCA’s Call for Inputs on mortgages, the FCA is looking at whether there are barriers to innovation in mortgage products that might address issues surrounding older consumers, particularly because they have a different asset profile. .

This initiative overlaps with the ongoing work on pensions, advice and guidance, mortgages, customer vulnerability, access, scams/fraud and smarter consumer communications.  The FCA knows that some of the issues relevant for older consumers have important and useful lessons for other groups, as the same protection or policy may be appropriate to safeguard a wide range of consumers and take this forward, the FCA will work with other parties, such as trade bodies to understand what can be done to improve customer outcomes, particularly for, vulnerable customers.

The FCA’s Ageing Population Strategy will launch in Summer 2017 and to develop this strategy, the FCA will continue to gather input from stakeholders through a combination of bilateral meetings and roundtables on key issues.

FCA publishes occasional paper on price discrimination and cross-subsidy in financial services

The FCA has published its Occasional Paper No. 22 which sets out the economic and policy considerations relevant to price discrimination and cross-subsidy in financial services, highlighting when intervention may or may not be necessary.

The paper includes examples from retail financial markets, based on work recently undertaken by the FCA and other regulators. The paper sets out how economists analyse such pricing practices and how that analysis addresses concerns about fairness, efficiency and distribution. It also examines the link between the pricing practices and competition, recognising that price discrimination and cross-subsidy can be products of a normal and maybe very intense competitive process, but that the same practices can also be an indicator of weak competition in some segments of the market.

What does this mean for you?

From a market perspective, the FCA appears to be particularly concerned where larger firms are selling products below cost and distorting market dynamics, which is proving to be a barrier to competition.  This is particularly noticeable for small challenger firms who are not large enough to absorb fixed costs.

From a consumer perspective, the FCA appears to be concerned that vulnerable consumer groups might be particularly affected by higher pricing, for example, customers with poor credit history may believe their options are limited, not shop around and pay higher prices as a result.  In addition, consumer who are less savvy may inadvertently pay higher prices when compared to more savvy customers.

The discussion feeds into the FCA’s increasing concern in competition, behavioural economics and some of the behavioural drivers behind decision making.

Firms should note that the FCA is not a price regulator, so any action against firms in this area is likely to be conduct related, i.e. whether pricing strategies exclude certain demographics of consumers, including vulnerable customers.  Does it leave them paying more for services due to the greater level of care they require and therefore their associated cost and is this fair?  Firms should also consider whether they have sufficient oversight of any intermediaries selling their products and whether they can get under the bonnet of pricing structures to understand if, where and why price discrimination and cross-subsidy exist. 

FCA publishes its policy and feedback statements on Smarter Consumer Communications

The FCA has published its Policy Statement (PS16/23) and Feedback Statement (FS16/10) in connection with its Smarter Consumer Communications initiative.

The Policy Statement summarises the responses to the October 2015 consultation on removing ineffective disclosure requirements from the FCA Handbook and sets out how the FCA intends to proceed with its proposals.

The FCA intends to make changes to a number of reports and disclosure documents including, among others, the removal of:

  • the requirement for firms operating with profit businesses to produce a consumer friendly principles and practices of financial management (CFPPFM) document. This will take effect from 22 November 2016; and 
  • the templates in MCOB relating to the Initial Disclosure Document (IDD). This will take effect from 1 February 2017.

The Feedback Statement provides feedback to the responses received to the interactive Discussion Paper published in June 2015 on smarter consumer communications. The Feedback Statement addresses various issues including the presentation of terms and conditions, common terminology in the general insurance sector, raising awareness of the Financial Ombudsman Service and cost transparency.

The Feedback Statement also contains the FCA’s intended next steps to support the smarter consumer communications strategy, which include:

  • host a Smarter Consumer Communications event in order to engage further with stakeholders on key issues, including terms and conditions;
  • conduct consumer testing to identify innovative approaches to address concerns raised in its Social Media Guidance;
  • consult on good disclosure guides, including digital disclosure;
  • consult on the changes in disclosure rules, or accompanying guidance where they are identified as a barrier to smarter communications;
  • consider the use and definition of ‘durable medium’ in the Handbook and consult on possible updates;
  • investigate instances where firms provide unhelpful disclosure or risk warning to consumers which reduce effective communication and remove unhelpful and unnecessary provisions of information if necessary; and
  • respond to the issues raised in the finance advice market through FAMR by working with the APFA, the Personal Finance Society and the Financial Ombudsman Service to develop the guidelines for suitability reports.

What does this mean for you?

The Smarter Consumer Communications initiative aims to encourage firms to better communicate with their customers. This initiative is applicable across the financial services industry.

The Feedback Statement discusses various approaches to customer communications such as using videos to explain complex information to consumers, using social media to communicate to a younger demographic and using text alerts to draw customer attention to important communication.  Feedback on the FCA’s proposals in the consultation paper are summarised and the FCA’s addressed firms concerns that consumers find it hard to engage with terms and conditions. The FCA responded by stating that the key challenge for the industry is to incentivise customers to engage with critical information in the terms and conditions, especially in a digital environment. It was also recognised that the presentation of terms and conditions is a complex issue and the FCA welcomes existing efforts made by firms to make the content of terms and conditions more approachable and delivered in innovative ways. However, the FCA believes improvements can be made and to facilitate progress, will be hosting roundtables with firms by early 2017 to start discussions on how improvements can be made.

The concept of a durable medium was also discussed and the FCA acknowledged that it agrees, in principle, that the definition of “durable medium” may be outdated and that the use of the term could benefit from reconsideration.  Therefore, the FCA will undertake a review of the use of the term “durable medium” in the Handbook and will consult on possible changes in early 2017.

In the discussion stage, some consumer organisation and other stakeholders highlighted that consumers do not generally understand how to interpret APRs or that they might be charged a higher APR than the “Representative APR” given in advertising.  The mortgage rules standardise the way in which firms calculate the annual percentage rate of charge for mortgages and other loans secured on land.  The FCA agrees that the interpretation of the APRs is an issue for consumers and that further work might be required to improve consumers’ understanding and enable them to make informed decisions.  The Market Study on competition and the mortgage sector will consider whether the available tools to helps consumers make choices. such as price comparison websites, effectively meet their needs. 

In the Policy Statement, the FCA sets out how it intends to proceed with its proposals.  In relation to the proposed changes, the changes to the CFPPFM will be of interest to insurance companies operating with-profits business as well as firms providing advice on this business. While changes to the IDD will be of interest to home finance firms. Deleting the template for the Services and Costs Document currently set out in COBS will be of interest to all firms that offer advice to retail clients or arrange transactions for them in relation to packaged products.   

FCA publishes findings from its thematic review on packaged bank accounts

The FCA has published its findings from its thematic review (TR16/8) on packaged bank accounts, following its assessment of how firms implemented packaged bank account rules in the Insurance: Conduct of Business Sourcebook (ICOBS) that was introduced in March 2013. The rules set out in ICOBS require firms to establish and record customers’ eligibility to claim on the insurance policies in their packaged bank account and to send customers annual eligibility statements prompting them to review their eligibility.

The assessment covered the period from October 2014 to April 2016, in which there was a significant increase in packaged bank accounts complaints. The review involved mystery shopping, desk-based reviews of data, policies and procedures, firm visits and complaint file reviews across a range of firms.

The FCA's key findings were as follows: 

  • checking eligibility – Despite noted improvements, the FCA found that its mystery shopping indicated that firms are not consistently checking eligibility for every type of insurance in the package and the desk-based review showed that firms’ records lacked the detail to demonstrate that eligibility had been established for all insurances;
  • annual eligibility statements – The FCA found that firms were broadly complying with the FCA rules, however it was noted that firms could give further consideration to how the statements could be designed in a more effective manner. The FCA has confirmed that inclusion of additional information is not permitted under the FCA rules; and
  • complaint handling – Whilst the FCA noted that firms have been focused on making improvements since 2014 with increased engagement from senior management, the FCA observed certain inconsistencies in how complaints were handled and that senior management oversight appeared to be hampered by gaps in management information and data. The FCA also observed some weaknesses in firms’ second line of defence functions (Compliance and Internal Audit) provided to the business.

Going forward, the FCA intends to review a sample of mis-sale complaints only, received by firms between March and May 2016 to test whether the firms have improved the quality of their complaint handling for such products. The FCA also plans to hold a roundtable with firms selling packaged bank accounts, to set expectations regarding how they check and record eligibility. The FCA has also confirmed that as part of its broader work on behavioural economics, the FCA will also consider how any behavioural research on customer communications may be relevant to the design and use of annual eligibility statements.

What does this mean for you?

To ensure that firms meet their regulatory obligations, they should ensure the product which they’re selling is suitable for the buyer, treat customers fairly in their communications and make sure that their sales processes are compliant.

Product suitability formed a significant part of the thematic review, triggered by concerns that consumers were being mis-sold products that didn’t fit their circumstances.  In order to achieve this, firms should adopt an approach where compliance is in-built and governance is an inherent part of “business as usual”. Increasingly, the FCA is highlighting the link between an ethical culture and good regulatory outcomes. Compliance is not something that can be overlaid on to poor practices.

The FCA’s TCF requirements set out clearly what firms are expected to do regarding their communications. Firms should make sure that their communications are appropriate for their audience, displaying any risk warnings prominently so people are clear what they’re signing up to and paying particular attention when communicating with groups that may be vulnerable such as the elderly.

Finally, a firm’s Compliance team can do much to help Sales to work in a way that meets regulatory requirements. Compliance should work with Business Development to understand how sales are made and to ensure the correct processes are followed.

PRA issues policy statement on underwriting standards for buy-to-let mortgage contracts

The Prudential Regulation Authority (PRA) has issued policy statement PS28/16 on underwriting standards for buy-to-let mortgage contracts, providing feedback from the responses to Consultation Paper 11/16 “Underwriting standards for buy-to-let mortgage contacts.” 

The PRA sets out the minimum requirements for buy-to-let mortgages, which, among others, include:

  • Affordability assessments to consider the borrower’s costs including tax liabilities, verified personal income if this is being used to support the borrowing and possible future interest rate increases. This will only apply to new buy-to-let mortgages and not re-mortgaging if there is no associated increase in the borrowing. Firms should implement this from 1 January 2017.
  • A specialist underwriting process should be employed when lending to portfolio landlords (owning four or more mortgaged buy-to-let properties). Firms will have until 30 September 2017 to implement this.
  • Clarification that the provision in Capital Requirements Regulation (CRR), which reduces the capital requirements on loans for small and medium-size businesses by approximately 25%, does not apply where the borrowing is to support buy-to let business.

What does this mean for you?

This policy statement is relevant to all firms regulated by the PRA that undertake buy-to-let lending that is not already subject to FCA regulation. The FCA regulates buy-to-let lending to related persons through their Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) and lending in relation to consumer buy-to-let mortgage contracts through the Mortgage Credit Directive Order 2015. the supervisory statement, SS13/16, which is appendixed to this policy statement does not apply to either of these types of lending. The PRA expects regulated firms to ensure that the standards contained in the SS13/16 are adopted by other firms undertaking buy-to-let lending within their groups.

CMA publishes update on the retail banking market investigation

The Competition and Markets Authority (CMA) has published an update on the retail banking market investigation following its final report on 9 August 2016.  As per the administrative timetable, the CMA has begun an informal consultation on its draft 2017 Retail Banking Order and Undertakings, with the intention of holding a public consultation in November 2016.

The CMA received proposals from the nine providers specified in its final report for the structure, membership, governance and funding arrangements of the Implementation Entity which the CMA requires them to produce as part of its open banking remedy. The Implementation Entity will act as the forum for the discussion and agreement of the application program interface (API), data and security standards which form the open banking remedies. Any comments on the proposals should be submitted by 21 October 2016.

The CMA has also received a proposal from banks, through the BBA for common information and evidence requirements for opening a Business Current Account (BCA), forming part of the small and medium-sized enterprise (SMA) remedy. Additionally, the CMA’s service quality remedy will require banks to collect and publish information on their service quality to enable customers to easily compare providers. The CMA commissioned Research Works to undertake this research and this also includes findings from parallel customer research on how banks should describe the monthly maximum charge (MMC) remedy for unarranged overdrafts. Any comments on the proposal from banks or the Research Works should be submitted by 31 October 2016.

What does this mean for you?

ICO publishes new Privacy Notices Code

The Information Commissioner’s Office (ICO) has published a new code of practice, Privacy Notices, transparency and control, on communicating privacy information to individuals (the Code).

The Code sets out the ICO’s recommended techniques to present privacy information to individuals to encourage good practice within the industry. The ICO has confirmed that firms can use the techniques that are recommended in whatever combination is most effective for them.

The ICO has also informed that firms should be transparent and provide privacy notices to ensure that customers know how their information will be used and that a Privacy Notice alone may not always necessarily amount to fair processing, therefore firms must also have regard to the impact of processing on the individuals concerned.

Whilst the ICO cannot take action against a firm for failing to adopt the provisions contained in the Code, it can, nonetheless, have due regard to the Code when considering whether a firm has breached data protection requirements.

What does this mean for you?

To be confirmed

For more information on the services we offer, see our Retail Finance page.

David Saunders, Partner

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