This Week in Regulation


TR17/1: Customer Understanding: Retail Banks and Building Societies

The FCA has recently published its findings from its thematic review of how firms assess customer understanding of transactions administered by banks and building societies.

Everyday, a large variety of financial transactions are undertaken by millions of consumers and processed by banks and building societies and the information provided by banks and building societies is used by consumers to determine whether they undertake particular transactions. If a financial transaction is misunderstood, there is the potential for harm as the transaction has failed to meet the expectations and needs of the customer.

This thematic review builds on the results from the FCA’s recent survey of 17 banks and building societies on how they assess their customers’ understanding of products purchased. The survey was conducted as a recommendation of the Parliamentary Commission Banking Standards (PCBS) as part of banks obligation to show duty of care to customers, especially when designing products. This involves closely listening to consumers’ feedback and effectively dealing with complaints, with the overall aim of treating customers fairly.

From its thematic review, the FCA has identified firms which are developing practices and systems to assess customer understanding of their products throughout the product life cycle. The review also highlights that have a good understanding of the need to ensure customers have a good understanding of the products they purchase, as well as the additional benefits of increased customer loyalty, increased business and fewer complaints.

The review includes examples of developed approaches identified in the survey around culture, pre-sale practices, point-of-sale practices and post-sale practises. These indicate how firms are working towards making sure customers understand transactions that are in accordance to the PCBS recommendations.

The FCA review identified that:

  • Firms are aware of the importance of assessing customer understanding of products and are developing ways to enhance this;
  • A sample of firms have progressed on developing practices to ensure customers are provided with the opportunity to understand the products purchased;
  • A large proportion of firms are now clear on the differences between customer understanding and customer satisfaction;
  • Checking customer understanding is likely to take place post-sale by using developed systems and practices;
  • Online sales were the area least developed in terms of practices, however firms are working towards developing this further.

The FCA encourages firms, when considering how to develop their responses to the PCBS recommendations, to remember these examples and implement action where necessary.


Non-Bank Payment Service Providers to Gain Access to Settlement Accounts at the Bank of England

The FCA has recently announced that non-bank payment service providers will now have access to settlement accounts in its real-time gross settlement (RTGS) system. This will enable customers to access the UK’s sterling payments and allow the Bank of England to promote innovation and competition across the payments sector.

Under the Payment Services Regulations 2009 and Electric Money Regulations 2011 the FCA has a duty and is responsible for the regulation of non-banking payment service providers. The FCA, HM Revenue and Customs and the HM Treasury have been working towards building a framework for non-bank payment providers to access the real-time gross settlement system.

Non-bank payment service providers will have to undergo a supervisory assessment to gain access to the real-time gross settlement system. Applications for the system will firstly be reviewed by the payment schemes and the Bank of England, and referred to the FCA at the relevant point. Once accepted into the system, non-bank providers will be supervised by the FCA, ensuring they are adhering to the appropriate standards.


Use of the Interbank Rate in Online Currency Converter Tools

The FCA has raised the concern around the way in which currency converter tools are used in relation to currency transfer services. Many customers have been misled as there are discrepancies between the rates advertised and the materially inferior rate that customers will likely obtain. Customers are unlikely to be informed about the materially inferior rate until they are at a progressive stage of the customer journey.

Legal and Regulatory Provisions

All firms which undertake currency transfers must abide by the Consumer Protection from Unfair Trading Regulations 2008. Banks also must also conduct currency transfer services under the conduct of business provisions of the PSR’s and abide by the requirements outlined in the FCA handbook.

Payment institutions that conduct currency transfer services are subject to the Payment Services Regulations 2009 (PSR’s), as well as E-money institutions that undertake currency transfer services, as well as being subject to the Electronic Money Regulations 2011 (EMR’s).. The FCA has the authority to place a requirement on a firm’s authorisation/registration under the PSR’s and EMR’s.

Action from the FCA

If firms do not meet the FCA’s expectations, it has the right to take appropriate action. The FCA has previously undertaken a series of investigations involving a number of institutions, where the promotion of rates by payment institutions has mislead consumers by advertising the interbank rate which is inaccessible to them.

Many firms have undertaken various approaches since the investigations to ensure they do not misinform customers of the rate they will obtain if they wish to use the firm’s services. In addition, following liaison with the HM Treasury, the FCA is to extend its rule making powers around payment services which will enable it to apply specific rules which payment institutions and e-money institutions will have to abide by when advertising financial promotions. The FCA plans to make consulting on new rules for financial promotions a priority.


PS17/16 Regulatory Reporting – Retirement Income Data

A policy statement has been issued including final rules requesting providers of pensions, annuities and income drawdown to be published by the FCA. The statement includes its response to feedback from its consultation paper CP16/36 Regulatory reporting: Retirement income data.

Following the introduction of the pension freedoms in April 2015, the FCA has been collecting income data from pension, annuity and income drawdown providers on a quarterly basis using a representative sample. As part of this data collection exercise, the FCA also reviewed the information and the guidance it provides to firms. As a result, the FCA consulted on issuing two new regulatory returns for the collection of retirement income data.

Following this consultation, published in November 2016, the FCA has set out changes to the regulatory returns in order to provide a more complete overview of the market:

  • To complete the retirement income flow data return (RE015) every six months;
  • Annually complete the retirement income stock data and withdrawals (REP016).

This will help the FCA identify emerging risks and target its supervisory resources more effectively and track markets trends in the retirement income market, with a view to eliminate any potential harm to consumers.

The changes applied are relevant to providers of pensions, annuities and income drawdown, as well as stakeholders with an interest in pensions and retirement issues which involve:

  • Individuals and firms providing advice and information on these issues;
  • Financial products distributors, specifically involving retirement income products;
  • Asset Management firms;
  • Trade Bodies representing financial services firms;
  • Charities & organisations interested in the ageing population and financial services.

Firms should ensure they understand these changes around the rules and guidance in its handbook and implement the processes to ensure they meet the new reporting requirements.

  • REP015 should contain data for 1st April 2018 to 30th September 2018 and must be submitted within 45 business days of 30Th September 2018;
  • REP016 should contain data for 1st April to 31st March 2019 and must be submitted within 45 days of 31st March 2019.

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