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This Week in Regulation

04/08/17

FCA Agenda for Consumer Credit Market

The FCA has published the outcome of its review into High-Cost Short-Term Credit (HCSTC), and set out its future agenda for the Consumer Credit sector.

The FCA will maintain the current price cap on HCSTC. This decision is based on the outcomes of the review which found that consumers in this market have seen substantial benefits as a result of the cap and other regulatory measures.

However, the review did identify other forms of high-cost credit as a potential cause for concern, specifically unarranged overdrafts, rent-to-own home-collected credit and catalogue credit. The FCA is due to consult on action to address these concerns in early 2018.

In addition, the FCA has published proposals to clarify rules around creditworthiness and affordability in the consumer credit market, in particular:

  • The distinction between affordability and credit risk;
  • The factors that should be used when designing affordability checks that are appropriate and proportionate in relation to individual lending decisions;
  • The appropriate role of income and expenditure information;
  • The regulatory expectations around firms’ policies and procedures.

FCA Consulting on FAMR Implementation and Insistent Clients

The FCA has published proposals that aim to support the advice sector and assist with the implementation of recommendations made by the Financial Advice Market Review (FAMR). The proposals form part of the regulator’s wider aim to tackle consumer access issues and foster a market with effective competition and good availability of high quality advice.

Proposals cover:

  • Changes to the handbook to reflect the amendments to the Regulated Activities Order (RAO), which as of January 2018 will stipulate that most authorised firms will be exempt from the regulated activity of ‘advising on investments’ unless specifically providing a personal recommendation;
  • Changes to the Perimeter Guidance Manual (PERG) to give firms more clarity on what amounts to a personal recommendation;
  • New guidance on the treatment of insistent clients;
  • Guidance for firms looking to use automated advice services informed by the experience of the Advice Unit, including the treatment of clients with uncertain investment needs, assisting a client with the automated advice service, the identification of clients with a low risk appetite, and the timing of key documents and information.

The FCA requires responses before 2nd October 2017.

Regulator Publishes Findings from 2017 Survey

The FCA and the FCA Practitioner Panel have recently published the findings from their joint survey of regulated firms, which evaluated the industry’s perceptions of the FCA and its effectiveness as a regulator.

The survey showed largely positive results, particularly in the long-term savings and pensions sector and in the feedback on how the FCA was performing against its three operational objectives.

Areas for improvement include:

  • Ensuring all firms in the consumer credit industry clearly understand the FCA’s remit;
  • Improve transparency around future plans to reduce the impact on firms’ resources;
  • Clear communication on issues around Brexit.

Speech: Competition at the FCA

Mary Starks, Director of Competition and Economics at the FCA, recently delivered a speech on the importance of effective competition within the financial services industry, how the FCA works to strengthen competition and how it strikes the balance between regulation and supporting innovation.

Why have a competition objective?

When competition is working effectively, clients can make informed choices between suppliers. This puts pressure on firms to increase efficiency, drive lower prices and increases innovation and quality. It is beneficial for both consumers and the wider UK economy. The financial crisis exacerbated many existing concerns about the state of competition in retail banking, as it saw the demise of many of the main challengers in the sector such as HBOS, Northern Rock and Bradford and Bingley. As such, the FCA was given a top line objective to promote competition.

How does the FCA advance its competition objective?

Market studies: the FCA continually monitors financial services sectors it oversees for indicators of weak competition and consumer harm, which could include high concentration, barriers to entry and growth, or low levels of consumer engagement. It will then launch an in-depth, evidence based study of a market’s operational effectiveness, based on particular ‘theories of harm’ – a hypothesis of how the competitive process has begun to break down and the potential adverse effects. It will test the hypothesis through a process of gathering evidence, consulting with stakeholders, and proposing remedies to specific issues.

Competition law enforcement: in 2015, the FCA was granted powers that allows it to investigate alleged or suspected breaches of competition law, and currently has two cases open under the Competition Act. Prohibitions in competition law include acting as a cartel by entering into cooperation agreements with firms that should be rivals and abusing a dominant market position in a way that exploits customers and excludes rivals.

How does the FCA promote pro-competition regulation?

By default, the FCA itself acts as a barrier to entry through its Authorisations function and position as a gatekeeper to firms wishing to operate in the UK financial services industry. It is therefore highly important that the FCA operates a gateway function that allows businesses to enter as smoothly as possible, whilst keeping out unscrupulous firms in order to protect consumers and sustain market integrity.

The main way the FCA does this is by promoting innovation through schemes such as the Regulatory Sandbox. After all, innovation is critical to boosting competition as it allows new firms to challenge the status quo and potentially transform the provision of services.

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