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This week in regulation

05/03/18

The Speed Read

  • FCA issues statement on introducing public register
  • Credit card provider fined and ordered to compensate customers
  • Speech: What lessons can we learn from price regulation?
  • Speech: Examining today's consumer credit landscape
  • FCA introduces new credit card rules
  • Speech: Recent developments in the financial markets


FCA issues statement on introducing a public register

The FCA has issued a statement outlining its intention to consult on proposals to introduce a public register of certified employees and other important individuals, including traders, advisers, non-executive directors and portfolio managers.

The statement comes after industry feedback in response to the implementation of the Senior Managers and Certification Regime (SM&CR), which would see only Senior Managers listed on the public Financial Services Register.

The regulator expects to consult on its proposals by summer 2018, as well as providing an update on its improvements to the usability of the register, following feedback from the Work and Pensions Select Committee.


Credit Card provider fined and ordered to compensate customers

The FCA has fined a credit card lender £1,976,000 for failing to disclose the total cost of a Repayment Option Plan (ROP) add on. Compensation, estimated to be around £168,781,000, will also be paid to affected customers to cover the undisclosed charges they incurred.

The add-on was designed to help consumers manage their account, enabling them to freeze their account, take payment holidays, receive text alerts, and provided a lifeline feature that enabled customers to avoid late fees for one month out of the year.

In 100% of the interactions reviewed by the regulator the full cost and risks of the ROP, including the risk of further indebtedness, were not fully explained. The FCA requested that the firm freeze sales of the add-on in April 2016; in response the firm conducted a customer contact exercise to inform customers of the full cost of the product and provide an opportunity to cancel it.


[Speech] What lessons can we learn from price regulation?

Mary Starks, FCA Director of Competition and Economics recently delivered a speech examining the lessons to be learnt from successful and unsuccessful attempts at price regulation.

For around 1700 year, price regulation has appealed to regulators, but proven difficult to effectively implement. While the FCA doesn’t conduct a formal, annual price review like some other regulators (OFGEM, OFCOM etc.) there have been times when it has intervened in pricing matters in order to promote effective competition and safeguard consumers.

However, fixing prices can have serious, but often unintended consequences and can become entrenched, making it difficult to reverse even when to do so would be in consumers’ interests.

There are three areas where the FCA has introduced price caps in recent years; high-cost short-term credit, workplace pensions and early exit pension charges. In each case, the regulator had different drivers for implementing the cap, including meeting its consumer protection and competition objectives. But it views such measures as the exception, rather than the rule.

The FCA expects that price control will be an option in certain markets in the future, but any decision on this front will need to weigh up the potential outcomes to determine the fairest approach for all.


[Speech] Examining today’s consumer credit landscape

Chief Executive of the FCA, Andrew Bailey, recently delivered a speech on the current consumer credit landscape at the Finance & Leasing Association (FLA).

The industry forms a key part of the FCA’s supervisory strategy and Mr Bailey provided listeners with an overview of the regulator’s priorities in a number of market segments.

Credit Cards

The FCA has recently published new rules to address the findings of its credit card market study, which identified serious issues of indebtedness amongst certain groups of consumers. These rules are designed to reduce levels of indebtedness, provide consumers with greater control over limit increases and make firms take action to support those with persistent debt.

Car Lending

The use of Personal Contract Purchase (PCPs) to buy cars has grown rapidly over the past few years. The FCA is currently looking into whether:

  • Firms are taking the right steps to ensure responsible lending;
  • Conflicts of interest exist within the commission arrangements between dealers and lenders and, if so, whether these are appropriately managed;
  • Customers are provided with clear and transparent information and make informed decisions;
  • Firms are managing the risk that asset valuations could decrease.

The regulator expects to publish an update on this work later this month.

The FCA’s approach to regulating consumer credit

As part of its Mission consultation, the FCA received a number of comments regarding its supervision of the market, including:

  • A lack of clarity in the regulatory approach, particularly the mis-match between the Consumer Credit Act and the rest of the FCA’s powers;
  • Small firms struggle to have effective two-way communication with the regulator, making it difficult to identify and engage with policy change. This potentially provides larger firms, with a dedicated supervisor, a competitive advantage;
  • While the FCA should avoid trying to fix the social issues at play within the market, it could do more to engage with those with responsibility for those areas.

The FCA will publish its approach to supervision in the coming weeks, with a greater focus on business models, culture and governance, as well as moving towards the supervision of firms as groups or portfolios with comparable business models.

Within the consumer credit industry, the FCA is also reviewing the appropriateness of retained services and whether they provide appropriate levels of consumer protection. Mr Bailey notes that this isn’t about increasing or decreasing the level of consumer protection, but ensuring that older models are appropriately adapted for the modern world.


FCA introduces new credit card rules

The FCA has published its final rules to increase protection for consumers in persistent credit card debt or at risk of financial difficulty. These measures follow an in-depth study of the market (CP17-10 and CP17-43) which found that competition wasn’t working effectively for higher-risk consumers. The rules came into force on 1st March 2018, with firms having until 1st September to comply.

The package of remedies introduced as a result of this study include:

  • Shopping around and switching: clear standards for price comparison services, greater access to credit card usage data to help consumers make more accurate comparisons, promote the greater use of quotation searches;
  • Introductory offers: clear notification of when introductory offers come to an end;
  • Credit limits: simpler processes for declining a credit limit increase and offering consumers the ability to make firms obtain explicit consent for each limit increase;
  • Everyday use: provide tools to help consumers monitor the amount they are borrowing and avoid fees and charges, enable customers to request a ‘later than’ payment date;
  • Earlier intervention: Introduce rules to aid the earlier introduction of customers at risk of financial difficulty;
  • Persistent debt: Offer greater help to customers in persistent debt, including showing greater forbearance, restrict offers of credit limit increases to customers in persistent debt for 12 months.

Now, with the publication of the policy statement, this package of measures is now largely in place, with some work continuing on repayment options.


[Speech] Recent developments in the financial markets

Andrew Bailey, Chief Executive of the FCA delivered a speech on recent market developments within the wholesale markets, particularly the introduction of MiFID II and the regulator’s work on LIBOR. We bring you the highlights.

Mr Bailey highlighted that, while there has been recent market volatility, this hasn’t affected the FCA’s ongoing work in the market. The regulator has been reviewing the risks from open-ended structures, following what happened with property funds in the aftermath of the EU referendum and ensuring firms have appropriate governance structures in place when utilising algorithmic trading.

On MiFID II, he highlighted that market systems appeared to cope well with heavy trading activity during the market volatility spike in February and that the expected downturn in OTC equity trading occurred as expected. While there have also been delays in introducing some of the measures, Mr Bailey is certain that these will be implemented with minimum disruption to the markets.

It’s too early to say whether the aims of MiFID II  have been realised, but the necessary changes occurred with minimal disruption to trading.  The regulator now expects firms to be focusing on those areas of implementation yet to be completed and addressing issues as they arise.

Turning his attention to LIBOR, Mr Bailey lauded the fact that soon market participants will be able to choose a reference rate that doesn’t come with an economically significant credit risk, providing borrowers with better access to variable rates. However, this also raises a significant question: what about legacy contract? There will be a number of cases where it’s not practical or economical to change reference rates.

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