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This week in regulation: FCA propose price cap on rent-to-own products

23/11/18

The Speed Read:

  • FCA continues to focus on protecting vulnerable customers with proposed price cap on rent-to-own products
  • FCA publishes research on designing effective current account prompts  
  • Looking to the future of cryptoassets
  • Is AI a silver bullet for financial crime?
  • New Chair of the Sterling Risk Free Reference Rates Working Group announced
  • New requirement to report on Settlement Internalisation to be introduced

FCA continues to focus on protecting vulnerable customers with proposed price cap on rent-to-own products

The FCA has published plans to introduce a price cap in the rent-to-own (RTO) sector to increase protection for some of the most financially vulnerable consumers in the UK.

The regulator’s research highlighted that only a third of this consumer group are in work, the majority have an income of between £12,000 and £18,000 and are likely to have missed a bill payment within the last six months. In certain cases, RTO customers can end up paying four times the average retail price for essential household goods, such as washing machines and cookers.

The proposed cap is designed to control prices by:

  • Capping the total credit amount at 100%
  • Requiring firms to benchmark base prices against retail prices
  • Preventing firms from increasing the price of insurance premiums or arrears charges to recoup lost revenue resulting from the price cap.

The FCA is proposing to implement the cap as follows:

  • From 1st April 2019, for products introduced on and after that date
  • For any prices changes that take place after 1st April 2019, the cap would apply from the date of the change
  • From 1st July 2019 for all other cases.

The regulator estimates that the RTO price cap will save consumers £17.9m a year. The analysis suggests that fewer than 5% of consumers would lose access to RTO services as a result of these proposed changes if all RTO firms continued trading.

The FCA is also introducing final rules around the sale of extended warranties, which it consulted on earlier this year. Firms will be banned from selling extended warranties alongside the RTO agreement (the point-of-sale ban) and have to give two clear days before enabling consumers to purchase an extended warranty as an add-on. RTO firms will also be required to provide consumers with information on the weekly, annual and length of contract cost of the extended warranty as well as how it relates to the manufacturer’s warranty and any theft and accidental damage insurance.

 

FCA publishes research on designing effective current account prompts  

The FCA has published the key findings of its research into designing effective prompts within the current account market. Overall, the regulator found that clear prompts, which contain all the information a customer needs, alongside clear instructions, are likely to be the most effective.

Specifically, the report found the following tactics to be effective:

  • Detailing why a customer is receiving this information can help reduce confusion and increase action
  • Dispelling myths
  • Presenting information about both cost and service quality
  • Telling customers they are missing out
  • Using the customer’s name and personalised information about costs and charges
  • Action-orientated headlines
  • Listing the next steps or informing the customer of how to take action
  • Messages that interrupt customers at appropriate times
  • Graphics, bullet points and use of colour increase engagement.

‘Teaser’ messages were tested as part of this research, but the FCA found that these did not prompt customers to find out more. Participant feedback highlighted that directing customers to download an app or search online for information wasn’t seen as an appropriate route for firms to take.

 

Looking to the future of cryptoassets

Following the publication of the Cryptoassets Taskforce’s report into the regulatory regime surrounding this emerging technology, the FCA’s Christopher Woolard, Executive Director of Strategy and Competition, gave a speech looking at its impact and potential future developments.

2008 will go down as the year Lehman Brothers collapsed, but there was another significant event, the publication of the government’s first Bitcoin whitepaper. The market has changed significantly since then, including the establishment of a joint taskforce between HM Treasury, the FCA and the Bank of England on cryptoassets and distributed ledger technology (DLT).

Currently, the UK is not a major exchange market for cryptoasset trading and their use isn’t very widespread. However, the taskforce is concerned that there is the potential for consumer harm. The risk of an increase in financial crime and poor conduct could also damage market conduct.

To tackle this, the recent report outlined a number of actions that the taskforce is taking forward:

  • The FCA will consult on perimeter guidance to clarify which cryptoassets fall within the existing regulatory regime, and those which don’t. This will be followed by a HM Treasury consultation on whether there is a need to extend the regulatory perimeter.
  • The FCA will also consult on prohibiting the sale of derivatives which reference certain types of cryptoassets to retail investors.
  • The Treasury will consult and legislate on implementing the 5th EU Anti-Money Laundering Directive (5AMLD) and methods to broaden the scope of anti-money laundering legislation further.
  • The Treasury will also undertake further investigation into how exchange tokens could be regulated effectively.

In order to ensure that the cryptoasset market is able to develop and continue to innovate for the benefit of the market and consumers, it is vital that domestic and international regulators understand and take action to mitigate the risks.

 

Is AI a silver bullet for financial crime?

Rob Gruppetta, Head of the FCA’s Financial Crime Department recently delivered a speech that discussed the regulator’s approach to innovation in its efforts to combat financial crime and the findings from its first annual financial crime data return. We bring you the highlights.

Tackling financial crime and making the UK a hostile environment for criminals is one of the FCA’s key priorities. As the tools to facilitate financial crime and money laundering are constantly evolving and using more sophisticated technologies, the FCA is also developing its approach and adopting new technologies where appropriate.

AI is one innovation that could help tackle financial crime, however the technology is still in its infant stages, so until sound principles for AI development are in place, the FCA will continue to tread slowly.

Machine learning is one area of AI that has grown exponentially. Significant advances in algorithms and freely available interfaces enable analysts to apply this technology to a range of challenges in financial services with relative ease. Given the complexity and fast-moving nature of financial crime, machine learning is not a simple solution. However, it can be deployed to analyse historic data to make systemic predictions about the direction of travel. In order to do this, the challenge is to ensure there is access to robust, industry-wide data on instances of financial crime and money laundering.

To address this gap, the FCA introduced the financial crime data return in 2016, which has helped the regulator to prioritise its supervisory activities around those issues and firms that represent the highest risks. By using machine learning algorithms to analyse this data the FCA has been able to detect instances of suspicious activity across markets and venues, which was previously impractical. As a result, the regulator has improved its year-on-year AML risk targeting by over 65%.

 

New Chair of the Sterling Risk Free Reference Rates Working Group announced

The FCA and Bank of England (BoE) have announced that Tushar Morzaria has been appointed Chair of the Sterling Risk Free Reference Rates Working Group, effective from the start of 2019.

Tushar Morzaria takes over the role from Francois Jourdain, who has been chair of the Group since its inception in 2015. Since 2013 he has been Chief Financial Officer at Barclays and a member of the Group board. He previously held roles at JP Morgan, Credit Suisse and SG Warburg.

 

New requirement to report on Settlement Internalisation to be introduced

From July 2019, regulated firms which act as settlement internalisers will be obliged to report this activity to the Bank of England under Article 9 of the EU Central Securities Depositories Regulation (CSDR).

This requirement will apply to firms with regulatory permissions to:

  • Arrange the safeguarding and administration of assets; and
  • Safeguard and administrate assets, without arranging.

The first reports are due by 12th July 2019 and should cover the period from April 2019 through to the end of June 2019.

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