Kick off 2019 with a bumper roundup of the latest news in regulation


The Speed Read:

  • New complaints rules introduced to help victims of Authorised Push Payment fraud
  • FCA issues statement on the treatment of Gibraltar post-Brexit
  • Temporary permissions regime registration open for CMCs
  • FCA announces changes to the way banks charge for overdrafts
  • Draft legislation for the Financial Services Contract Regime published
  • Do risk warnings really work?
  • Working to reduce the barriers to entry in the UK banking sector
  • Speech: Why diversity and inclusion matter in financial services
  • New members of FCA and PSR decision-making committees unveiled
  • FCA fines and penalties

New complaints rules introduced to help victims of Authorised Push Payment (APP) fraud

New rules have been published to enable the victims of APP fraud to complain to the payment service provider (PSP) receiving the payment and then refer the complaint to the Financial Ombudsman Service (FOS) if they are unsatisfied with the outcome. These rules will come into force on 31st January 2019.

Currently, complaints around APP fraud can only be made to the sending PSP, which must be handled according to existing complaints handling rules within the FCA Handbook. Following a super complaint by Which?, an FCA and PSR investigation found that receiving PSPs could do more to identify potentially fraudulent payments and prevent accounts from being compromised.

To meet the requirements of the Payment Services Directive 2 (PSD2), the FOS compulsory jurisdiction is being extended to include complaints by the payer of a misdirected payment about the service provided by the recipient PSP.

A steering group has also been established by the PSR to develop a voluntary code of standards for PSPs to prevent and respond to instances of APP fraud, and reimburse victims in certain circumstances.


FCA issues statement on the treatment of Gibraltar post-Brexit

The FCA stated that, in line with the Government’s commitment to enabling Gibraltar firms to access the UK financial markets until 2020, it will maintain its current regulatory position on Gibraltar in its Handbook.

For those able to exercise passport rights, they will be able to continue passporting from exit day without needing to enter the temporary permissions regime or the financial services contract regime. The FSCS will continue to apply to Gibraltar-based firms passporting into the UK, as it does now.

Draft rules and guidance have been published, with the FCA planning to finalise them shortly before the UK leaves the EU.


Temporary permissions regime registrations open for CMCs

The FCA will take over the regulation of claims management companies (CMCs) in April 2019. In order to continue operating after this date, CMCs must be authorised by the FCA.

The window to register for temporary permissions, which will allow CMCs to continue operating until they are granted full FCA authorisation, is now open. Firms have until the end of March to register. Once registered, firms will be required to submit their application for authorisation during one of two application periods between April and the end of July.


FCA announces changes to the way banks charge for overdrafts

The FCA has announced new rules to prevent banks from charging higher prices for unarranged overdrafts, as part of its ongoing intervention into the high-cost credit market.

The FCA’s research found that more than 50% of banks’ unarranged overdraft fees came from 1.5% of customers in 2016 and unarranged overdraft fees can be more than 10 times higher than charges for payday loans. Vulnerable customers and those in more deprived areas of the country are more likely to be negatively impacted by these fees.

To address this, the FCA is proposing the following changes:

  • Mandating that the cost of an overdraft is communicated as a single, simple interest rate, including APR
  • Preventing firms from charging higher rates for unarranged overdrafts
  • Banning fixed fees for borrowing via an overdraft
  • New guidance to reiterate that charges for refused payments should reasonably correspond to the cost of refusing payment
  • Tell banks to do more to identify and support customers showing signs of financial difficulty.


Draft legislation for the Financial Services Contracts Regime published

The government has published draft legislation of the Financial Services Contracts Regime (FSCR), which will allow firms to wind down their UK business if they do not enter the temporary permissions regime if the UK leaves the EU without a withdrawal agreement.

The legislation will allow EEA passporting firms a window in which they can continue servicing existing UK contracts, in order to wind down the business in an orderly fashion. This will apply if the relevant firms fail to notify the FCA that they wish to enter the temporary permissions regime or fail to secure authorisation at the end of the regime. Firms within the FSCR will be required to maintain authorisation in their home state and must notify the FCA if their authorisation is varied or cancelled.

The FSCR will operate for a limited time, depending on the regulated activity. For insurance contracts this will be a maximum of 15 years, with a five year limit on all other contracts. The Treasury can extend this period, if a joint assessment by the FCA and PRA deems it necessary.


Do risk warnings really work?

We encounter risk warnings pointing out obvious dangers on a daily basis, from warnings about hot liquid in takeaway coffee cups to the dangers contained within our medicine cabinets. In this article for FCA Insight, behavioural scientist Laura Smart considers whether these warning could actually be causing more harm than good.

Risk warnings have become an oft-wielded tool for governments and policy makers as they are relatively straightforward to implement and put the onus on the consumer to do what is best for themselves. Research has shown that the indiscriminate and intense use of warnings can lead to ‘warning fatigue’ or impair the consumer’s ability to identify options with the highest levels of risk. The FCA’s own research highlighted that risk warnings on social media posts made consumers less likely to shop around and such posts were less likely to be interacted with.

Ms Smart proposes two hypotheses for this. Either the proliferation of risk warnings makes all options appear unfavourable or they made them all look similar, despite having very different risk profiles.

Recent research around disclosure has found that regulators and policy makers tend to over-estimate the effectiveness of risk warnings. From a psychology perspective, this is understandable as humans tend to avoid information they find boring, particularly if it contradicts an existing belief.

To address this, she proposes that risk warnings should only be used where research supports their effectiveness and they have been tested in different contexts. Nudges and defaults could also be used more effectively to guide to appropriate options. There should also be further research conducted into the long-term educational effects of risk warnings.


Working to reduce the barriers to entry in the banking sector  

The FCA has undertaken an analysis of the effectiveness of the 2013 reforms to the banking authorisations process, designed to reduce barriers to entry, boost competition and benefit consumers by increasing the range of products available.

Overall the evaluation found:

  • The authorisations process is more efficient, with the time taken to assess applications reduced by three months
  • There is a higher rate of entry into the market then before the 2013 reforms, although this is unlikely to be the sole cause of the increase
  • Consumers now have a broader choice of products
  • There has not been substantial change in concentration or competition.

A number of lessons have emerged from this analysis, with the regulator highlighting that ease of entry is an important market feature but that alone is not sufficient to encourage greater competition. It also highlights that it takes time for results to be seen after implementing measures to reduce barriers to entry.


Why diversity and inclusion matter in financial services

Diversity is no longer a ‘nice to have’. It has become a commercial imperative and can have a significant effect on how the FCA views and assesses a firm. In a recent speech, Christopher Woolard, the FCA’s Executive Director of Strategy and Competition, gives his insight into the challenges the industry is still facing.

Diversity within the workforce helps businesses make better decisions as more varied life experiences lead to different viewpoints and richer outcomes. The FCA is trying to encourage greater diversity within its own ranks, with targets for both female representation and ethnic minorities amongst its senior staff.

In the wider industry, things are slowly moving in the right direction, but research shows that the percentage of women at the level below the Board (e.g. senior managers) has only grown by 1.5% over the past decade.

The FCA’s interest in this is not just an issue of social justice, it also forms a part of its assessment of a firm’s culture and can impact the fitness and propriety of senior managers.

The way a firm handles allegations of non-financial misconduct is just as important as the way it deals with financial misconduct. All forms of misconduct are unacceptable. Over the past 12 months, the regulator has seen an increase in the number of reports of discrimination and other related issues, a concerning trend. Embedded attitudes and behaviours take a long time, and consistent action, to change, but the FCA expects all firms to be working towards achieving this.


New members of FCA and PSR decision-making committees unveiled

The FCA and PSR (Payment Systems Regulator) have announced a number of new appointments to three decision-making committees:  the FCA’s Competition Decisions Committee (CDC) and the PSR’s CDC and Enforcement Decisions Committee (EDC).

Lesley Ainsworth has been appointed to the PSR’s EDC and both regulator’s CDCs. With over 30 years’ experience in the legal sector, she is also a panel member of the Competition and Markets Authority (CMA). Joining her is David Thomas, who has 34 years’ experience across regulated sectors including financial services, utilities and aviation. Competition law specialist, Simon Polito has also been appointed to the three committees following four years as Inquiry Chair of the CMA, alongside Tim Tutton, economist and regulatory specialist.

Finally, Alasdair Smith has been appointed to the FCA’s CDC. Currently a member of the Determinations Panel of The Pensions Regulator, a Commissioner at the Scottish Fiscal Commission and Emeritus Professor of Economics at the University of Sussex.


FCA fines and penalties

NED fined and banned for failing to declare conflicts of interest

The FCA has fined a former non-executive director (NED) of two mutual societies £20,000 for failing to act with integrity by not declaring conflicts of interest and banned her from acting as a non-executive director.

During her time as NED, both mutual societies sought advice on investment management services and the individual recommended a company that she was simultaneously seeking consultancy work from. By not declaring this conflict of interest, the NED failed to demonstrate the expected standards of integrity and the conflict could not be addressed by either board.

Bank fined for probate and bereavement process failings

A retail bank has been fined £32.8m for failing to effectively process the accounts and investments of its deceased customers and for failing to disclose these issues to the FCA when it became aware of them.

The bank’s probate and bereavement process contained significant weaknesses:

  • Inability to effectively identify all the funds which formed part of a deceased customer’s estate
  • Lack of communication with its deceased customers’ representatives, leading to cases not being closed
  • Ineffective monitoring of open cases, meaning the bank was unable to determine whether cases had progressed to closure.

Because of these weaknesses, funds were not identified and transferred to those who were entitled to them, depriving them of their use for a considerable amount of time. The bank also took too long to address these failings and provide appropriate redress once they were discovered.

Individual banned from working in the financial services industry

The FCA has banned a former director from working in the financial services industry after he was found to lack honesty and integrity. The individual was found to have funded the purchase of a debt management firm using money from his existing debt management business, which should have been used to pay customers’ creditors at a time when the firm was facing a significant client money shortfall.

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