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Tackling a dysfunctional overdraft market: This week in regulation

13/06/19

The speed read

  • New remedies to address the dysfunctional overdraft market announced
  • Understanding the risk of money laundering in the capital markets
  • Final rules for Buy Now Pay Later products unveiled
  • [Speech] Working towards an innovation culture
  • New Chair of the Financial Ombudsman Service (FOS) appointed

New remedies to address the dysfunctional overdraft market announced

The FCA has announced a host of measures to tackle what it has described as the ‘dysfunctional’ overdraft market. This is the most significant regulatory change the market has seen in a generation.

These measures are designed to ensure overdrafts are simpler, fairer and easier to manage, particularly for more vulnerable consumers who are disproportionately more likely to suffer detriment. The FCA is:

  • Preventing lenders from charging higher prices for unarranged overdrafts than arranged overdrafts
  • Banning all fixed fees for borrowing via an overdraft
  • Requiring overdrafts to be priced using a simple annual interest rate
  • Requiring overdraft adverts to list the price with an APR, to enable consumers to easily compare products
  • Publishing new guidance outlining that refused payment fees must correspond with the actual cost of refusing payments
  • Requiring banks and building societies to take steps to identify consumers in financial difficulty and put strategies in place to reduce repeat overdraft use.

Alongside these measures, the regulator has also published extensive consumer research, which highlights the value consumers place on seeing the cost of borrowing set out in pounds and pence. UK Finance has agreed to take this forward with its members.

The guidance on refused payments will come into effect immediately, with the remedies to address repeat usage taking effect on 18th December and the remainder of the new rules coming into force on 6th April 2020.

 

Understanding the risk of money laundering in the capital markets

The FCA has published a thematic review outlining the money laundering risks and vulnerabilities within the capital markets.

Due to the regulated nature of the capital markets, many of the money laundering risks are mitigated to a certain extent. However, there are certain risks that market participants need to be more aware of, including:

  • The need for each firm in the distribution chain to perform effective customer due diligence
  • Any movement of assets between accounts prior to being sold should be viewed as higher risk and may require enhanced due diligence (EDD)
  • The regulator found limited evidence of effective communication between participants within a chain, which can negatively impact firms’ ability to identify suspicious transactions
  • There was limited evidence that firms had considered whether any parallels exist between the findings of their market abuse surveillance and AML transaction monitoring. The regulator believes a more coordinated approach would be beneficial.

The FCA also found that some firms were not clear on their obligations around submitting Suspicious Activity Reports to the regulator and has highlighted the need for accountability and ownership on money-laundering risks within the first line to improve.

 

Final rules for Buy Now Pay Later products unveiled

New rules are on the horizon for Buy Now Pay Later products, estimated to save consumers around £40-60 million a year.

These products typically have an initial promotional period, in which the consumer doesn’t have to make repayments and doesn’t incur interest. If a consumer doesn’t repay in full during this period they are usually charged interest from the day of purchase, including on the part that has been repaid. This typically occurs in a third of cases, with vulnerable customer disproportionately affected.

The new measures mean:

  • Firms can no longer charge backdated interest on amounts that have been repaid during the promotional period
  • Firms will have to provide consumers with balanced information about promotional periods and offers, including the risks associated with the product
  • Prompts must be introduced to remind consumers that a promotional period is coming to an end.

The enhanced disclosure rules will come into force on 12th September 2019, with the rules around interest being charged on partial repayments coming into effect two months later, on the 12th November 2019.

 

[Speech] Working towards an innovation culture  

Nick Cook, the FCA’s Director of Innovation, spoke at the 6th Central Bank Executive Summit about how technology and innovation is impacting the way it regulates the markets. We bring you the key points of his speech.

Traditionally, regulation was summed up in three verbs – “to forbid, to require and to permit”. However, the landscape has changed and a fourth needs to be added, “to enable change that is consistent with its objectives”. Much of this change is driven by emerging technologies and the growing use of data.

One of the FCA’s aims is to stimulate innovation in specific areas of the market where it can deliver public value, e.g. GreenTech or anti-money laundering & financial crime through its TechSprints and Call for Inputs. Mr Cook believes that these won’t be the only occasions where the FCA is actively involved in stimulating market development. However, due to its competition remit, it will remain vendor-neutral.

The FCA is also working to improve its own internal adoption of technology and innovation by:

  • Increasing the data science expertise within its workforce
  • Testing new tools to improve monitoring and efficiency across the organisation
  • Looking at ways to improve the flow and quality of public and commercial information into the regulator
  • Exploring ways to make part of its Handbook machine readable and executable.

Not all of these can be provided by currently available products, so in-house solutions will need to be developed. In order to attract the talent it needs to achieve this, the FCA is focussing on developing an internal culture of innovation.

 

New Chair of the Financial Ombudsman Service (FOS) appointed

The FCA board, with approval from HM Treasury, has appointed Baroness Zahida Manzoor CBE as the new Chair of the FOS from 2nd August 2019. She takes over this position from Sir Nicholas Montagu, who has served for seven years in this post.

Baroness Manzoor has served as The Legal Services Ombudsman for England and Wales and the Legal Services Complaints Commissioner, as well as being appointed to the House of Lords in 2013.

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