1. FCA set out regulatory priorities for 2019-20

The FCA published their Business Plan in April 2019 setting out their immediate and medium term regulatory priorities for the industry.

The Business Plan sets out FCA’s main areas of focus for 2019/20. It outlines the priorities and describes their response to the current regulatory issues identified by them. It also covers  the supervisory priorities based on the market studies and the policy work undertaken by the FCA in the recent past. This enables industry and consumers to understand the entirety of FCA’s work and what they can expect from the regulators in the coming year. The FCA regulate 59,000 financial services firms and approve/ supervise 152,000 individuals who play an important role in delivering the desired outcomes to consumers and the markets that their firms serve.

The key priorities and planned activities for this year are set out under the FCA’s 8 focus areas which cut across different financial sectors as well as their priorities for the 7 specific sectors, as set out below.

 

Cross-sector priorities

 

  1. EU withdrawal and supporting a smooth Brexit transition
  2. Firms’ culture and governance
  3. Operational resilience
  4. Financial crime (fraud, scams) & AML
  5. Fair treatment of existing customers
  6. Innovation, data and data ethics
  7. Demographic change
  8. The future of regulation

Sectoral Priorities

 

  1. Investment management
  2. Retail lending (see below for more details)
  3. Pensions and retirement income
  4. Retail investments
  5. Retail banking
  6. General insurance and protection
  7. Wholesale financial markets

The FCA have confirmed that the immediate top priority will remain supporting an orderly transition post-Brexit. The Business Plan outlines four ongoing cross-sector priorities: extension of the SMCR to all firms, fair treatment of firms’ existing customers, further work on operational resilience and combating financial crime and improving anti-money laundering practices. Additionally, future of regulation is a key priority in this year’s Business Plan.

Within the sector priority for ‘retail lending’ the FCA’s main concern remains affordable and responsible lending. They have stated that “Unaffordable lending and borrowing can cause real harm to individuals and society. Vulnerable customers are disproportionately affected, with some business models benefitting from consumers struggling to repay in full and on time”.

The regulatory work during the year within ‘retail lending’ will be focused in the following areas.

  1. Ensuring that consumers are protected in high-cost credit markets

The FCA have confirmed they will ensure effective implementation of their interventions on overdrafts, rent-to-own and other markets covered in their recently concluded High-Cost Credit Review.

They will continue to review areas where they believe there may be continuing harm, such as in the volume of relending and in firms’ affordability checks.

  1. Business models that drive unaffordable lending

In recent years, the FCA have introduced measures to help consumers in markets with a high incidence of poor value products, services or treatment of those in financial difficulty. They remain concerned that the business models of some retail lending products, including some subprime credit and second charge mortgage products, are designed to benefit from consumers not repaying their debts.

  1. Making the mortgage market work better for consumers

The mortgage market is the largest retail lending market in terms of volume of lending, so even relatively isolated misconduct can cause significant harm. The FCA want to understand whether the causes and consequences of some business models exploit consumer biases and cause harm.

The regulator aims to make it easier for consumers to switch mortgage products, particularly consumers who cannot switch easily. They would like to help consumers make more informed choices, both about products and intermediary services, such as mortgage brokers. As consumers’ needs change, they also want to ensure that the regulation supports the market to develop appropriate and innovative products and services. For this, they will continue to implement the remedies set out in the Mortgages Market Study

In a section outlining the ‘outcome indicators’ used for assessing potential consumer harm, the FCA highlighted the Mortgage Lending and Administration Report (MLAR) as a key tool to monitor consumers in arrears. Product sales data also shows how many consumers are on the lenders’ Standard Variable Rate, indicating they could potentially choose a different product and pay less.

They will also review the number of complaints to firms and notifications from firms about second charge lenders to monitor how they are treating these consumers.

  1. FCA’s Video on Treating customers fairly – Consumer Credit Series

The FCA have launched in April 2019 a video and a new webpage as part of their consumer credit series to provide practical guidance on regulatory compliance to firms. FCA want to help firms understand what they are required to do under the rules to meet the regulatory expectations. On this page, the FCA have set out why treating customers fairly should be at the heart of every business.

The FCA have reminded all regulated entities that customers expect financial services and products that meet their needs from firms they can trust. The fair treatment of customers should be at the heart of every business and each firm should be able to demonstrate this.

In this video, the FCA speak about the 6 Consumer Outcomes that firms should strive to achieve.

Treating customers fairly is a regulatory requirement for all regulated firms, no matter their size or the nature of the activities they undertake. The way in which firms ensure that they meet that requirement should, however, be proportionate and relevant to their size and activities.

Firms need to consider the fair treatment of customers throughout the entire customer journey – both before and after entering into a contract. Financial promotions, sales and ongoing service are all covered in the videos but having customers at the heart of the business and ensuring a good culture at every firm is imperative to ensuring that customers are treated fairly.

The FCA have asked firms “It is important to understand your customer and what their needs are – both overall and at an individual customer level – so you can ensure that your business model and strategy take their interests into account and put customers at the heart of what you do”.

Once a strategy is set, firms need to have appropriate systems and controls in place to monitor whether the strategy is successful and whether customers’ needs are being met. This should include adequate record keeping and monitoring to ensure compliance – not only by the firm and its staff but also, where appropriate, third parties acting on behalf of the firms. They have reminded firms to look at SYSC 9.1 for general rules on record keeping as well as other Handbook rules covering the systems and controls a firm should have in place.

Firms’ culture and governance are a priority for the FCA, as once again set out in their Business Plan for 2019-20.  A poor culture is often a driver of poor outcomes for customers and therefore the tone from the top is important in ensuring that a firm treats customers fairly. There is no one size fits all approach to culture but FCA have published a Discussion Paper aimed at helping firms understand what a good culture might look like for them.

  1. FCA warn General Insurance firms to consider value for money to consumers in product design

The FCA are concerned that some General Insurance (GI) firms continue to follow the product design, sales and distribution approaches that can lead to customers purchasing inappropriate products, paying excessive prices or receiving poor service.

FCA have reminded all firms in a report published in April 2019 that the recently implemented Insurance Distribution Directive requires that all firms in the GI distribution chain act in accordance with the best interests of the customer. The Senior Manager and Certification Regime is designed to make Senior Managers accountable for the actions of their firms. The FCA have warned the industry that they will not hesitate to intervene with both firms and their senior managers where they sees a failure to have appropriate regard to the value that firms’ ultimate customers receive.

The FCA have said the GI products are key to giving UK consumers and businesses the security and stability to go about their daily activities with confidence. It is therefore essential that they can access high quality, good value insurance products.

The FCA report acknowledges that while some GI distribution chains involve only one or two parties (e.g. a direct insurer or an insurer and an insurance broker) but others can include multiple parties. The report highlights how the remuneration of all the parties in the distribution chain can result in customers paying significantly higher prices than the production and delivery costs of the products they are buying. In some distribution chains, there can also be a high risk of unsuitable sales, for example, where the distributor is selling insurance alongside a non-financial product like a car, white goods or a holiday.

The FCA had earlier published two reports which highlighted failings in the governance and control of GI distribution chains, including concerns over outsourced arrangements. While they note that some progress has been made since, this report outlines that significant potential for customer harm remains.

The issues identified in the report indicate many firms lack sufficient focus upon customer outcomes and need to address this urgently to mitigate the potential harm to customers.

  1. FCA publish feedback statement on Duty of Care to increase consumer protection

The FCA have published in April 2019, a Feedback Statement summarising the responses received to their Discussion Paper – ‘A duty of care and potential alternative approaches’ – published in July 2018, and setting out next steps.

As a result of the feedback the FCA received and its early analysis, FCA have identified options for changes that are most likely to address potential deficiencies in consumer protection.

These are:

  • Reviewing how the FCA apply the regulatory framework – in particular, the application of the Principles in their authorisations, supervisory and enforcement functions, and how transparently they communicates with firms about this
  • New/revised Principles to strengthen and clarify firms’ duties to consumers, including considering a potential private right of action for Principles breaches

Andrew Bailey, Chief Executive of the FCA said:

‘I’m pleased that so many people shared their views with us as part of this process. Inevitably, there were a range of opinions about what would secure the right level of protection for consumers. Given their long-lasting impact, we now want to weigh-up possible changes, including whether reworking our Principles of Business is the right way forward. I will continue to push this forward as getting the right answer on this question is essential to the FCA delivering on its Mission.’

The Feedback Statement outlines the FCA’s initial proposals to review their Principles of Business and consider changes to the current regulatory approach to increase protection for consumers. This will form an important part of the FCA’s Business Plan priority for 2019/20 to consider the future of regulation following the FCA’s Mission and as the UK leaves the EU.

The discussion paper encouraged debate on whether the FCA’s regulatory framework delivers the necessary level of consumer protection and achieves the right balance between firm and consumer responsibilities and, if not, how this could be addressed – whether by imposing on financial services firms a formal Duty of Care or by other means. The majority of respondents, from across the range of the FCA’s stakeholders, consider that levels of harm to consumers are high and there is a need for change to protect them better.

The FCA will undertake further work to examine these options and will outline next steps in the autumn, seeking detailed views on specific options for change.

 

 

  1. CMA issues Directions to five banks for delay in delivering the Open Banking programme

The Competition & Markets Authority (CMA) has issued in April 2019 Directions to five banks in respect of the Retail Banking Market Investigation Order 2017. These Directions relate to delays in delivering certain aspects of the Open Banking programme, in particular with regard to mobile app functionality. Whilst it is recognised that four of the mandated banks have met the deadline, the Implementation Trustee of OBIE has recommended to the CMA that Directions are issued to those banks who have missed the agreed deadlines, and that enforcement processes are put in place.

Commenting on the CMA Directions, Trustee of the Open Banking Implementation Entity (OBIE) said:

“While we are aware that the Open Banking programme has ambitious and challenging timescales, it is disappointing that some banks have needed more time to deliver some important new Open Banking functionality to their customers.

“However, we are pleased to see that four of the mandated banks have delivered these changes either on or ahead of time – which means that their customers will start to reap the benefits of the enhanced functionality and features that have been introduced.

“While it is still early days, overall it is clear that Open Banking is gaining momentum and traction, with innovative new products and services launching which will ultimately help customers move, manage and make more of their money.”

A revised Implementation Delivery Plan, which takes into account the revised deadlines agreed with the banks, and details key implementation dates on an individual bank basis has been agreed.