- Breathing space provisions for consumers facing problem debt
The regulation of consumer credit activity has already been transformed materially through transferring the regulation to the Financial Conduct Authority (FCA). FCA rules have strengthened the responsible lending provisions by mandating consumer credit firms to only lend money to people based on an assessment of their affordability to repay the debt without adversely impacting on their financial situation. FCA regulated firms must also comply with a high-level principle to treat customers fairly.
However, despite the new rules for offering due forbearance to customers facing financial difficulties, the government recognises the importance of putting in place effective safety nets for those who fall into problem debt. This includes ensuring a sufficient supply of debt advice and the availability of appropriate debt solutions.
With a view to addressing the issue of problem debt, the HM Treasury is consulting on introduction of a breathing space and a statutory debt repayment plan designed to provide additional protection to consumers who are most in need, and encourage the earlier uptake of debt advice.
A breathing space period would give someone in serious problem debt the right to legal protections from their creditors for up to six weeks, in order to receive debt advice and enter into a sustainable debt solution. And a statutory debt repayment plan (SDRP) would enable those with unmanageable debts to enter into an agreement to pay their debts to a realistic timeframe. Individuals entering an SDRP would receive legal protections from creditor action during their plan.
The government published a Call for Evidence to gain further insight about how best to design, implement, administer and monitor a breathing space scheme in October 2017. The HMT has now published in June 2018 a summary of the responses received to the Call for Evidence.
The five key points made in the responses are:
- That six weeks of breathing space is helpful, but there must be no gap in protection between the breathing space and an individual’s debt solution
- That eligibility for a breathing space should be flexible, and based on an affordability assessment
- For all debts to be included in the scheme, with certain debts prioritised for repayment
- For there to be flexibility in how the statutory debt repayment plan is administered, and
- For the scheme to maximise support for families with children
Most respondents felt that an individual should continue to engage with debt advice during a breathing space period to maintain eligibility for the protections it offers. However, some respondents noted that some vulnerable individuals could find it challenging to access debt advice during a breathing space, and asked for flexibility on this requirement.
The HMT will outline a policy proposal for consultation later this summer through which we will aim to design a scheme which is accessible, supportive and easy to administrate. The government then intends to lay regulations to establish the scheme during 2019 to be administered by the FCA for all regulated firms.
- Financial Lives Survey
The FCA have published in June 2018 their key findings from the Financial Lives Survey 2017 (FLS). The FLS is the first time the FCA have carried out a large-scale, tracking survey of consumers’ behaviour and experiences when engaging with financial services firms and buying financial products. FCA plan to run this survey every two years as part of their commitment to serving the public interest by improving how financial markets function and how firms conduct their business.
The survey provided a wealth of information, including estimates of the number of UK adults holding any one of over 90 financial products, or combinations of products, and profiles of those who do and do not hold these products. The survey has helped the FCA to better understand and observe the financial behaviour and experiences of people’s everyday lives.
While the survey assesses in detail the demographics and usage of all types of financial products, it finds in relation to unsecured loan products that 75% of UK adults use one or more credit or loan product that falls under FCA regulation. This equates to 38.1 million adults. After subtracting the 29% of UK adults whose only credit products are credit cards, store cards or catalogue credit, or a mix of these, which they pay off in full every month or most months, the survey identifies about 46% of UK adults whom are described as ongoing users of consumer credit, equating to 23.2 million adults.
More adults living in urban areas (81%) than in rural areas (69%) have any credit or loan product. This will partly be due to there being a higher proportion of older adults in rural areas who are less likely to hold these products.
The Survey also shows that overall one in eight (12%) UK adults (or about 6 million people), have no savings and investments at all. A further 37% (or 19.1 million people) have total savings or investments of less than £10,000. This means that in total almost half (49%) of UK adults, equating to over 25.0 million people, either have no savings or investment assets at all or ones less than £10,000 in aggregate value.
The highest proportions of adults with characteristics of potential vulnerability, where results are statistically significant, are found in the North West (55%) and rural areas (54%). There is also a noticeable difference in results between urban (48%) and rural (54%) areas.
One characteristic of potential vulnerability is low financial resilience, and being over-indebted is a component part of low financial resilience. Over-indebtedness is defined as considering as a heavy burden keeping up with domestic bills and credit commitments, or missing any credit commitments and/or any domestic bills in any three or more of the last six months.
The Survey further indicated that just over one in twenty (6%) UK adults have had regulated financial advice in the last 12 months related to investments, saving into a pension or retirement planning. Another quarter (25%) might need it, while half (50%) are less likely to need it.
Note: The Survey covers interesting findings in relation to the consumer behaviour and experiences when using different financial products, which vary a great deal depending on their overall circumstances. Regulated firms may find it useful to read the sections on any particular product type that they are interested in conducting consumer research for developing any specific product or proposition. The link below can be used for ease of access to the relevant publication:
- Crypto-assets and financial crime
Following emergence of evidence about the scope for cryptoassets to be used for criminal purposes, the FCA have written a Dear CEO letter regarding good practice for how regulated firms should handle the financial crime risks posed by these products.
The FCA recognise that there are many non-criminal motives for using crypto-assets. These include using them as high-risk speculative investments or as a means of funding innovative technological development. However, in FCA’s view, this class of product can also be abused because it offers potential anonymity and the ability to move money between countries. The regulator has, therefore, asked firms to take reasonable and proportionate measures to lessen the risk of regulated firm being used for financial crimes which are enabled by cryptocurrency and crypto-assets.
According to the FCA, appropriate steps and actions that firms should consider, subject to the circumstances and services being provided, include:
- Developing staff knowledge and expertise on crypto-assets to help them identify the clients or activities which pose a high risk of financial crime
- Ensuring that existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in, and that they are capable of keeping pace with fast-moving developments
- Engaging with clients to understand the nature of their businesses and the risks they pose
- Carrying out due diligence on key individuals in the client business including consideration of any adverse intelligence
- In relation to clients offering forms of crypto-exchange services, assessing the adequacy of those clients’ own due diligence arrangements, and
- For clients which are involved in ICOs (initial coin offerings), considering the issuer’s investor-base, organisers, the functionality of tokens (including intended use) and the jurisdiction
The FCA have pointed out that the adoption of a risk-based approach does not mean that firms should approach all clients operating in these activities in the same way. Instead, the regulator expects all firms to recognise the higher risks associated with crypto-assets including that the risk associated with different business relationships in a single broad category can vary, and to manage those risks appropriately.
- FCA impose fine and restrictions on Canara Bank for AML failings
The FCA have fined Canara Bank £896,100 and has imposed a restriction, preventing it from accepting deposits from new customers for 5 months for failures in the Bank’s Anti-Money Laundering systems and controls.
Financial services firms are required to maintain robust anti-money laundering (AML) systems and controls, since they are at risk from those seeking to launder the proceeds of crime or to finance terrorism.
However, as observed by the FCA during the period from 26 November 2012 and 29 January 2016, Canara Bank failed to maintain adequate AML systems and failed to take sufficient steps to remedy identified weaknesses, despite having been notified of shortcomings in its AML systems and controls.
Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:
“Financial crime and money–laundering failures are areas of focussed priority for us. Canara Bank was warned its money laundering controls were inadequate and so its failure to remediate them properly is at the more serious end of the range of sanctions.”
Canara Bank operates through a branch network of its parent Indian bank in the UK. The Final Notice highlights the importance of branches of overseas banks and their senior management having sufficient understanding of their regulatory responsibilities and ensuring those obligations are met with appropriate resources.
Specifically, the FCA found that Canara Bank failed to maintain adequate systems and controls to manage the risk of money laundering. These failures were systemic and affected almost all levels of its business and governance structure including: (1) Senior Management; (2) Governance / Oversight; (3) three Lines of Defence; (4) Money laundering reporting function; and (5) AML systems and controls.
As a result, Canara Bank breached Principle 3 (taking reasonable steps to organise its affairs responsibly and effectively, with adequate risk management systems) of the FCA’s Principles for Businesses.
- Tighter regulation for Claims Management Companies
The FCA have published a consultation paper (CP 18/15) in June 2018, detailing the draft rules and guidance in relation to claims management. These draft rules set out the standards that FCA would like the Claims Management Companies (CMCs) regulated by the FCA to meet.
Since 2007 the Government has become increasingly concerned about misconduct in the claims management sector. In 2015 it commissioned the independent Brady Review to examine the nature and extent of the problems in the market and make recommendations to improve the way it was regulated. The Government accepted these recommendations. The Financial Guidance and Claims Act 2018 (FGCA) enables the transfer of regulation of CMCs to the FCA from the existing Claims Management Regulator (CMR).
A number of reports have highlighted harm to customers in this sector, including the Brady Review, the FCA’s Financial Lives Survey and those published by the CMR. These reports helped the FCA develop a view of the sector which they have used to inform their policy decisions. Specifically FCA have identified the following harms in the sector:
- Customers may experience financial loss due to lack of clarity about how much they will pay and the services they will receive
- Poor service (e.g. poor communication on claim status)
- Customers may pay higher prices in other markets due to spurious or fraudulent claims
- Customers may buy inappropriate services, and nuisance can be caused to wider society, by poor
conduct such as aggressive or misleading marketing or sales tactics (eg unsolicited calls and texts)
- Customers may buy inappropriate services due to unauthorised activity
- Customers may suffer financial loss or delays to their claim due to disorderly wind down. The FCA want
CMCs to be trusted providers of high quality, good value services that help customers pursue legitimate
claims for redress, and benefit the public interest.
The FCA’s three main areas of focus to address the identified issues in the sector are:
- Customers: FCA would like customers to be empowered and confident in choosing a value-for-money
(VfM) service which is appropriate for their needs.
- CMCs: FCA also want CMCs to help customers secure redress in a way that complies with the rules and
be authorised so that they meet a common set of standards.
- Regulatory: The FCA would regulate CMCs in a way which prioritises high standards of conduct and
Improves public confidence in claims management services.
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