FCA have introduced new rules for price comparison websites (PCWs) in relation to high cost short term credit (HCSTC) sector from December 2016, following a review of the recommendations by the Competition and Markets Authority (CMA), to improve standards of fairness and transparency with a view to ensuring best outcomes for consumers who use PCWs to buy HCSTC products.
Key provisions introduced by FCA have been set out in a new section CONC 2.5A in the Consumer Credit Sourcebook (CONC) within the FCA Handbook, which include the additional requirements as below:
- Rankings: New rules require credit brokers acting as price comparison websites (PCWs) to rank HCSTC products in ascending order of price according to the Total Amount Payable (TAP) and to display the information in a way that neither the ranking of search results for products nor the prominence of their display is based on the firm’s commercial interests or its commercial relationships.
- Advertising: The provisions require any financial promotion or additional advertising by PCWs for HCSTC to be outside of the ranking table and not interspersed within them, with the search results being clearly distinguishable from any other financial promotion. FCA has also added guidance to clarify that all information displayed on the price comparison website must comply with the requirement to be ‘clear, fair and not misleading’ and the detailed rules in CONC 3 and, in particular, CONC 3.5 through the inclusion of a representative example.
- Website search functionality: New requirement for PCWs comparing HCSTC products to enable consumers to search according to the value and duration of the customer’s desired loan.
- Market coverage: PCWs are also required to list in one place on the website the brand names of lenders they compare.
The main challenge for firms is to ensure implementation by the deadline of December 2016, not considered enough by some firms to make system changes after receiving and reviewing the relevant information from each of the lenders. The ongoing challenge will be for lenders to keep PCWs updated as and when they introduce any changes to the product features to ensure due compliance with the new disclosure requirements.
(Ian Norman and Rajiv Agarwal were interviewed by LexisNexis recently to provide their views on the above changes. The Interview, as published on LexisNexis website, is attached for information of readers)
FCA, as part of their further review of ‘high cost short term credit’ price cap, have now decided to look across high-cost products as a whole to build a full picture of how these are used, whether they cause detriment and, if so, to which consumers. The review is designed to examine whether further policy interventions are needed, and whether these should be more consistent across the market than they are at present. For example, risk warnings and limits on the number of times continuous payment authorities and rollovers currently apply only to HCSTC. It will also enable the FCA to consider the potential consequences of taking action on specific high-cost credit products, particularly on firm behaviour, consumer welfare and access to credit.
The types of high-cost credit included in the FCA review are HCSTC (including payday loans), home-collected credit, catalogue credit, some rent-to-own, pawn-broking, guarantor and logbook loans. Other credit products – such as motor finance, credit cards and overdrafts – may also fall into this category, particularly for less creditworthy customers, depending on how they are designed and used.
FCA have stated that, although differentiated in some respects, the customer base for ‘high-cost’ products shares certain characteristics, including a higher-than-average incidence of vulnerability. In many cases consumers are likely to be using several high-cost products, or switching between them because of difficulties in accessing credit, for emergency borrowing or juggling repayment dates. Different levels of protection may therefore not be fair or transparent.
Based on the findings of the review, FCA will publish their proposals for changes to be finalised through a consultation paper next year.
FCA have released in November 2016 a high-level guide to financial crime for consumer credit firms. The guide is designed to help all consumer credit firms, especially those that are new to FCA regulation. The guide contains:
- Examples of good and poor practice for businesses under the Money Laundering Regulations 2007 (MLRs), relevant to consumer credit businesses.
- Guidance to firms on steps that can be taken to reduce financial crime risk.
The aim of this guide is to enhance understanding of the FCA’s expectations and help firms to assess the adequacy of their financial crime system and controls.
Prevention of financial crime is one of the key areas of FCA’s priorities in terms of their current Business Plan. They will be looking at measures that firms take to monitor, detect and prevent financial crime risk. The FCA’s financial crime rules are set out in SYSC 6.3.6–6.3.10, including the requirements for most consumer credit firms, other than sole practitioners and limited permission firms, to appoint a money laundering reporting officer (MLRO).
The guide covers the following:
- Risk Assessment
- Governance, Policies and Procedures
- Staff Awareness
- Customer Due Diligence
- Data Security
- Suspicious Activity Reporting
- Ongoing Monitoring
- Record Keeping
Some of the key action points highlighted in guide are:
- Requirement to carry out a risk assessment and for reviewing it periodically
- Requirement to clearly document firm’s approach to complying with its regulatory obligations in relation to financial crime and to undertake regular reviews of the relevant policies and procedures
- Senior management to set the right tone and demonstrate leadership on financial crime issues
- Relevant training is in place to ensure staff knowledge is adequate and up to date.
- Clearly allocated responsibly for the oversight of data security.
- Requirement for firms to understand and document the ownership and control structures of customers and their beneficial owners.
- Requirement to obtain sufficient information about the purpose and nature of the customer relationship so firms understand the associated money-laundering risks.
- Firms to document policy for higher-risk customers who should be regularly and more closely monitored
- Firms to proactively follow up gaps in and update Customer Due Diligence (CDD) for higher-risk customers.
- Firms to use monitoring results to review whether CDD remains adequate, and
- Requirement to obtain sample/ copy documents to test their reliability where a firm relies on checks done by a third party.
Prevention of financial crime, besides being integral to the FCA’s statutory objectives, forms part of the key priorities set out in FCA’s business plan this year and they have signalled their intention to adopt a proactive stance in reviewing firms’ systems and controls in this area both pre and post authorisation.
[Lightfoots’ Regulatory Services Division offers assistance in undertaking a ‘gap-analysis’ and carrying out a review of firms’ current policy and processes to ensure compliance with the regulatory guidance including the new requirements for AML controls set to be introduced from June 2017 with implementation of the EU’s 4th Money Laundering Directive provisions in the UK]
The Financial Policy Committee (FPC) has the powers to set a maximum aggregate exposure to high Loan-to-Value (LTV) or Debt-to-Income (DTI) lending if it has financial stability concern related to direct risks to lenders’ balance sheets. For this reason, it has already imposed a DTI cap for regulated first charge mortgage lending for most lenders. Accordingly, mortgage lenders (which extend residential mortgage lending in excess of £100 million per annum) are required to ensure that they do not extend more than 15% of their total number of new residential mortgages at loan to Income ratios at or greater than 4.5. Second charge mortgage contracts are currently exempt from the LTI flow limit rules.
HM Treasury’s has decided that, considering the financial stability risks that buy-to-let (BTL) lending may also pose to financial stability, the FPC should use its powers of direction to the PRA and FCA in relation to BTL lending with a view to addressing these risks and ensuring long-term economic stability. HMT has highlighted the interdependency between an expanding private rental sector, driven in part by demographic and structural trends, and growth in the buy-to-let market, in support of its decision to grant the FPC powers of direction over LTV and Interest Coverage Ratio (ICR) ratios for BTL lending.
It is for the FPC to decide what must be taken into account whenever they take action. The FPC will set out in its forthcoming buy-to-let policy statement as to how it intends to use the power and provide clarity to the market and the wider public on the FPC’s direction in relation to BTL market.
FCA’s guidance consultation GC 16/8, released on 30 November 2016, has proposed some amendments to the application of DTI limit of 4.5 (as above) for regulated mortgage contracts, which include application of the LTI flow limit to mortgage lenders on a four-quarter rolling basis instead of the current monitoring on a quarterly basis. They have confirmed that, currently, second and subsequent charge mortgages remain excluded from the LTI ratio calculation, although the FCA intend to consult on including these loans in the LTI flow limit when second charge loan level data becomes fully available in the course of 2017.
The above regulations made on 7 November 2016, set to come into force on 30 October 2017, prescribe certain requirements for banks for the purposes of the statutory regime applicable to current accounts. These include:
- A requirement on banks and building societies for immigration checks to be carried out on a quarterly basis, from the quarter commencing on 1 January 2018
- The information that the Home Office must provide to a bank or a building society to enable it to comply with its duty to close accounts (under section 40G of the Immigration Act 2014), and
- A requirement on banks and building societies to inform the Home Office of the steps taken to comply with that duty.
FCA do not intend to provide guidance or additional rules with respect to the relevant additional sections of the Act or this order at this time. The FCA will, however, signpost firms to additional sources of information where possible and will work with industry and trade associations to assist banks and building societies in complying with their obligations under the Act.
The FCA have advised, in a letter to the Treasury Select Committee (published in November 2016), the implications for banks and other regulated firms in relation to their exercise of the ‘passporting’ rights in the event of UK leaving the single market.
The letter explains that under the single market ‘passporting’ regime, an entity’s authorisation to do business in one Member State is recognised by others as an authorisation to do business in their territory as well, subject to notifying the ‘home regulator’, without further authorisation. It clarifies that there is no single passport available across all financial services sectors and firms can seek specific permission through notification to provide cross-border financial services (directly cross-border or via a branch) as detailed in the relevant single market legislation. Where such passporting is not available (for example, there is no ‘consumer credit’ passport), firms choose to seek authorisation in the Member State in which they wish to do business or rely on their direct rights under the Treaty on the functioning of the European Union (TFEU) to operate on a cross-border basis from the UK.
If the UK were to leave the single market and no Free Trade Agreement with the EU was in place, its financial services sector would no longer have access to the passport mechanism and would ‘default’ to the access governed by the World Trade Organisation (WTO) protocols. WTO’s existing financial services schedule does not cover the UK as a country outside the EU and, in the absence of ‘passporting’ rights, UK firms would need either to seek access under ‘equivalence’ frameworks to be able to use ‘third country’ passports where available under specific pieces of legislation. The specific process leading to establishment of ‘equivalence’ can take time to work through and a decision on this may also require that the third country can provide an effective reciprocal mechanism for offering access to EU entities. Other alternative for firms would be to seek authorisation from each regulator of the jurisdiction into which they aim to do business.