FCA tell mortgage lenders to remediate customers impacted by automatic capitalisation

The FCA have published a guidance paper in October 2016, GC 16/6, setting out their concerns about the adverse impact of the practice followed by some mortgage lenders (especially when any rate changes are effected) resulting in automatic capitalisation of the customers’ payment shortfall. They have found that some mortgage firms (lenders and administrators) have automatically included customers’ payment shortfall balances within their contractual monthly instalments (CMI), which are recalculated from time to time, for example when an interest rate changes.

FCA consider this practice to be ‘automatic capitalisation’ of payment shortfalls and a likely breach of their rules in MCOB.

Accordingly to the FCA, because firms have not extinguished (reduced to zero) the payment shortfall, they are collecting the payment shortfall over the remaining term through a higher monthly payment and also continuing to pursue these balances through their collection processes, treating them as immediately payable.

The FCA believe it might be driven by firms’ historical systems programmed to ensure the CMI is sufficient to repay the mortgage by the end of term.

FCA have said that even if inadvertent, the practice lacks transparency for customers and can lead to harm. Therefore they expect firms to take appropriate action to put this right, and make sure the practice stops. The proposed remediation framework set out by the FCA in the GC is one option firms could use to do this.

FCA have developed the remediation framework with input from an industry working group. Use of the framework is not mandatory, but they expect firms to determine a remediation approach to achieve fair outcomes for affected customers. The FCA’s priority is to ensure a proportionate, practical and fair remediation approach, delivered in a timely manner.

The FCA have said that they will monitor the work firms carry out to determine whether customers have suffered as a result of firms’ approach to remediation, reserving the use of formal interventions, such as enforcement action to deal with any unfair firm behaviour.

FCA change their guidance on guarantor loans

The FCA had earlier consulted on their draft guidance (GC16/2) published in February 2016 when they set out their view, in relation to a guarantor loan, that a default notice is required if a lender wishes to request or take payment from a guarantor following non-payment by the borrower, as it amounted to enforcing the security (guarantee). This includes where payment is taken using a continuous payment authority (CPA) or direct debit mandate previously provided by the guarantor. Whilst the consumer organisations supported FCA’s interpretation, trade bodies and firms were largely opposed to the proposed guidance as most considered that their view was not in line with relevant case law, or with a proper interpretation of the CCA. The revised guidance consultation addresses some of the issues raised by firms.

 

In partial modification of their guidance contained in the February paper, the FCA have now clarified that a guarantee is enforced where, following breach of the agreement by the borrower:

  • the lender demands payment by the guarantor, or
  • the lender takes payment from the guarantor by using a CPA or direct debit mandate that was previously provided and without at least appropriate prior notification to the guarantor

 

On the other hand, a guarantee is not enforced in FCA’s view if:

  • payment is made voluntarily by the guarantor, following notification of the borrower’s default, and without any element of compulsion, or
  • the lender requests payment by the guarantor, but making clear that this is not a demand for payment

 

The FCA have stated that, in effect, in order to collect any payment from the guarantor, a lender will have the following three options:

  • issue a default notice in accordance with section 87 (and wait for at least 14 days)
  • obtain the guarantor’s express consent to payment being taken, or
  • pre-notify the guarantor (in writing and with sufficient detail to enable an informed decision) and wait a reasonable period (at least 5 working days), during which the guarantor can cancel the authority

New Matchmaking Service for Small Businesses Looking for Finance

From 1 November 2016, nine of the UK’s biggest banks will pass on the details of small businesses they have rejected for finance to three finance platforms – Funding Xchange, Business Finance Compared and Funding Options.

These platforms will then share these details with alternative finance providers and go on to facilitate a conversation between the business and any provider who expresses an interest in supplying finance to them.

These new rules make it easier for businesses to access finance when they have been turned down by traditional lenders. RBS, Lloyds, HSBC, Barclays, Santander, Clydesdale and Yorkshire Bank, Bank of Ireland, Danske Bank and First Trust Bank, will all have to offer access to these finance platforms, with small business having to give their permission before their details are shared.

Research shows that 71% of businesses seeking finance only ask one lender and, if rejected for finance, many simply give up on investment rather than seek alternative options. Last year 324,000 small and medium sized business sought a loan or overdraft, 26% of these were initially declined by their bank and only 3% of those declined were referred to other sources of help.

Overall Responsibility for Legal Function under Senior Management Regime

FCA have provided further guidance as set out in their discussion paper DP 16/4 as to how the ‘Senior Management Function 18’ applies to the legal function within banks and other firms affected by the Senior Management Regime (SMR). SMR is the new accountability regime that currently (from 7 March 2016) applies mainly to banks and insurers, though the FCA have already proposed to extend the regime to all firms, replacing the current ‘Approved Persons Regime’ (APER) in other regulated entities by 2018. One of the core principles of the SMR is that a Senior Manager must have ‘overall responsibility’ for each area of the firm’s business, ensuring complete coverage with ‘no gaps’.

As part of their implementation of SM&CR, firms have questioned the FCA on how ‘Senior Management Function 18 – Other Overall Responsibilities’ (SMF18) applies to the legal function. According to the FCA, a Senior Manager must have overall responsibility for all areas of the firm (including the management of the legal function) and this may mean appointing the person responsible for legal function as an SMF18 if this responsibility has not already been allocated to another Senior Manager (for example, to the Head of Compliance).

They have clarified that their current rules require that a Senior Manager must have overall responsibility for every activity, business area or management function in a relevant firm. This includes the legal function. As such, whoever has overall responsibility for management of the legal function needs to be captured as an SMF18 if they are not already captured under another SMF (such as the Head of Compliance)”. In the paper, FCA have stated that the relevant legislative and regulatory framework does not contain any requirement that the role of General Counsel be designated a Senior Manager within the SMR.

Through this DP, the FCA have invited further industry feedback/ comments for reviewing whether SMF18 should continue to apply to the management of the legal function.

(Whereas the above DP is currently relevant to all deposit takers and insurance providers, it will be of interest to other firms as well due to the FCA’s proposals to apply SMR to all regulated firms by next year. They may therefore consider, in the meantime, whether they should be allocating the responsibility for managing the legal matters/ affairs of the firm to an appropriate FCA approved person within the allocation of responsibilities/ job descriptions of senior managers)

FCA issue updated Information Sheets for Consumer Credit

The FCA have amended the Information Sheets required to be provided to consumer credit customers in certain circumstances. Essentially, consumer credit lenders are required to include a copy of the relevant information sheet when notifying a consumer that they are in arrears or default, in accordance with the provisions of the Consumer Credit Act 1974 (section 86A). These information sheets are intended to help consumers by telling them about their rights and responsibilities, and where they can get help. Lenders must use the information sheets published by the FCA rather than any previously provided by the Office of Fair Trading.

New versions of the information sheets do not become current until 3 months after they are published on FCA’s website and therefore firms must continue to use the current versions of the information sheets until 17 January 2017.

FCA ban use of restrictive contractual clauses in corporate finance business

The FCA propose to ban the use of restrictive contractual clauses in investment and corporate banking engagement letters and contracts where these clauses cover future corporate finance services carried out from an establishment in the UK. This prohibition would apply to all agreements entered into after the commencement date. It would not apply to existing agreements.

The ban would prohibit the use of two commonly used forms of restriction:

‘Right of first refusal’ clauses- these prevent clients from accepting a third party offer to provide future services unless they have first offered the mandate to the bank or broker on the terms proposed by the third party.

‘Right to act’ clauses- these prevent clients from sourcing future services from third parties, regardless of any potential third party offers.

FCA have excluded from the prohibition future service restrictions in bridging loans. This type of loan is provided on the basis that the client will replace it with longer term financing, typically a bond issue, equity issue or term loan. The bank would be unlikely to provide the bridging loan at all or on the same terms if it did not also know that it would be mandated on the subsequent longer term financing.

The FCA propose to include this restriction in the Conduct of Business Sourcebook (COBS 18.3), which applies to corporate finance businesses.