Are we meeting the needs of older customers?
In February 2016 the FCA had published a discussion paper on the ageing population, which looked specifically at the way in which financial services meet the needs of older consumers. They have gathered views from a range of stakeholders and have decided to undertake focused work in key areas to supplement work already ongoing across the FCA and provided an update in September 2016 to explain our direction of travel at this stage in the project.
The FCA stated that shifts in demography mean the traditional concepts of retirement are changing. Products and services will need to adapt to meet the needs of an ageing population. Demographic change offers a range of opportunities and challenges that both the industry and regulators need to address for the future. Good outcomes for older consumers will come only from collaborative action, and the FCA’s Ageing Population Strategy is intended to help shape and encourage change in financial markets.
The FCA are aware that some products have age limits, some of which they have outlined in more detail in their recent FCA Occasional Paper on access. They intend to look in more detail at markets that restrict access based on age, and explore whether voluntary initiatives on transparency and signposting may help consumers to understand the options are open to them at every age. They have stated that they will also consider whether they need to do more to ensure the markets for these services work well.
Older consumers have a different asset profile to the rest of the UK population, and are currently more likely than younger consumers to be asset-rich and cash-poor, which raises issues about how older consumers can make the most of their overall wealth. Building on the FCA’s Call for Inputs on mortgages, they are looking at whether there are barriers to innovation in mortgage products that might address some of these issues. They have been encouraged to see firms thinking innovatively, with the intention of better serving the needs of older people, evidenced by some recent product developments. They are, however, keen to explore whether there is more to be done to help consumers make the most of their resources for their whole retirement.
UKRN Report on price comparison websites
The UK Regulators Network (UKRN), which included the FCA and the Payment Systems Regulator, published its final report on price comparison websites (PCWs) on 27 September 2016. The report offers a view on the following key points:
- How consumers engage with the market of PCWs;
- What benefits there are for customers and for competition;
- What potential risks could undermine the effectiveness of the comparison sites; and
- What regulatory powers can be applied to address these potential risks now as well as the future challenges that will come from innovations in the market.
In certain circumstances, the FCA directly regulate PCWs operating within financial services. This is where the firm that operates the PCW is undertaking an activity that is defined as a regulated activity under the Financial Service and Markets Act 2000 (Regulated Activities) Order. The Regulated Activities Order includes activity such as credit brokering and insurance mediation. Firms carrying out these regulated activities, unless they are exempt, are required to be authorised by the FCA and regulated by the FCA. They must follow the FCA’s rules and, by virtue of this, the FCA have the power to enforce the Financial Service and Markets Act 2000 (FSMA) and their rules against them as with all other regulated firms.
The Report highlights how PCWs can help consumers navigate potentially complex products and reduce search costs by comparing offers simultaneously in one place. PCWs can also help firms secure new customers, reduce barriers to entry and stimulate stronger competition and innovation between product providers.
It also found that, whilst PCWs can bring benefits to consumers, firms and competition, their effectiveness as a tool for enhancing consumer engagement and competition may be undermined if consumers are unable to navigate the information presented to them, if they do not have confidence in the conduct or safety of PCWs or if they do not shop around amongst PCWs to find the best deal.
Regulators have identified the following concerns which they would seek to address appropriately:
- Rankings may be complex (for example in the credit cards sector, ranking of credit cards and their offers might not always be helpful for consumers)
- Rankings may not be suitable for all customers (PCWs’ rankings are sometimes ordered by ‘popularity’, this may not be helpful for consumers and it could lead to an unfavourable outcome if previous users have made poor choices)
- PCWs may give prominence to suppliers they have a commercial relationship with
- Not all products are presented to consumers because of a lack of commercial relationship
- The method of ranking may affect which deals consumers use.
Dealing with Vulnerable Customers – LSB Guidance
The Lending Standards Board’s (LSB) Standards of Lending Practice have replaced their Lending Code from 1 October 2016. The LSB has published five documents dated September 2016 to help regulated firms with examples of the approach that they could take into consideration to demonstrate compliance with the regulatory provisions including the Standards. These cover a) Product sale, b) Account maintenance and servicing, c) money management, d) financial difficulty and e) consumer vulnerability.
The FCA rules require firms to have a vulnerability strategy, which defines its approach to the identification and treatment of customers considered to be vulnerable (CONC 2.10, 7.2 etc). In LSB’s view, firms should ensure that there is executive level support and accountability for developing a fair approach to dealing with customers in vulnerable circumstances, recognising that the strategy will need to be reviewed, evaluated and strengthened based on what works well and not so well. This should be supported by appropriate management information, governance frameworks and strong reporting lines to the executive to ensure vulnerability continues to remain a corporate priority.
The LSB would encourage firms to consider the development of customer feedback mechanisms which could be used to explore the practical impact of the current structures in place. Consideration could also be given to establishing formal and informal focus groups to gain insight into their customer base and utilising for example, short customer experience questionnaires. They have also advised that firms could establish a set of common ‘principles’ which underpin the design and operation of all products and services, to help ensure the fair and consistent treatment of customers in vulnerable circumstances. These principles may include: a consistent definition of vulnerability across the organisation, methods of support, and guidance to business areas. When considering the impact vulnerability can have on an individual, Firms should have regard to:
- The customer’s state of mind: (across both traditional and where possible, digital channels) and their ability to understand key product features/risks and make informed decisions both in relation to new applications and reviewing the suitability of existing products held; and
- The customer’s finances: focusing on their ability to manage existing commitments, and the impact the situation may have on current and future income and household expenditure, and the customer’s ability to maintain their contractual repayments.
Financially Vulnerable Mortgage Customers – mitigating the impact of any increase in payments?
The FCA have published in September 2016 a thematic review into mortgage lenders’ strategies to mitigate the impact of any potential increase in monthly payments on financially vulnerable customers.
In the report, the FCA asked the firms to:
• consider which borrowers are most likely to be affected by potential rate rises
• deal sensitively with borrowers who may have particular vulnerabilities
• take action to identify customers susceptible to falling into arrears
• have appropriate strategies to treat these customers fairly
Most firms who were asked to take part in the FCA review had considered what characteristics may make a customer more vulnerable to a rise in interest rates and had built their analysis around this – however these characteristics varied from firm to firm. Firms carried out a range of work to identify their most financially vulnerable customers, which included:
• identifying customer segments using credit reference agencies to analyse payment profiles, indebtedness, affordability and behavioural measures
• stress testing across different rate rise scenarios to identify the impact on Contractual Monthly Instalments (CMI)
Some firms excluded certain customer types from their analysis which the FCA believe could result in poorer outcomes for those customers. This included:
• customers currently in arrears – some firms view their existing collections procedures as accommodating such customers
• fixed rate customers, in some cases irrespective of the time until product maturity
The FCA found that most firms produced Management Information as part of their analysis to assess the impact of an interest rate rise on the overall mortgage book but only one firm reviewed this regularly.
Firms can take steps now to be better prepared and do not have to wait until an interest rate rise to develop strategies. By understanding the numbers of customers likely to be impacted by a rate rise and developing strategies, firms could reduce the risk of customers entering arrears or arrears positions worsening.
Aviva fined £8 million by FCA for inadequate oversight of Outsourcing Arrangements
The Financial Conduct Authority (FCA) has today fined Aviva Pension Trustees UK Limited and Aviva Wrap UK Limited (together Aviva) £8,246,800 for failings in its oversight of its outsourced providers in relation to the protection of client assets.
The Client Assets Sourcebook (CASS) rules are there to protect client money and custody assets if a firm becomes insolvent and to ensure money and assets can be returned to clients as quickly as possible.
Mark Steward, Director of Enforcement and Market Oversight at the FCA said:
“Aviva outsourced the administration of client money and external reconciliations in relation to custody assets, but failed to ensure that it had adequate controls and oversight arrangements to effectively control these outsourced activities. With outsourced arrangements firms remain fully responsible for compliance with our CASS rules. Firms are reminded that regulated activities can be delegated but not abdicated.
“Other firms with similar outsourcing arrangements should take this as a warning that there is no excuse for not having robust controls and oversight systems in place to ensure their processes comply with our rules when CASS functions are outsourced.
“This is the first CASS case in relation to oversight failures of outsourcing arrangements and we will continue to take action against firms that fall short of our CASS Rules.”
Payday Firm CFO Lending to Pay £34 Million Redress
CFO Lending trading as Payday First, Flexible First, Money Resolve, Paycfo, Payday Advance and Payday Credit mainly offers customers with high-cost short-term credit loans (payday loans) but also provides guarantor loans or a combination of both.
FCA discovered that CFO lending was treating its customers unfairly and made the firm enter into an agreement with them to provide over £34 million of redress to more than 97,000 customers for unfair practices. The redress consists of £31.9 million written-off customers’ outstanding balances and £2.9 million in cash payments to customers.
A number of serious failings took place which caused detriment for many customers. Failings date back to the launch of CFO Lending in 2009 and include:
• The firm’s systems not showing the correct loan balances for customers, so that some customers ended up repaying more money than they owed
• Misusing customers’ banking information to take payments without permission
• Making excessive use of continuous payment authorities (CPAs) to collect outstanding balances from customers. In many cases, the firm did so where it had reason to believe or suspect that the customer was in financial difficulty
• Failing to treat customers in financial difficulties with due forbearance, including refusing reasonable repayment plans suggested by customers and their advisers
• Sending threatening and misleading letters, texts and emails to customers
• Routinely reporting inaccurate information about customers to credit reference agencies
• Failing to assess the affordability of guarantor loans for customer.
In August 2014, following an investigation by the FCA, the firm agreed to stop contacting customers with outstanding debts while it carried out an independent review of its past business. It also agreed to carry out a redress scheme. In February 2016 the FCA, satisfied with the results of the independent review, authorised the firm with limited permission to collect its existing debts but not to make any new loans.
The changing definition of Financial Advice – is it likely to help your business?
In August 2015, the government launched the Financial Advice Market Review (FAMR) to explore how consumers could access help with their finances more easily.
FAMR examined the regulatory framework governing the provision of financial advice (and guidance) and its effectiveness in ensuring that consumers have access to the help they need in order to make effective decisions about their finances. It acknowledges that consumers face complex financial choices and often seek help. Whilst some consumers need guidance in making their own financial decisions, others would benefit from limited advice on a particular need, such as how to invest their spare income as opposed to those who need full advice covering all of their financial needs.
FAMR suggested that consumers with relatively straightforward financial needs or relatively small amounts to invest would benefit from high quality and detailed guidance services. However, FAMR found that firms were reluctant to offer this potentially less expensive guidance to consumers.
A key reason for this reluctance was uncertainty about what constitutes regulated advice. Firms, consumer groups and employers all highlighted a lack of clarity about the point at which general forms of consumer support become regulated advice. Stakeholders highlighted two areas of ongoing uncertainty:
- the boundary between providing helpful guidance and unintentionally straying into an implicit personal recommendation
- managing the risks of the different regulatory requirements that apply depending on whether a firm is providing factual information on particular investments, or moving beyond that
As a result of this uncertainty, FAMR found that firms are limiting the amount of guidance they are giving consumers for fear of inadvertently straying into the provision of regulated advice without meeting the higher regulatory requirements. There was a strong consensus during FAMR that a clearer boundary between regulated advice and guidance would allow firms to better help consumers. A range of respondents, including the FAMR Expert Advisory Panel, suggested that the uncertainty around the boundary stems from an unclear definition of financial advice.
As a result, it has been decided that the FCA will produce new guidance to support firms offering services that help consumers to make their own investment decisions without a personal recommendation. This will include a series of illustrative case studies highlighting the main considerations firms need to take into account when developing such services and dealing with specific areas of uncertainty identified during the Review.