Do Mortgage Firms Need ‘Debt Counselling’ Permission when Recommending Debt Consolidation?

The FCA have issued a clarification in June 2016 that, in their view, firms offering debt consolidation mortgage advice could also be carrying on credit-related activities (refer to PERG 2 for further guidance). For example, a broker may recommend
that a debtor should consolidate only certain unsecured debts due under credit agreements into a regulated mortgage contract and the exclusion in Article 39J of the RAO might not be available as in line with Q5.1 in PERG17.5 (see link below).

The FCA has said that even implicitly steering the customer to a particular course of action will constitute advice for the purposes of the regulated activity of debt counselling. Firms are responsible for ensuring they have the appropriate permission in place at all times for the regulated activities they carry on.

Firms which require the debt counselling permission can apply for a variation of permission (VoP) through the FCA’s Connect system.

Are You Correctly Allocating the Payments Received from Customers with a ‘Payment Shortfall’?

The Financial Conduct Authority (FCA) published in June 2016 a consultation paper, CP16/16, on proposed changes to its requirements for firms when dealing with customers experiencing a payment shortfall.

The rules set out in the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) chapter 12 are designed to ensure that firms do not impose unfair or excessive charges. In particular, MCOB 12.4.1BR sets out how the FCA expect firms to allocate payments received from customers who are suffering a
payment shortfall. The rule aims to ensure that payments are allocated in a way that minimises the time taken to pay off the arrears and thus reduces the amount paid in related fees and charges.

The FCA has recently reviewed a number of firms’ allocation of payments processes. As a result, they believe it would be helpful to amend the wording of MCOB 12.4.1BR, as below to remove any ambiguity in allocating such payments.

“When a customer has a payment shortfall in respect of a regulated mortgage contract, a firm must ensure that no part of any payment received in respect of that contract is allocated towards paying interest or charges incurred because of a payment shortfall before the balance of the payment shortfall has been cleared”

FCA have also clarified that the definition of payment shortfall was not intended to include outstanding amounts other than missed CMI of capital or interest (or both). They have decided to amend the definition of a payment shortfall as below to ensure that fees, charges, interest (on missed payments) and ancillary items (such as unpaid service charges settled by the lender) are not included within payment shortfall.

“The total sum of periodic instalments of capital or interest (or both) that has become due under the terms of a regulated mortgage contract but which, in breach of those terms, remains unpaid”

The above rule changes clarify the regulatory expectations to help ensure an appropriate level of consumer protection.

Are you Ready for New Complaints Rules and Regulatory Return?

The FCA’s new complaints-handling rules will come into force from 30 June 2016 and firms will have to submit a new complaints return for reporting periods starting from 30 June 2016.

By way of a quick recap, the FCA made the changes to the DISP rules after they found certain issues especially with regards to the following two areas where firms needed to improve the way the customer complaints are dealt with:

• Identifying all complaints, in particular, expressions of dissatisfaction which were considered less serious and were not always being treated as complaints. The FCA stated that all expressions of dissatisfaction which meet their definition of a complaint must be recorded and handled in line with the DISP sourcebook.

• The level of detail of firms’ root cause analysis – the FCA saw examples where root cause analysis was not carried out or conducted at too high level, or where actions taken did not relate to the issues identified. They see root cause analysis as the key to ensuring that firms identify and fix systemic problems in their processes.

The key changes to complaints rules are summarised below.

• Extending the ‘next business day rule’ (for complaints handled less formally by firms) to the close of three business days after the date of receipt
• Reporting all complaints in a new report format (including the informal complaints) via Gabriel
• Sending a ‘summary resolution communication’ for informal complaints, following the resolution by the close of the third business day after receipt

The new regulatory return for complaints has more information requirements than the current return. This has been done by the FCA to give them more detail about complaints and how they are handled by firms to help them (FCA) spot any concerns and support their supervisory priorities. The following link provides the policy statement which gives details of the new requirements including notes for compiling the new complaints return.

[Firms that require any assistance with new procedures, staff training or Gabriel returns may contact]

Modern Slavery Act 2015 – New Conduct and Reporting Obligations

The Modern Slavery Act 2015 (“the Act”) came into force from 29 October 2015, introducing a number of measures to combat slavery and human trafficking. In addition to creating new criminal offences, powers of enforcement and measures to protect victims, it introduces requirements intended to eliminate slavery and trafficking in global supply chains. It gives the UK the same wide-reaching ethical remit as regards slavery and trafficking as the Bribery Act 2010 gives it in the field of bribery and corruption.

The Act is intended to encourage businesses to make greater efforts to identify and combat slavery and trafficking within their own supply chains. It is deliberately intended to make suppliers accountable to consumers, and to use consumer pressure to drive business change. Non-compliance in this area is therefore likely to have adverse consequences for a company’s reputation besides being subject to a legal challenge and its financial consequences.
Section 54 of the Act requires certain businesses to publish a slavery and human trafficking statement on their website setting out the steps they have taken during the financial year to ensure that slavery and human trafficking are not taking place, a) in any part of its supply chains, and b) in any part of its own business, or a statement that the organisation has taken no such steps.

To whom does it apply?

Section 54 applies to businesses (companies and partnerships) which:

  • Are based inside or outside the UK and carrying on business within it;
  • Have a turnover of more than £36million; and
  • Have a financial year ending on or after 31 March 2016 (companies with a financial year ending before that need not comply with the reporting requirement until next year but it may still be worthwhile considering what practical steps can be taken before that to put in next year’s statement).
  • International Reach

    Section 54 applies to any “body corporate (wherever incorporated) which carries on a business, or part of a business, in any part of the United Kingdom”

    This wording is the same as that used in Section 7 of the Bribery Act 2010 (failure of commercial organisations to prevent bribery), so the intention is to give the UK a broad international jurisdiction in this area. However, the guidance notes make it clear that a common sense approach will be applied when determining whether a company has a “demonstrable” business presence in the UK. Similarly, a parent company with a subsidiary in the UK will not automatically be caught, as it is possible for a subsidiary to act entirely independently.

    Firms should consider any specific requirements that apply to them to ensure compliance. The standards of practice will apply to all trades and businesses irrespective of whether the reporting obligations apply or not.

    Financial Advice Working Group Established by FCA

    The Financial Conduct Authority (FCA) announced in June 2016 that it has established a Financial Advice Working Group in response to the recommendations of the Financial Advice Market Review (FAMR) report published in March 2016. The aim of the FAMR has been to explore ways in which government, industry and regulators can take individual and collective steps to stimulate the development of a market to deliver affordable and accessible financial advice and guidance to everyone.

    The Working Group will take forward the three recommendations assigned to it by the FAMR:

    • Recommendation 12: The Working Group will work with employer groups to develop a guide to the top ten ways to support employees’ financial health, and devise a strategy for rolling this out. It will align the timing of this with the FCA and The Pensions Regulator joint factsheet for employers and trustees, which is due to be published in early 2017;
    • Recommendation 17: The Working Group will publish a shortlist of potential new terms to describe “guidance” and “advice” by the third or fourth quarter of 2016;
    • Recommendation 18: The Working Group will lead a task force formed of interested stakeholders to design a set of rules of thumb and nudges with the aim of increasing consumer engagement. The Working Group will consider the crucial life stages at which these nudges and rules of thumb could be delivered and complete initial testing of these by quarter one of 2017.

    The Working Group may commission such research as it considers necessary in order to take forward this work. It should engage regularly with the FCA and HM Treasury and consult these organisations regarding the work it carries out. The Working Group will act as a source of ongoing expertise to the FCA and HM Treasury during implementation of the FAMR recommendations, providing background on current business practices in the financial advice market and on consumer needs.

    The FCA and HM Treasury will also keep the Working Group updated on implementation progress and invite its response on consultations which arise from FAMR’s recommendations. The Working Group will report to the FCA Board and the Economic Secretary on the progress of its work after 12 months.

    FCA Bans Two Individuals for Lack of Integrity

    The FCA announced on 9 June 2016 that they have banned Mark Kelly and Patrick Gray from working in the financial services industry on the basis that they lack integrity. The ban highlights the importance of due disclosures and transparency in firms’ dealings with their customers especially when advising them in relation to financial investments.

    Mr Kelly provided financial services to UK customers under the name PCD Wealth and Pensions Management (PCD) and Mr Gray was one of his advisers. Between 2008 and 2010 PCD arranged for over 350 customers to be advised and invested nearly £24 million of customers’ funds in potentially unsuitable investments. PCD also failed to declare to customers the fees it was receiving from a number of these investments.

    The FCA could not levy a fine on either individual because they were not approved persons at the time of the misconduct. The FCA have stated that further investigations were continuing.