FCA’s Responsible Lending Review post MMR– TR 16/4

The FCA have published TR 16/4 to provide a feedback on the key findings of their market-wide thematic review of how firms were applying the new responsible lending rules introduced in April 2014 following the Mortgage Market Review (MMR).

This review looks at the impact of the MMR on the mortgage lenders responsible lending approach and it forms part of their wider programme of mortgages work that also includes the proposals outlined in the feedback statement of the mortgages Call for Input (CFI) on competition in the mortgage sector.

Summary of Key Findings
FCA found that most lenders were using the flexibility afforded by the FCA rules when dealing with their existing mortgage customers who want to make changes to their loan. However, they observed that where firms are prepared to use flexibility in the rules, they were not always doing so early in the process. In particular, there was scope for some firms to be more proactive and consistent in using exceptions to the responsible lending requirements for existing customers. The FCA have advised that whether or not firms choose to apply the exceptions, they (firms) should consider the fair treatment of customers when they (customers) want to make a change to their mortgage. In doing so, firms should ensure that customers do not face unreasonable barriers to changing product.

Key messages for firms

Adequacy of Affordability Assessment:
Firms have recognised the aim of the FCA’s responsible lending rules and have implemented them broadly in line with regulatory expectations.

FCA have further advised that, as firms continue to develop their processes, they must ensure that each aspect of their affordability assessment is adequate and appropriate to the circumstances of the customer, including the following.

• Income needs to be verified accurately in each case
• Where relying on modelled expenditure, firms need to assure themselves that the figures are based on realistic assumptions.
• When considering the effect of expected future interest rate changes, firms must have regard to both market expectations and any prevailing FPC recommendation, and to be able to clearly justify the basis used with reference to both.

Required Improvement in Record keeping for lending decisions:
Firms need to ensure they can demonstrate how they assess affordability in each case.

The review showed that most firms were using the flexibility allowed by the rules when dealing with their own existing mortgage customers. Where it is firms’ policy to use the flexibility, the FCA want some firms to improve their decision-making process for these customers, because they are not always using that flexibility early in the process. Their key observations in this respect are:
• Firms were prepared to apply exceptions to the affordability and interest-only requirements where the rules allow it.
• However, the processes for handling such cases were often time consuming. For example, some firms only consider using this flexibility after a customer has failed an affordability assessment. Firms should consider how they might improve processes and their impact on customers in these circumstances.
• Where a customer is unable to re-mortgage with another lender, the existing lender should not take advantage of the customer’s situation
to treat them any less favourably than it would treat other customers with similar characteristics.

Application of responsible lending standards for older borrowers and the

• The FCA have said that they recognise it is for individual firms to decide whether and to what extent they wish to operate in these markets, but have pointed out that their rules do not prevent lending responsibly to particular customer groups.

Online calculators should provide a more accurate guide to the amount they are likely to be able to lend

• The FCA found some firms online calculators reflected firms’ affordability assessments and gave a fairly accurate estimate.

• Others were based on simple multiples of income which may provide fairly inaccurate estimates.

[FCA’s observations in the paper will serve as useful guidance to both first and second charge lenders who are now governed by the same responsible lending requirements set out in MCOB. We will be happy to assist firms that may need any guidance for developing or reviewing their Responsible Lending policy]

FCA Findings on De-Risking

The FCA have published in May 2016 a webpage setting out the findings from research on the nature and scale of de-risking in the UK. FCA have stated that, in recent years, they have become aware that banks are withdrawing or failing to offer banking facilities to some customers. This is driven by banks’ concerns about the money laundering and terrorist financing risks posed by certain types of clients. This is known as de-risking. There has been a suggestion that this trend is influenced by big fines imposed on banks in recent years by regulators and prosecutors, particularly in the US, for primarily historic weaknesses in anti-money laundering (AML) controls and breaches of financial sanctions.

The FCA engaged the services of John Howell & Co Ltd to research the nature and scale of de-risking by financial services firms. The FCA wanted to understand what banks are doing and why, and to hear experiences from groups affected by banks’ decisions. The report now published shows that de-risking has been the result of a complex set of drivers and there appeared to be no “silver bullet” to solve the issue. The report does note some potential pathways towards mitigating this issue by balancing costs and risks between banks and high-risk sectors, and a better developed understanding of how to measure money laundering and terrorist financing risks risk on a case-by-case basis.

The FCA have said that it is important for banks retain flexibility in setting up appropriate systems and controls to ensure they comply with legislation, as well as in making commercial decisions on whether to provide banking facilities that are consistent with their tolerance of risk. Banks should not use AML as an excuse for closing accounts when they may be closing them for business reasons.

The FCA have sounded a note of warning by saying that banks are subject to competition law, in particular the prohibitions on anti-competitive agreements and abuse of market power contained in the Competition Act 1998, and should be mindful of these obligations when deciding to terminate existing relationships or decline new relationships.

The FCA have also reminded the banks that, from 18 September 2016, the Payment Accounts Regulations 2015 will require most of them to offer a payment account with basic features to consumers legally resident in the EU. In addition, the UK will need to implement the second Payment Services Directive by 12 January 2018. This will require payment institutions to have access to credit institutions’ payment account services on an objective, non-discriminatory and proportionate basis. While banks will still have to comply with the Money Laundering Regulations 2007, these new measures should help some sectors particularly affected by de-risking.

[Though the above report has immediate relevance to banks, there is a message in it for all firms to adopt a reasonable approach towards financial inclusion of customers and customrr-types who are perceived to be ‘high-risk’]

The Consumer Credit (Disclosure of Information) (Amendment) Regulations 2016

The above Regulations, SI 2016/530, have come into force on 17 May 2016. These regulations have made provision in connection with the transfer of consumer credit regulation from the Office of Fair Trading to the Financial Conduct Authority (FCA).

To ease the transition, the FCA have established an interim permissions regime enabling consumer credit firms to continue to operate on the basis of an interim permission pending the grant of full authorisation at which point the firm is given a firm reference number (FRN).

The interim permission number ceases to be valid as soon as a firm is given a FRN, so that firms are currently required to change their systems and stationery immediately as soon as they are given a FRN. The Regulations now permit firms a grace period of 90 days during which either number can be used on the Standard European Consumer Credit Information document or on pre contractual information in relation to non-business overdraft agreements following a firm’s full authorisation by the FCA. The FCA have also published a related memorandum to explain the new requirements clearly to the affected firms.

Consumer Credit Directive (Radio Advertising)

European Commission has published, on 27 May 2016, a clarification with respect to the application of the advertising rules in response to a written question from the European Parliament on the Consumer Credit Directive (CCD) and radio advertising.

The Commission has clarified that Article 4 of the CCD does not impose the provision of the standard information requirements for all advertisements concerning credit agreements, but only for those which indicate an interest rate or any figures relating to the cost of the credit to the consumer. Therefore, the provision of this standard information (specified by the FCA for UK firms in CONC 3.5 and 3.6) is not required if the advertising does not indicate an interest rate or any figures relating to the cost of the credit. In addition, the CCD foresees that Member States can require that the annual percentage rate of charge (APRC) is indicated in advertising concerning credit agreements that does not indicate an interest rate or any figures relating to the cost of the credit, in such cases, the indication required by Member States of the APR in advertisements does not trigger the obligation to provide the standard information. This in our view is in line with the FCA approach set out in CONC 3.

Earlier, an impact assessment was carried out for the Mortgage Credit Directive which contains similar provisions on financial promotion and provision of information to consumers. It confirmed that many advertisements lacked clarity and were therefore detrimental for consumers. The research for the impact assessment had confirmed the support of consumers and many Member States for the obligation to provide standardised information.

Retail Banking Market Investigation: CMA Decision on Remedies

The Competition and Markets Authority (CMA) published in May 2016 its provisional decision on remedies in its market investigation into retail banking. The provisional decision outlines a wide-ranging package of measures to address the issues hindering competition in personal current accounts (PCA) and in banking services for small and medium-sized enterprises (SMEs).

In order to transform the market, the CMA stated that banks need to be made to provide their customers with the right information so that they can easily find out which provider and type of account offers best value for them. The CMA also proposes to promote the development of new online comparison tools and improve the current account switch service to make switching banks more straightforward and give customers more awareness of the process.

The CMA also considered whether to get rid of “free, if in credit” current accounts. It says that such accounts are certainly not free for overdraft users, who represent nearly half of personal customers. The CMA’s proposals include new measures targeted at overdrafts, with a particular focus on users of unarranged overdrafts. In 2014, £1.2 billion of banks’ revenues came from unarranged overdraft charges. The CMA has proposed requiring banks to set a monthly maximum charge for unarranged overdrafts on personal current accounts and to alert people when they are going into unarranged overdraft, and give them time to avoid incurring the charges.

The CMA says that significant technological changes are happening and it wants banks to harness them to empower customers to compare and switch accounts. The CMA is proposing to require banks to move swiftly to introduce an Open API (application programming interface) banking standard. This standard will enable personal and SME customers to safely and securely share their unique transaction history with other banks and trusted third parties. This will enable bank customers to click on an app, for example, and get comparisons tailored to their individual circumstances, directing them to the bank account, which offers them the best deal. The CMA also proposes that banks should be made to regularly prompt their customers to check that they are getting good value from their banking provider. When these prompts direct customers to digital comparison services, which give tailored price-comparison and service quality advice, the foundation has been laid for a major change in the retail banking sector.

The CMA proposes to build a strong package of measures to deliver better banking services to SMEs. Making it easier for SMEs to shop around and open a new current account will reduce business owners’ reliance on their personal bank when choosing a bank for their business. By making the prices and availability of lending products more transparent, the majority of SMEs need not, as is the case now, turn directly to their existing bank for finance without considering other offers. The CMA will publish its final report on the retail banking market investigation by 12 August 2016.

[This is considered as a major shake-up by the CMA to improve retail banking services for customers and is of interest to banks and all customers which include retail clients and SMEs]