A compliance round-up from the team at Protiviti
To be or not to be loyal?
Possible exploitation of vulnerable customers in the insurance industry, BREXIT, signs of behavioural improvements in Banking
“This month the spotlight has turned to the insurance industry. The Financial Conduct Authority’s (“the FCA”) interim market study report on home and motor insurance pricing points its finger at “Dual Pricing”, in effect the penalisation of loyalty where existing customers subsidise new customers. The misuse of data analytics to provide behavioural insights for premium setting alongside more traditional commercial and financial assessments have a negative impact on vulnerable customers. Read our UK blog which evaluates the impact of the Regulator’s proposed actions. Should the Regulator impose further price transparency, there will be consequences for an industry already suffering from low investment returns and increased competition.
The FCA’s is also focussing on protecting the UK financial industry from uncertainties arising from the UK ‘s departure from the EU. To minimise disruption and displace complacency, the FCA has provided additional information on its website, set up dedicated phone lines and revised its Temporary Transitional regime.
The UK Finance’s report on the evolution of the senior managers and certification regime (SMCR) in the banking sector suggests improvements in behaviours and processes in that sector. However, the sector may need collectively to consider further guidance on the Duty of Responsibility and what constitutes a breach of a conduct rule in the absence of further information from the regulator. As the implementation date looms for solo regulated firms, these are areas they may want to keep a close eye on. Lastly in the first half of 2019, PPI (Payment Protection Insurance) related complaints once again led to an increase in overall complaints about regulated firms. PPI complaints made up almost half (49 per cent) of all complaints in this period, and again topped the table of the most complained about products. However without PPI, the figures are the lowest volume of complaints firms have received since new reporting rules came into effect in 2016.”
Bernadine Reese, Managing Director, Risk & Compliance
Conduct & Governance
Financial Conduct Authority (“the FCA”) sets out potential remedies to tackle concerns about general insurance pricing
The FCA has published an interim report of its market study into the pricing of home and motor insurance. It found that competition is not working well for all consumers in these markets, especially ‘vulnerable customers’. It sets out concerns about how pricing in these markets leads to consumers who do not switch or negotiate with their provider, thereby paying high prices for their insurance. The FCA estimates that around 6m policyholders pay high prices (including 1 in 3 who are potentially vulnerable) and are not getting a good deal on their insurance. If those customers paying high premiums paid the average premium for their risk they could save around £1.2 billion a year. The FCA's final report is due in Q1 2020 and could have a far-reaching impact on the profitability and business models of the actors in the insurance industry.
Source - FCA
Speech by FCA's Charles Randell on stress testing for human beings
Charles Randell made the point that although the financial system and individual banks can be capitalised to deal with their credit and investment losses in a downturn, behind those losses will be millions of people in real financial distress.
Under the latest hypothetical stress test scenario, unemployment would be expected to rise to 9.2%, house prices would fall by 33%, and stock market would decline by 41%. In this scenario, many people would be unable to pay their existing unsecured debts and they and others would lose access to further credit.
In response, the FCA is changing its rules to make sure that consumers who are up-to-date with their mortgage payments are not unfairly prevented from switching to better deals. The FCA feel that the focus should be maintained on ensuring that better value, well diversified investment products are available and signposted, both in the accumulation and decumulation phase of people’s retirement plans.
Source - FCA
FCA finds MiFID II research unbundling rules working well for investors
The FCA has published its findings on research unbundling rules implemented under MiFID II. MiFID II requires asset managers to explicitly pay for research separately from execution services, and either charge clients transparently or pay for research themselves. Brokers are to price and provide each service separately. Among the 40 asset managers surveyed, the FCA estimates £70m was saved in the first six months of 2018 by investors in UK-managed equity portfolios. The FCA reports that most asset managers have chosen to pay for research from their own revenues instead of using their clients’ funds. And, despite research budgets falling on average by 20%-30%, most asset managers reported they were still receiving the research they needed as well as there being no material reduction in research coverage of small to medium enterprises. The FCA intends to carry out further work in this area in 12 to 24 months' time to assess firms' ongoing compliance with the rules.
Source - FCA
UK Finance report on SM&CR in banking
UK Finance published a report on the evolution and reform of the senior managers and certification regime (SM&CR) in the banking sector. The key finding of the report is that the introduction of the SM&CR has been regarded as a positive development, which has led to improvements in behaviours and processes within firms. However, the report suggests that industry guidance on the Duty of Responsibility and breaches under the Code of Conduct would provide some clarity for firms.
Source - UK Finance
Changes to mortgage reporting requirements
Proposed new reporting requirements have been made which would apply to regulated mortgage lenders and home finance administrators. The FCA plans to publish a data reference guide in October 2019 and to make a testing environment available within GABRIEL (FCA's reporting system) from November 2019
Source - FCA
Speech by FCA's Debbie Gupta on Improving the suitability of financial advice
Debbie Gupta, Director of Life Insurance and Financial Advice Supervision highlighted four broad areas of work the FCA is focusing on with respect to suitability of advice: improving standards, targeting firms that cause the most harm, supporting consumers and helping advisers.
Source - FCA
Updates to the FCA’s directions under the Temporary Transitional Power
The FCA has updated and published draft directions under its Temporary Transitional Power (TTP). The TTP gives the FCA flexibility in applying post-Brexit requirements, allowing firms to transition to a new UK regulatory framework. The main updates relate to the following areas:
- Extending the proposed duration of the directions issued under the TTP from 30 June 2020 to 31 December 2020;
- Updating the provisions relating to prudential requirements to reflect new HM Treasury legislation and FCA exit instruments published since 29 March 2019;
- Revoking certain directions in relation to payment services, provided by EEA credit institutions in the financial services contracts regime; and
- Applying a standstill direction to allow European Economic Area Central Banks and the European Central Bank to continue to rely upon their status as exempt persons until 31 December 2020.
Source - FCA
FCA steps up efforts to ensure firms are getting ready for a no-deal Brexit
FCA wants all firms to be prepared for a no-deal Brexit. It has published extensive information on its Brexit pages and held events, reaching firms and trade organisations around the country. Actions they are taking include:
- Running a series of digital adverts signposting to the FCA Brexit webpages
- Providing a dedicated telephone line (0800 048 4255)
- Putting in place a number of measures to minimise the potential for disruption, for example Temporary Transitional Powers and the Temporary Permissions Regime.
Source - FCA
Speech by FCA's Andrew Bailey on Preparing for Brexit in financial services
Andrew Bailey, Chief Executive of the FCA, provided a detailed update on Brexit planning and preparation at the FCA and in financial services. The largest part of the overall Brexit preparation work is for a “No Deal No Transition” Scenario as this would involve the most significant change. He acknowledged the need not to be complacent despite many firms having stepped up their preparations with good progress being made by authorities in the UK and in the EU to mitigate risks of material disruption.
Source - FCA
The European Insurance and Occupational Pensions Authority (“EIOPA”) report on cyber risk challenges and opportunities
The EIOPA has published a report on the challenges and opportunities for insurers arising from cyber risk.
The report provides an overview of cyber risk as part of the risk profile of insurers from the operational risk perspective as well as the challenges and opportunities for the European cyber insurance market.
EIOPA found that the most common cyber incidents affecting insurers are phishing mail, malware infections, data exfiltration and denial of service attacks. The main consequences for insurers are business interruption and material costs for policyholders and third parties. It found that the industry is aware of potential cyber threats and has incorporated cyber risk explicitly in risk management frameworks.
Source - EIOPA
Bank of England sector resilience exercise
The Bank of England recently carried out an exercise to explore the financial sector’s resilience to a major cyber incident impacting the UK. According to the Prudential Regulatory Authority (“the PRA”), this exercise aimed to ensure that the financial sector was prepared and could respond effectively to a major operational disruption such as a cyber-attack. Major findings of the exercise were:
- There are opportunities to improve the way the sector coordinates at an operational level during incidents that impact the sector;
- Disparity in risk tolerance for suspending services could impact the functioning of the financial sector;
- Recovery of services is impacted by differences in the way data is stored across the financial sector;
- Effective and consistent communications are key to maintaining customer and market confidence.
Source - BOE
European Union (“EU”) to consider new supervisor in fight on money laundering
EU finance ministers are reported to be considering setting up a bloc-wide supervisor on money laundering due to growing banking scandals and crypto currency usage. According to the European Commission, rules are applied less strictly in some of the 28 EU states leaving them to be vulnerable to money laundering scandals.
Source - Reuters and EU
How prepared are markets for the end of Libor?
The Bank of England's internal analysis supports the belief that Libor-linked lending continues to dominate in loan markets. Many new long-dated derivative contracts also continue to reference Libor, with steady growth in the stock of cleared sterling Libor swap contracts maturing beyond 2021. Firms now need to focus on shifting new business from Libor to alternative rates and should put in place a clear transition plan to mitigate their legacy risk from older contracts.
Source - BOE
Digital & Innovation
Use of big data analytics in insurance – The International Association of Insurance Supervisors (“ the IAIS”) publishes its issues paper
The IAIS has published for consultation a draft issues paper on the use of big data analytics in insurance. The paper focuses on issues relating to the use of personal and other data by insurers as a result of digitisation. The granularity of data from multiple sources can lead to more personalised and affordable insurance products. (Refer also above to the article concerning the FCA’s interim report on its market study on pricing in general insurance)
The European Banking Authority (“the EBA”) publishes clarifications to use of Application Programming Interfaces (“API”) under Payment Services Directive 2
The EBA has published clarifications to a fifth set of issues raised by participants of its Working Group on APIs under PSD2. The clarifications respond to issues raised on: the measurement of response times of the dedicated interface, the machine-readability of the EBA register, reliance on electronic IDentification, Authentication and trust Services (“eIDAS”) certificates as well as various issues related to the contingency measures, including the identification of third party providers through ‘guest books', the data that can be accessed and documentation.
BoE implementation update on ISO 20022 migration for UK payments industry
The BoE has published an update on the UK payments industry’s move to ISO 20022, which is a common language standard for world-wide payments data. The BoE’s approach to the implementation of ISO 20022 in CHAPS consists of three phases: the preparatory phase (phase 1), the introductory phase (phase 2) and the enhanced phase (phase 3). The BoE’s website page provides details of the benefits of ISO20022 that includes flexibility; harmonization, detection of fraud and financial crime, resilience, enriched data that will improve decision making, innovation, straight-through-processing.
Source - BOE
“Dear CEO” letter on extra time for Payment Service Providers (PSPs”) to implement strong customer authentication requirements under PSD2
The FCA published a Dear CEO letter on requirements for strong customer authentication (“SCA”) under the PSD2. From 14 September 2019, all PSPs were to apply SCA where a payment service user initiates an electronic payment transaction.
However, in response to concerns about industry readiness to apply SCA to e-commerce transactions, the FCA has decided to delay the enforcement of this requirement to March 2021. This decision is limited to the application of SCA to card-not-present e-commerce transactions, and only applies to PSPs that can demonstrate that they have taken the necessary steps to comply with the plan to deliver SCA by 14 March 2021. The FCA has also set up a webpage which sets out the FCA's expectations about how firms should develop SCA solutions that work for all groups of customers. This means that firms may need to provide several different methods of authentication for customers, including methods that do not rely on mobile phones.
Source - FCA