The Financial Conduct Authority’s (FCA) annual Sector Views for 2020, published in February, signals where consumer harm, whether actual or potential, could arise in the sectors the FCA regulates. The FCA identifies particular consumer practices that are of concern and highlights cross-sectoral themes that are having the greatest impact on the financial services industry: the macroeconomic environment, including the potential impact of Brexit and US-China trade tensions; the ongoing impacts of coronavirus; societal changes, such as increased longevity and higher levels of student debt; and finally; the growing importance of environmental and sustainability issues; and developments in technology - the rise of digital services which could present new and expanded risks, including data misuse, cybercrime, mis-selling and ethical issues over data use. Interestingly, the regulator also acknowledges there are opportunities in areas such as Brexit and digital consumer solutions which will no doubt make its role as the “protector” of the consumer even more important.
In other news:
- Both in the UK and in Europe, as EIOPA (European Insurance and Occupational Pensions Authority) launches its European- wide thematic review of consumer protection insurance sold through banks, questions remain on the suitability and the sales channels of insurance products and how market practices could potentially lead to consumer detriment.
- EIOPA also issued guidelines on outsourcing to cloud service providers which all financial firms, not just insurance, should review since key risks are common across all sectors of financial services.
Finally, we also note the end of the FCA’s two-year investigation into Provident’s motor finance firm, Moneybarn, which provides car loans to those with poor credit history resulted in a £2.77m fine for breach of its TCF principles. The theme of protecting the most vulnerable is evident in this action. Such customers are at an increased risk of financial vulnerability as they often have a poor or no credit history or past problems with credit due to periods of unemployment, ill-health or other adverse life events. They are also at greater risk of suffering detriment if they fall into arrears. All firms have an obligation to review practices and processes with weaknesses relating to these customers.
Ultimately, this leads us to the FCA’s 2020/21 business plan expected in Q1.It would come as a surprise to us if TCF does not feature prominently throughout; equally the focus on the motor finance industry is expected to continue. It remains to be seen whether this could be major reputational issue for the financial industry.
This is a mere snapshot of what we are reading. The impacts of non-adherence to regulation is increasingly fraught with complexity. If you would like to discuss any articles included in this newsletter, please do get in contact.
- Bernadine Reese, Managing Director, Risk & Compliance
FCA recognition of LSB's Standards of Lending Practice for business customers
The FCA published a feedback statement (FS20/1) on the recognition of the Lending Standards Board’s (LSB) Standards of Lending Practice for business customers. There will be a three-year period of recognition of the standards by the FCA. This recognition will be withdrawn before the end of this period if the FCA thinks that the standards no longer represent proper standards of market conduct. The FCA webpage on recognised industry codes has been updated. The FCA will not supervise firms or individuals directly against the standards in unregulated markets. However, the FCA expects firms and individuals to consider both the spirit and letter of the standards to ensure that they fully meet any obligations to observe "proper standards of market conduct" for unregulated activities.
Mortgage life and other credit protection insurance sold through banks
EIOPA is launching an EU-wide thematic review looking into consumer protection issues with respect to mortgage life and other credit protection insurance sold through banks.
There will be a roundtable on 5 March 2020 hosted by EIOPA to discuss the following areas:
- Issues and risks with the insurance products within scope
- Business models used to manufacture and distribute these products and underlying conduct risks, addressing also the different corporate arrangements arising between insurers and banks;
- Potential benefits for consumers, insurers and banks;
- Market practices that could lead to consumer detriment; and
- Developments and trends in recent years.
EBA launches 2020 EU-wide stress test exercise
The European Banking Authority (EBA) launched the 2020 EU-wide stress test, the fifth exercise since its establishment, and released the macroeconomic scenarios. The adverse scenario follows for the first time a ‘lower for longer’ narrative, i.e., a recession coupled with low or negative interest rates for a prolonged period. The EU real GDP would decline by 4.3% cumulatively by 2022, resulting in the most severe scenario to date. The EBA expects to publish the results of the exercise by 31 July 2020.
FCA, ICO and FSCS publish joint statement to insolvency practitioners and authorised firms
The "Financial Conduct Authority (FCA), the Information Commissioner’s Office (ICO) and the Financial Services Compensation Scheme (FSCS) issued a joint statement warning insolvency practitioners and FCA-authorised firms to be responsible when dealing with personal data.
They specify that the terms, conditions and clauses within a standard contract are highly unlikely to constitute sufficient legal consent for personal data to be shared with claims management companies (CMCs) to market their services and may not be lawful. By passing on personal data, companies may be failing to meet their obligations under the Data Protection Act 2018 and the General Data Protection Regulation (GDPR). CMCs are required to act honestly, fairly and professionally in line with the best interests of their customers or face regulatory actions
EIOPA Guidelines on outsourcing to cloud service providers for national supervisory authorities
The guidelines provide guidance to insurers on how the outsourcing provisions in the Solvency II Directive should be applied in the case of outsourcing to cloud services providers. The guidelines broadly cover the following areas:
- Criteria to distinguish whether cloud services should be considered within the scope of outsourcing.
- Principles and elements of governance of cloud outsourcing, including documentation requirements and the notification requirement to supervisory authorities.
- Pre-outsourcing analysis, including criteria to assess whether a cloud outsourcing arrangement relates to an operational function or activity that is critical or important, and instructions on how the risk assessment of the cloud outsourcing and due diligence on the cloud service providers should be performed.
- Contractual requirements.
- Management of access and audit rights, security of data and systems, sub-outsourcing of critical or important operational functions or activities, monitoring and oversight of cloud outsourcing, and exit strategies.
- Instructions for national supervisory authorities on the supervision of cloud outsourcing arrangements including, where applicable, at group level.
The guidelines apply from 1 January 2021 to all cloud outsourcing arrangements entered into or amended on or after that date.
FCA tells credit card firms to review their approach to persistent debt customers
The FCA has written to credit card firms telling them to review their approach to borrowers who are stuck in persistent debt (PD36), where they are paying more in interest, fees and charges than they are paying off their balance. The FCA wants to see:
- Firms encouraging customers to speak with them to discuss potential repayment arrangements and for firms to treat them with forbearance and due consideration, if customers cannot afford the options proposed by the firm.
- Firms not to suspend a credit card without having an objectively justifiable reason.
- Firms being operationally ready to deliver their PD36 interventions in line with the FCA's regulatory requirements.
EU issuers need to improve their disclosure of alternative performance measures
The European Securities and Markets Authority (ESMA) has issued a consultation paper on the impact in practice of the transparency obligations established pursuant to MiFIR and, in particular, on the impact of the volume cap mechanism. ESMA has published two consultation papers in this regard.
This consultation paper of transparency regime for equity and equity-like instruments contains proposals aiming at simplifying the structure of the transparency regime while trying to improve the overall trade transparency available to market participants. ESMA will consider the feedback it received to this consultation in Q1/Q2 2020 and expects to publish a final report to the European Commission in July 2020.
Report analysing the transparency regime applicable to non-equity instruments will be published later.
LSB publishes its findings from the thematic review of compliance with standards for business customers in financial difficulty
The Lending Standards Board (LSB) published a report on the findings from a thematic review, carried out in 2019, to understand how registered firms are meeting the LSB's standards for business customers in financial difficulty. The review involved the LSB looking at the key controls six firms have in place to ensure the standards are being followed, and the correct customer outcomes are achieved. The review found that all firms reviewed carried out some work to promote a culture that supports business customers in difficulty. Staff demonstrated a genuine desire to help customers experiencing financial difficulty. There were many examples of good practice but there were also some areas for improvement. These areas include further development in assessing vulnerable business customers, and improving early intervention strategies. The LSB issued individual action plans to all six firms involved in the review and these will be tracked through to completion. It will carry out a follow-up review with each firm where issues were identified. The LSB intends to carry out further thematic work focused on specific elements of the standards.
Source: Lending Standards Board
FCA fines Moneybarn
The FCA has fined car finance provider Moneybarn £2.77m for treating customers unfairly when they fell behind on loan repayments and for being insufficiently clear with customers about the likely financial consequences of failing to keep up with payments. Moneybarn provides motor finance for used vehicles predominantly to "non-standard" customers who typically cannot access finance from mainstream lenders due to their personal circumstances. These customers are at an increased risk of financial vulnerability as they often have either a poor, or no, credit history or past problems with credit due to periods of unemployment, ill-health or other adverse life events. They are also at greater risk of suffering detriment if they fall into arrears.
Speech by EC's Valdis Dombrovskis on the review of the Solvency II Directive
Valdis Dombrovskis, Executive Vice-President delivered a speech at the conference 2020 Solvency II Review: challenges and opportunities. In his speech, Dombrovskis explains that the 2020 review is being carried out to ensure that the Solvency II regime is fit for purpose in all economic environments. He notes the importance of the regime being regularly evaluated and updated, especially given the challenges faced, including climate change and sustainability, digitalisation, new technologies and cybersecurity.
- Plans to assess how insurers integrate climate and environmental risks, and how best to reflect this in the EU rules.
- Will continue to explore ways to remove barriers to insurers wanting to invest in companies that create jobs and growth.
- Is considering the Solvency II long-term guarantee (LGT) measures. In particular, whether these measures still work well in an extended period of low interest rates, and whether they could work better to remove disincentives to long-term investment.
Speech by FCA's Mark Steward on securities regulation in Europe
Mark Steward, Executive Director of Enforcement and Market Oversight delivered a speech on the confluence of EU, UK and US law and practice in their securities markets. Highlights of his speech included :
- Avoid fragmentation in the EU, UK and US markets as it will provide wrongdoers with arbitrage opportunities for misconduct.
- The market cleanliness metric, published in 2019, is currently at its lowest score at around 10% and a new measure has been developed which has produced a lower figure of 6.4%.
- In 2019, the FCA received 9.8 billion MiFID II transaction reports – an increase of 17% on 2018. About 10% of these reports were received from European Economic Area National Competent Authorities (EEA NCAs) via the EU’s Transaction Reporting Exchange Mechanism
- FCA has taken a strategic and integrated approach to the market integrity efforts encompassing enforcement, primary and secondary oversight and surveillance, and wholesale supervision which could explain improvements recorded by the market cleanliness metric and abnormal trading volume ratio.
EBA consults on revised guidelines on money laundering and terrorist financing risk factors
The EBA issued a public consultation on revised money laundering and terrorist financing (ML/TF) risk factors guidelines.
The EBA is proposing key changes, including new guidance on compliance with the provisions on enhanced customer due diligence related to high-risk third countries. New sectoral guidelines have been added on crowdfunding platforms, corporate finance, payment initiation services providers (PISPs) and account information service providers (AISPs) and for firms providing activities of currency exchanges offices.
Considerations for UK firms after the implementation period
The UK left the EU on 31 January 2020 with a withdrawal agreement and entered an implementation period which is due to operate until 31 December 2020. The FCA has updated its Brexit webpage to set out issues for UK firms to consider during and after the transition period.
The webpage included:
- Questions to help firms assess whether their business might be affected at the end of the transition period.
- Information on servicing EEA customers.
- Reminds firms to ensure that they have a clear understanding of any dependencies on EEA outsourcing or third-party service providers.
- Asks banks and payment service providers to take steps now to ensure that they are ready to provide the relevant customer information when making payments after the transition period.
FCA sector views: February 2020
The FCA published its sector views. In addition to looking at individual sectors, the FCA summarises the impact of the macroeconomic environment, Brexit, societal changes and the financial needs of different generations and the impact of technology on the market. These provide the FCA's annual analysis of the changing financial environment and the resulting impact on consumers and market effectiveness. The sector views are based on the data available as at mid-2019. The FCA groups all the markets it regulates into seven sectors, looking at the issues in each: retail banking and payments, retail lending, general insurance and protection, pension savings and retirement income, retail investments, investment management and wholesale financial markets. They enable the FCA to keep its priorities under review and focus its resources effectively for the 2020/21 business plan.
Financial services AI public private forum
The Financial Conduct Authority (FCA) and the Bank of England (BoE) have committed to undertake work to better understand how artificial intelligence (AI) and use of machine learning (ML) developments are driving change in financial markets, including business models, products, services and consumer engagement. The FCA and the BoE are establishing a forum to further constructive dialogue with the public and private sectors to better understand the use and impact of AI/ML, including the potential benefits and constraints to deployment, as well as the risks associated with the application of AI/ML.
The Financial Services AI Public Private Forum (AIPPF) will explore means to support safe adoption of these technologies within financial services and seeks to:
- Share information and understand the practical challenges of using AI and ML within financial services
- Gather views on potential areas where principles, guidance or good practice examples could be useful
- Consider whether ongoing industry input could be useful and what form this could take