FCA Fines Lloyds Record Amount For Retail Banking Failings

Firms were warned to expect that the Financial Conduct Authority (FCA) would be a tougher regulator than its predecessor, and in December 2013 Lloyds Banking Group was fined just over £28 million by the FCA, which represents the largest fine ever handed out for retail banking conduct issues.

The FCA found that Lloyds sales staff were heavily incentivised to sell financial products, regardless of whether the customer needed them. The FCA found evidence of bonus payments being made that were as large as 140% of salary, while salespeople could also be demoted or promoted by up to three salary tiers according to their sales performance. Bonuses were regularly paid to staff that had sales judged as unsuitable by Lloyds’ compliance monitoring programme.

This remuneration system was judged to represent a breach of FCA Principle 3, which reads: “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.”

The failings concerned sales made in branches of Lloyds TSB, Halifax and Bank of Scotland.

The fine covers sales of investments, such as stocks & shares ISAs; and insurance, such as critical illness and income protection, made in the period from January 2010 to March 2012, and while this is outside of the period in which Lloyds engaged in widespread mis-selling of payment protection insurance (PPI), some of the problems associated with PPI sales were again evident here. As with PPI, staff could see their salaries alter dramatically according to their sales performance, and large numbers of policies were sold to customers who did not need them. Lloyds has been forced to set aside over £8 billion in compensation for mis-sold PPI.

The FCA reported that one salesperson sold products to himself, his wife and a colleague simply because he feared being demoted.

Tracey McDermott, the FCA’s director of enforcement and financial crime, commented: “We expect firms to put customers first – but firms will never be able to do this if they incentivise their staff to do the opposite.”

This was not the first time that criticisms of this nature had been made of Lloyds. The fine on this occasion was increased by 10% as, back in 2003; Lloyds TSB was fined £1.9 million over the sale of unsuitable investment bonds, where the incentive structure in place for sales staff played a significant role in the mis-selling.

Lloyds will now review sales made between 2010 and 2012 and contact customers to make offers of compensation where appropriate. Customers do not need to wait for the outcome of the review though, and are free to make a complaint to Lloyds if they believe their policy was unsuitable.

Ms McDermott acknowledged that changes had been made at Lloyds by saying: “Both Lloyds TSB and Bank of Scotland have made substantial changes, and the reviews of sales and the redress now being made should right many of these wrongs.” However, the BBC website’s report on the story is now accompanied by a number of comments from readers who say that a pressurised sales environment still exists at Lloyds.


FCA Issues Statement About Licence Rebates

The Financial Conduct Authority (FCA) has issued a statement explaining which firms can expect to receive a rebate on their consumer credit authorisation fees, and outlining some of the processes to be used to pay the rebates. However, there is still no information available about the likely size of the rebate. It is the Government that will make the decisions on the terms of the rebate scheme, while the FCA will simply administer it.

The need for rebates exists because all consumer credit firms are expected to pay the necessary fee to become authorised by the FCA when it takes over as regulator of the credit sector from April 2014. However, firms have already paid for consumer credit licences (CCLs) from the Office of Fair Trading (OFT), raising the prospect of effectively needing to pay twice.

Generally speaking, firms who have paid a licensing and/or maintenance fee to the OFT in the five years prior to April 1 2014 will be eligible for a rebate. However, exceptions to this will include:

  • The 50 leading payday lenders, who were all ordered by the OFT, following their compliance review, to make urgent changes to their practices and procedures. It is the Government’s decision to exclude these firms from the rebate scheme.
  • Any firm for whom the rebate would be less than £10
  • Any firm who has been informed that the OFT is minded to revoke their licence, suspend their licence or refuse their application. In the event that a firm successfully appeals against such a decision, they would become eligible for the rebate once the appeal process has completed, assuming of course they meet the other criteria.

Firms expecting to receive rebates must ensure that they hold a CCL right up until April 1 2014. The only exception to this is firms who have relinquished their licence, by giving notice to the OFT, since April 23 2012. It is actually not necessary to seek FCA authorisation in order to receive a rebate, so some firms who are proposing to exit the industry will also be eligible for rebates.

The FCA has said that a key criterion in calculating the size of the rebate will be the time between April 1 2014 and the next occasion on which the firm would have either renewed its licence or paid the next maintenance payment, had the OFT licensing system remained in force.

Firms affected can expect to receive an email from the FCA about the subject of rebates ‘in the coming weeks’. The regulator will write to firms in 2014 where it does not hold an up to date email address.

Those firms that have completed the interim permission registration process will receive their rebates automatically, via a cheque in the post. Such firms are urged to check that their contact details are correct on the FCA’s registration system.

Firms that have not completed the interim permission process may need to apply via the FCA’s website to receive it. This facility will go live in January 2014. Firms in this situation are asked to carefully read the FCA’s email or letter when it arrives for further information.


Short-Term Lenders’ Adverts Rebuked by ASA

The months of October and November 2013 saw four payday or short-term lenders, including some of the best known names in the industry, censured by the Advertising Standards Authority (ASA).

CashEuroNet UK advertised its PoundsToPocket brand via a television advert involving an alien character. The voiceover began with the words: “Alien life forms are coming to Pounds to Pocket for help with their finances.”  The ASA found that the advert trivialised the subject of taking on debt and failed to explain why the ‘alien’ character needed the loan.

In ruling that the advert should not be broadcast again, the ASA described it as “socially irresponsible”, and commented: “We considered the use of an alien character removed the ad and the process of taking on debt from reality, which could disguise the seriousness and consequences of taking out credit.”

Later in October, Wonga was banned from broadcasting a radio advert, which included a song about the process of borrowing from Wonga, set to the tune of 1950s hit Mr. Sandman. The ASA took issue with some of the lyrics used, including: “You make it easy when the month feels too long”, which may have suggested it was appropriate to use a payday loan to supplement monthly income. They also felt the advert treated the subject of borrowing money with too much levity, by commenting: “We considered that the claim gave the impression that a high-interest short-term loan was not a financial commitment that required a great deal of consideration.”

Next to feel the force of the ASA was Cryton Ltd, which trades as urquickcash.com. The company sent text messages to people who had not consented to receiving them. According to the watchdog’s judgement, the texts also falsely implied the company held confidential financial information about the recipients. The company was banned from sending these texts again, and was ordered not to target people who had not consented to receiving marketing communications, and not to falsely imply they held data on prospective customers.

Lastly, the ASA found fault with the television adverts of Cash on Go, which trades as Peachy.co.uk. The company tried to differentiate itself from payday lenders by suggesting its loans could be repaid over several months. The advert voiceover said: “Payday loan companies expect you to repay your loan in one big payment. However, Peachy.co.uk offers multiple repayments, that’s right, multiple repayments.” According to its Facebook page, Peachy.co.uk allows loans to be repaid over periods of up to five months.

The ASA found that the advert was misleading, saying that many payday lenders now also allow repayment in instalments. It also said that the Annual Percentage Rate was not displayed sufficiently prominently. The advert cannot be broadcast again in its current form.


Debt Charity Hosts Debate On Future Of The Credit Market

At a debate hosted by debt advice charity StepChange and think tank and The Smith Institute, a clear consensus emerged that the credit market needs to change. The Smith Institute published a report in November 2013 entitled ‘Tomorrow’s Borrowers: Personal Debt by 2025’, suggesting that the UK’s debt problem is set to get much worse over the next 12 years. Peter Tutton, head of policy at StepChange and Lord Wilf Stevenson, chairman of StepChange, contributed extensively to the report.

In its press release accompanying the report, the Institute said: “This new report suggests that urgent action is needed to stop the UK sleep walking into a major personal debt crisis.” The Institute called on the Government to increase awareness of the risks associated with high cost credit, and to provide genuine incentives to save.

The report goes on to say that 25% of UK households consider themselves “burdened by debt.”  A series of wide-ranging recommendations follow, such as:

  • Ensuring that welfare reforms do not push people into debt
  • Improving financial literacy
  • Increasing the supply of housing
  • Encouraging employers to pay a living wage
  • Ensuring effective regulation of consumer credit

Stella Creasy MP, the Shadow Minister for Business, Innovation and Skills and a vocal critic of payday lenders, said in the debate: “Between travel costs, living costs and housing costs, it’s not hard to see why so many people have too much month at the end of their money.” Ms Creasy went on to say that the squeeze on living costs trapped people in a debt cycle, where they had to roll over debts or take out new loans to pay off previous ones, a problem that was compounded by the high cost of some forms of credit.

Much mention was made of the need for education on debt and other financial matters, and Barclays was praised for its Money Skills sessions in schools. Catherine McGrath, managing director of Transaction Product and Mass Market at Barclays, said: “The Smith Institute report supports the need for banks and others to continue working with free debt advice.”

Many of the contributors agreed that the introduction of real time credit monitoring was imperative. Ms Creasy added: “Lenders draw up contracts but aren’t complying with the terms they set out, and charge at rates they know their customers can’t afford because they are protected by the claim that they didn’t have access to the necessary information. It is our duty as regulators and citizens to change the system.”

The most obvious change to the credit market in the coming months is the transfer of regulation from the Office of Fair Trading to the Financial Conduct Authority. New requirements for firms will include limits on rollovers and use of continuous payment authority, the need for risk warnings on promotional material and more rigorous affordability checks. The Government has also announced that the total cost of credit will be capped. It remains to be seen what other changes will occur in the credit market in the coming years.


Money Advice Service criticised by Select Committee

The Treasury Select Sub-Committee of the House of Commons has made a number of criticisms of the Money Advice Service (MAS), the body that was set up by the Government to offer general advice on financial matters to the public.

In publishing its report, the Select Sub-Committee said that the MAS was currently “not fit for purpose”, but that it would wait until the conclusions of a Government review, expected in 2015, before deciding whether to recommend that the organisation is scrapped.

The Committee criticised the fact that only a small part of the annual MAS budget of around £80 million is spent on service delivery. It commented that large amounts had been spent on marketing instead. It went on to say that the MAS duplicates many services that are already available in the private and charitable sectors and questioned whether the Financial Conduct Authority (FCA) should be given powers to hold it to account.

It was also remarked on that MAS chief executive Caroline Rookes earns a base salary of £140,000, while strategy and innovation director Mark Fiander and marketing and service delivery director Karen Broughton both receive £160,000 per annum.

Committee chairman George Mudie MP commented: “The MAS is not currently fit for purpose. It is far from clear that it has adopted the right strategy or even that it is performing the correct role.”

He went on to suggest that the future of the MAS itself is in doubt. “In finalising this report, the committee considered carefully whether to recommend that the MAS be scrapped completely. Given that the Treasury had already announced its intention to conduct a review of the MAS, we were persuaded to grant a stay of execution” Mr Mudie added.

Ms Rookes responded by saying: “The MAS is fit for purpose. The committee’s findings are largely based on evidence taken well over a year ago. Since then, we have, with the FCA, appointed a new chairman and chief executive, and changed the direction of the organisation to focus much more on working with partners to help customers. What is more, we have already done much of what the committee recommends.”

The news may be welcomed by many financial advisers, who dislike having to fund the MAS when it could potentially be seen as offering a competing service. But some members of the advisory community have cautioned that the Treasury committee previously recommended a delay in the Retail Distribution Review reforms to the financial advice market, but that the Government disregarded this opinion.

A few days later, the National Audit Office also criticised the MAS. In its document “Helping consumers to manage their money”, it said that the debt advice arm of the MAS was working well, but that the money advice arm was not. It questioned whether the MAS was making sufficient use of its face to face and telephone advice offerings, noting that 97% of customer contact with the MAS is made via the website.


FCA issues video on consumer credit regulation

The Financial Conduct Authority (FCA) has issued a 45-minute video of a webinar about the forthcoming changes to consumer credit regulation. The panel comprised Nick Court (Consumer Credit Communications), Lesley Titcomb (Chief Operating Officer) and David Philpott (Consumer Credit Policy).

Mr Court began by saying that the FCA had held a number of roadshows to gauge opinion on its proposals for regulating the industry. The consultation regarding this closed in early December 2013.

Ms Titcomb said the FCA aimed to protect market integrity and provide consumer protection. She then said that maintaining these after the consumer credit regulation switchover in April 2013 would be a major challenge; given it will treble the number of firms regulated by the FCA. She urged firms to put customers first at all stages, from the initial affordability assessment to the collection of the debt.

She went on to explain that much of the FCA rulebook for consumer credit will be similar to the existing Office of Fair Trading (OFT) rules, but that additional requirements would be necessary in areas such as debt management and payday lending in order to protect customers. Next, she explained that key individuals from credit firms will require individual authorisation, and that the method of regulation may be different, even if many of the rules are not.

In the question and answer session, Ms Titcomb said that debt management and payday lending were amongst a series of activities that had been designated as higher risk by the Government, and that firms operating in these sectors should expect closer regulatory scrutiny. These firms will be the only ones who will need to have an approved person acting as compliance officer.

Payday lending took up a good portion of the webinar. It was re-iterated that firms cannot use continuous payment authority to collect loan repayments more than twice, but Mr Philpott invited firms who fear that this requirement may cause major issues to contact the FCA.

Mr Philpott clarified that retailers and other organisations who introduce customers to sources of credit should expect to be included in the new regulatory regime.

In response to a question about the standard of affordability assessment required, Ms Titcomb said the FCA would publish details of good and poor practice in this area in due course.

Firms for whom the OFT is still considering a licence application were advised that they would need to apply to the FCA as soon as they receive their OFT licence. It was emphasised that all firms will need to maintain their licences until the switchover date of April 1 2014.

Ms Titcomb said not all financial advisers require a consumer credit licence, or will require consumer credit authorisation come April, but did not give details of the circumstances in which these firms may or may not require a licence.

She said the FCA would prioritise applications for full permission from companies wishing to take on appointed representatives (ARs), in view of the fact that only companies with full permission will be able to act as principal firms. It was acknowledged that it may not be possible to take on ARs until late in 2014.

A series of dates will be published in due course explaining when firms of particular types can apply to upgrade their interim permission to full permission.

The FCA hopes to make the first rebate payments by the end of 2013. These are for firms who have already paid for indefinite consumer credit licences and who now need to pay for FCA authorisation. It was acknowledged that, for some firms, the cost of FCA authorisation may be significantly higher than under the OFT regime.

It was re-iterated that the final consumer credit rulebook was expected to be published in February 2014.

The webinar can be viewed at http://www.fca.org.uk/news/firms/fca-consumer-credit-webinar.


Treasury Select Committee Will Not Review RDR Until At Least 2015

The chairman of the Treasury Select Committee, Andrew Tyrie MP, has suggested that it would be at least 2015 before his committee conducts a comprehensive assessment of the impact of the Retail Distribution Review (RDR). He suggested that this was necessary in order to allow the full impact of the changes to become apparent.

RDR came into force at the start of 2013 and imposed new requirements on financial advisers, such as the need to attain additional qualifications, a ban on receiving commission and new requirements to be regarded as an independent adviser. The Select Committee had previously recommended that the project was delayed, and that experienced advisers could be exempted from the examination requirements, but to no avail.

“The RDR has only been going for about a year, and it will take at least two years for the full impact of the changes to work through the profession. And in any case, the FCA is carrying out its thematic review of the RDR and I think we need to see that,” said Mr Tyrie.

Speaking at the annual dinner of the financial advisers’ trade association, the Association of Professional Financial Advisers, he called for the Financial Conduct Authority (FCA) to focus less on data collection, and to make more use of judgement when assessing risk. Advisers are also likely to welcome his call for a freeze on regulatory authorisation fees.

Mr Tyrie also expressed concern that RDR has created an ‘advice gap’, where mass market customers are no longer offered advice because it would not be profitable for the adviser to do so. Many high street banks no longer offer face-to-face financial advice, and some advisers have set a minimum income or minimum level of assets that clients must have in order to receive advice. According to FCA data, the number of registered advisers fell from 35,073 in summer 2012 to 31,132 by the end of the year, before recovering to 32,690 by July 2013.

Two months earlier, when addressing a Centre for Policy Studies fringe event at the Conservative Party conference, he made some more outspoken remarks on the same subjects. On the issue of firms pulling out of giving advice, he said: “[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][RDR] is having the unfortunate consequence of consolidating the industry into a smaller number of large players which can be damaging for competition and needs to be watched very carefully.” On the subject of data collection, he said: “Anybody who works in a bank or regulated firm will tell you that [regulators] come in and demand heaps of material. God knows what they do with it, it costs a packet and the client cost is huge but what is the point in it all?”[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]


Anger as FSCS Hits Advisers With Interim Levy

The Financial Services Compensation Scheme (FSCS), which provides investor protection against company failures, has revealed that it is facing a £29.5 million funding shortfall, and it is said to be “highly likely” that an interim levy will be imposed on firms regulated by the Financial Conduct Authority and Prudential Regulation Authority to meet this shortfall. This additional charge is likely to be imposed in the first quarter of 2014, and the 2014/15 annual levy is also likely to increase as a result of the shortfall. The 2013/14 annual levy was £78 million.

In the November 2013 issue of the FSCS’s Outlook newsletter, chief executive Mark Neale commented: “Although [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][compensation] will come as a great relief for the many consumers who invested in those bonds, this means we expect to raise an interim levy on investment intermediaries.”

The FSCS says the shortfall has arisen largely due to the amount of compensation paid to clients of Catalyst Investment Group and Rockingham Independent Ltd. Catalyst was declared in default in October 2013 and Rockingham in November 2012. These companies sold a great many investment bonds invested in the ARM Asset Backed Securities life settlements fund, which collapsed in 2011. Mention was also made in the newsletter of the pressures placed on the FSCS by the failures of firms such as Fyshe Horton Finney, CF Arch Cru and TailorMade Independent. In addition, the FSCS continues to be forced to pay considerable amounts of compensation for mis-sold payment protection insurance.

The FSCS provides protection for investors when firms are unable to meet claims made against them. If for example, a customer’s current account provider is declared in default, compensation of up to £85,000 per person is then paid by the FSCS. For investment contracts, the protection is £50,000 per person per provider, and insurance contracts are covered for up to 90% of the claim (100% for compulsory insurance).

Similarly, the FSCS provides redress for customers in the event that complaints are upheld against failed firms. The Financial Ombudsman Service will not consider complaints against such firms, so customers need to complain to the FSCS if their firm is in default.

The levy on regulated firms is the FSCS’s only source of funding, so it really has no other choice than to increase the levy when it faces a shortfall. The inevitable debate is whether it is fair for firms who have stayed solvent and met their regulatory obligations to clear up the mess caused by those who haven’t. Chris Hannant, director general of trade body the Association of Professional Financial Advisers, commented: “This highlights the need for the FCA to look at the whole system for raising funds for compensation. Advice firms are under significant cost pressures and it is difficult for them to meet funding requests at short notice.” Syndaxi Chartered Financial Planners managing director Robert Reid accurately summed up the situation when he said: “We are subsidising a bunch of failures.”[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]


IFAs Seek To Charge CMCs For Time Wasted

Any claims management company (CMC) working on the basis that submitting a claim is a completely no-lose situation would do well to note some recent cases involving independent financial advisers (IFAs).

Alan Lakey, partner at Hertfordshire-based Highclere Financial Services, received a payment protection insurance (PPI) complaint from Lancashire-based CMC Aims Reclaim. The complaint alleged seven things Mr Lakey had failed to do when selling PPI to a particular client. This particularly angered Mr Lakey as he claims never to have sold PPI, and he added that the client in question said they had never submitted a complaint via Aims Reclaim.

Mr Lakey’s response was to send the CMC a bill of £100 for the 40 minutes of his time required to deal with their enquiry. He says that the amount was calculated on the same basis as the hourly rate advice fees he charges to his clients. When Aims Reclaim did not pay, Mr Lakey took the matter to the small claims court, and in October 2013, a judge at Accrington Crown Court found in favour of Mr Lakey, saying that the CMC had a duty to establish that there were reasonable grounds for a claim before submitting it. Aims Reclaim was ordered to pay Mr Lakey’s £100 claim plus £240.20 in costs.

Mr Lakey, an outspoken member of the IFA community, has described CMCs as “akin to the biblical plague of locusts.” He extensively lobbied Kenneth Clarke MP when Mr Clarke was Secretary of State for Justice, and managed to secure a personal meeting with representatives of the Claims Management Regulator. Speaking about this case, he commented: “The judge’s decision confirms claims firms cannot recklessly level accusations about events that did not take place. Further, they cannot make allegations the client has not made or was not even aware of.”

A Yorkshire-based IFA has asked a CMC to pay a larger sum of £3,861. Neil Liversidge, managing director of West Riding Personal Financial Solutions, received a complaint from Hampshire-based CMC Money Claims (UK) Ltd alleging failures in the sale of an interest-only mortgage policy. Unlike in the case of Mr Lakey, Mr Liversidge accepts that his company sold the product in question, but disputes the CMC’s central claim that he did not explain that a separate repayment vehicle would be required to repay the capital balance.

Mr Liversidge, who is a member of the ruling council of trade body the Association of Professional Financial Advisers, wants compensation for: the time spent by his personal assistant in scanning documents relevant to the case, the time he spent interviewing the adviser involved in the sale, the time spent writing letters associated with the complaint and the disruption to his family holiday caused by the complaint. He notes that, after he rejected the complaint, that the matter was not referred to the Financial Ombudsman Service.

Money Claims is yet to reply to Mr Liversidge, and it remains to be seen if this matter will also reach court.

In November 2013, the Claims Management Regulator announced proposals for new conduct rules, under which CMCs will need to establish that claims have a realistic chance of success before submitting them, and will be subject to new obligations to provide evidence to back up claims.