FCA to Publish List of Firms Who Don’t Apply for Interim Permission

All consumer credit firms who will remain regulated by the Office of Fair Trading (OFT) are advised to make immediate contact with the Financial Conduct Authority (FCA) regarding their intentions come April 1, if they have not already done so.

For any OFT licensed firm who intends to continue with credit activities after April 1, when the FCA takes over as regulator of this sector, this is a final reminder that they need to register for interim FCA permission before the switchover date. In spite of how close it is now to the switchover date, any firm who has not done so does not need to panic, as the interim permission registration process is purely an administrative exercise that takes a matter of minutes.

Any firm currently licensed by the OFT which has decided to cease credit-related activities also needs to make contact with the FCA, in their case they need to inform them of their intentions. Any firm who has already informed the FCA of this in an application for a rebate on their Consumer Credit Licence fee does not need to tell them again.

Firms who neither register for interim permission nor inform the FCA that they intend to cease doing business will have their names published in a special list on the FCA website. Suspicion will inevitably fall on any firm which appears in this list that they may be conducting consumer credit business illegally, as it will be a criminal offence to carry out credit activities from April 1 without having the FCA’s authorisation to do so. Carrying out a financial services activity without authorisation can result in a fine and/or two years’ imprisonment.

The FCA has promised to take court action to close down and prosecute any firm who carries out credit business after April 1 without its authorisation.

Once firms have obtained interim permission, they will be informed of the procedure to be followed to gain full permission from the FCA, at a later date. For some firms, information on this procedure will be given as soon as May 2014.

Firms who are not licensed by the OFT on March 31, but who wish to carry out credit activities in the future, are not covered by the interim permission regime and need to follow the FCA’s process for obtaining new authorisation. This includes firms who made applications for credit licences in recent months, but for whom the OFT has not reached a decision on.


FCA Publishes Second Review of RDR Implementation Standards

In March 2014, the Financial Conduct Authority (FCA) published a report on the second part of its thematic review into whether firms it regulates have implemented the provisions of the Retail Distribution Review (RDR).

The RDR was introduced at the start of 2013 and banned financial advisers from receiving commission payments and set new qualification standards for them to attain. It also introduced a new definition of ‘independence’ and it is this which is the only subject of the latest report.

Anything less than reviewing the whole of the market for all required investment products is considered to be restricted advice.

The FCA says that: “a significant number of firms understood the requirements for delivering independent advice and appeared to be delivering it in practice.” However, the report also indicates that some firms gave the regulator cause for concern in this respect.

During the review, information was requested from 113 firms, of whom 25 said they were not independent and offered only restricted advice.

Of the remaining 88, the FCA said it was certain that 2 firms were not meeting the new independence definition, and that it had doubts over another 28 firms in this respect.  17 of these 28 firms were then investigated in more depth, and 6 of these 17 were able to convince the FCA that they were in fact independent. Another 6 were described as ‘not acting independently’, while doubts remained over the other 5. So in summary, the FCA identified 8 firms amongst the 88 who were definitely not independent, and another 16 who may not be independent.

All firms are urged to read the many examples of good and poor practice given in the report, and consider whether to adapt their policies and practices as a result.

Examples of good practice cited by the FCA include:

  • Considering investments outside of investment platforms where appropriate
  • Having a range of risk-rated model portfolios for different types of client, with the ability to recommend investments outside of these portfolios if they suited the client
  • Using whole-of-market research tools

Examples of poor practice include:

  • Each adviser making excessive use of their own favourite investment platforms
  • The firm saying they could recommend off-platform solutions, but their advisers were unsure as to the process for doing this
  • Using a single model portfolio for all clients
  • The firm being unwilling to advise on certain product types
  • Individual advisers being unwilling to advise on certain product types. This is not independence, even if they refer them to other advisers within the firm for certain products.

The head of the main advisers’ trade association suggested some advisers were still confused as to what constituted independence. Chris Hannant, Director General of the Association of Professional Advisers, said: “We welcome the FCA’s findings that the vast majority of advisers are meeting the required standards, including smaller firms. That so many companies have successfully met some of the most stringent regulatory changes in a generation is testament to their professionalism and diligence. However, the fact that the review contains a further twenty pages of guidance for firms only goes to highlight some of the problems with the regulator’s definition of independent advice.”


ISA and Pension Changes in the Budget

Chancellor George Osborne MP’s 2014 Budget delivered a number of surprise changes to the pensions and savings environment which the UK’s financial advisers need to be aware of.

In the coming days, a series of changes will be made to the rules regarding pension drawdown. From March 27 2014, clients with capped drawdown policies will be able to access 150% of the Government Actuaries Department (GAD) rate each year, up from 120%. Flexible drawdown, where they have access to as much or as little of their pension fund as they wish, will be available to those with retirement income of £12,000 per year or more, down from the existing £20,000.

From April 2015, what you might call the ‘do it yourself drawdown’ option will become much more attractive. Essentially, all clients with defined contribution pension schemes will be able to access as much or as little of their pension funds as they wish once they reach the permitted age for taking benefits. It is actually theoretically possible to take your entire pension fund as cash at the moment, however  if more than 25% of the fund is taken as a lump sum, the excess over and above the 25% figure is subject to a punitive tax of 55%. Under the new rules, 25% of the fund can still be taken as a tax-free lump sum, with the remainder taxed at the client’s marginal rate of income tax.

“No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity,” said Mr Osborne.

These changes will inevitably lead to fewer clients purchasing annuities and traditional drawdown products. Furthermore, Mr Osborne also announced that he was making funds available to product providers and consumer groups to facilitate the delivery of free financial advice for all regarding retirement income options. Together, these two changes could have a major impact on financial advisers who currently charge fees for providing advice on retirement income options.

Pension benefits can currently be taken from age 55 to age 77, however it was also announced in the Budget that the minimum age will rise to 57 from 2028.

The tax-free savings regime is also changing. The existing ISA regime will apply for the first three months of the new tax year, which starts on April 6 2014. Investors will be able to invest £11,880 in ISAs during this period, of which the entire amount can be invested in stocks & shares, or alternatively up to half the allowance (£5,940) can be placed in a cash ISA, with the remainder in a stocks & shares ISA.

However, from July 1 2014, New Individual Savings Accounts (NISAs) will be introduced. These will allow tax-free investment of up to £15,000 in cash, stocks & shares or a combination of the two. For the first time, the full amount can be invested in cash, and monies held in stocks & shares ISAs will be able to be transferred into cash. Indeed, the terms ‘cash ISA’ and ‘stocks & shares ISA’ will no longer exist. Although cash and stocks & shares will still be the areas in which clients invest, all tax-free savings vehicles will be known simply as NISAs.

Plans were also announced to allow ISA investment in a wider range of investment bonds, and in peer-to-peer lending companies.


FCA Consumer Credit Supervision Webinar

The Financial Conduct Authority (FCA) has released a video of a webinar on how it will supervise consumer credit firms from April 1 onwards. The video is available on the FCA’s website. Firms’ questions were answered by Denise Sbraga and Francisco Esteves, who are both managers of the team that will supervise consumer credit.

The FCA’s approach will be different to that of the Office of Fair Trading (OFT) in that it will have the resources to subject firms to a formal, ongoing supervision programme; whereas the OFT could often act only once it had received information from other sources about possible issues.

Ms Sbraga began by saying that higher risk firms will receive a higher degree of supervision. All firms are divided into four categories: C1, C2, C3 and C4. C4 firms are deemed to present the lowest risk, and most credit firms will fall into this category.

She then explained the three ‘pillars’ of the way the FCA conducts its supervision activities:

  • Proactive firm supervision – its programme of regular supervision
  • Event-driven, reactive supervision – what happens once issues of concern have been identified. If the additional supervision of a firm carried out at this stage confirms the FCA’s concerns, enforcement action may follow.
  • Issues and products supervision – supervising business sectors to identify areas of concern. An example of this form of supervision is the FCA’s regular thematic reviews, where information is collected on a selection of firms to assess their conduct standards surrounding one specific issue. It has already announced that debt collection practices of payday lenders will be the subject of the first credit-related thematic review.

Mr Esteves reminded firms that, as well as obeying the detailed consumer credit rulebook, they needed to comply with the FCA’s Principles, which include the need to treat customers fairly, the need to conduct business with integrity and the need to provide clear and not misleading information at all times. The last of these also applies to financial promotions. Ms Sbraga later reminded viewers that another principle required firms to co-operate with the FCA at all times.

Mr Esteves added that debt management, payday lending, debt collection, credit cards, home-collected credit and pawnbroking would be early areas of priority, and that visits would be taking place to firms practising in these areas in the early months of regulation to assess conduct standards.

One of the most critical things he later mentioned was for firms to ensure that the FCA was named as the regulator on credit agreements. If this does not occur, the loan may be unenforceable.

He then reminded firms that the FCA can impose a wider range of penalties for non-compliance than was the case with the OFT. Key individuals can be banned from working in financial services, and the FCA can initiate prosecutions, as well as impose fines and prohibition orders on firms. He said that actions causing customer detriment were particularly likely to result in enforcement action, and added that the FCA would be taking over a number of investigations from the OFT.


Ms Sbraga urged any firms with queries about regulation to make use of the FCA’s Firm Contact Centre. Only firms in the C1 and C2 categories will be allocated a dedicated FCA supervisor.

Ms Sbraga said all firms would know by May 1 when they should apply to upgrade their interim permission to full permission.

She also gave some indications of the data reporting requirements for firms, in response to the many questions from viewers on this topic. Once credit firms have obtained full permission, they will be subject to the reporting requirements, and this task is likely to be new to firms who have only dealt with the OFT previously. Data is required on the firm’s financial position, numbers of customers and complaints received. Lenders will also need to provide information on the types of loans they are selling. Firms with turnover in excess of £5 million will need to report every six months, while the remainder will report annually.


Citizens Advice attacks lack of transparency of CMCs

National advice charity Citizens Advice (CitA), together with its sister body Citizens Advice Scotland, published a report in March 2014 entitled ‘The cost of redress’, in which it criticised the lack of transparency exhibited by some claims management companies (CMCs) towards their customers regarding claims for mis-sold payment protection insurance (PPI).

28% of the CMC customers surveyed say that they were pressurised into making a claim. 27% thought that the fee structure had not been sufficiently explained.

39% said they were unaware that they could have made their claim directly to the company that sold the policy, and 51% did not know that free sources of help with making a claim were available. 47% said that if they had known about these free sources of help, then they would not have used a CMC. The report says some customers believed that using a CMC would improve their chances of success, could increase the level of their payout and could result in the compensation  being paid faster.

Other issues of concern were highlighted. One extreme case was cited of a customer who paid more in fees to the CMC than she received in compensation. Mention was also made of the fact that some people end up in debt to their CMC. If a customer with a successful PPI claim has debt arrears with the same lender, then the financial institution can decide to use the compensation amount to reduce the arrears, and the customer never sees the money. However, in these circumstances the CMC still wants its fee, so some people in this situation have been forced to take out new loans in order to pay their CMC.

The report estimates that CMCs have taken up to £5 billion worth of customers’ PPI compensation in fees, based on the fact that financial institutions have set aside £22 billion to pay PPI compensation claims, and based on the typical share of a customer’s compensation that a CMC takes. The report suggested that: “Given the amount of work that CMCs carry out on a typical PPI complaint, the fees seem hugely disproportionate.” It went on to say: “By and large they have been cashing in on an easy money-making opportunity.”

Following on from the report, CitA has made a number of recommendations for regulatory changes to the claims industry, which include:

  • A ban on cold calling
  • A ban on taking upfront fees
  • Contracts with customers to explicitly set out which policies are covered by the terms of the claim

CitA Chief Executive Gillian Guy commented on the report’s findings by saying: “Some claims management companies operate well below the standards that are expected and sometimes outside of the rules. The regulator needs to quickly revoke the licences of firms that are not up to scratch.” CitA Scotland Chief Executive Margaret Lynch added: “This research lifts the lid on PPI compensation companies’ false promises – and shows they are too good to be true.”

The issues regarding putting pressure on customers to make a claim, making false claims about the customer’s prospects of success and not explaining fees properly would certainly be of interest to the Claims Management Regulator at the Ministry of Justice (MoJ). Over 200 CMCs lost their authorisation to trade as a result of MoJ action in 2013, representing almost 10% of the number of CMCs trading today, so it is vitally important that companies ensure they are following the rules.


Payday lender has licence suspended

In March 2014, consumer credit regulator the Office of Fair Trading (OFT) exercised its power to suspend a consumer credit licence with immediate effect once again, but on this occasion it was a payday lender who fell foul of the regulator, the first time this power has been used against this type of company. With consumer credit regulation passing to the Financial Conduct Authority (FCA) from April 1 2014, this may also be the last time that action is taken against a lender in this way by the OFT.

The OFT suspended the licence of London-based online only lender Micro Lend UK Limited. No reasons were given in the release for the decision, but the OFT’s press release says that “suspending the licence is urgently necessary to protect consumers.”

Micro Lend has until March 24 2014 – three weeks from the date the suspension was announced – to make representations regarding the decision to the OFT. The OFT’s Adjudicator will then either confirm the suspension or withdraw it.

It was anticipated that the OFT would  act in this way where there was evidence of fraud, dishonesty or violence; where there was a need to protect vulnerable customers; or where the firm failed to comply with previous instructions from the OFT or Trading Standards.

Most firms who are subject to OFT enforcement action are allowed to continue trading until appeals have been heard against decisions to revoke licences.

This is only the fourth time the OFT has immediately suspended a licence since it was given the legal power to do so in February 2013. In June 2013, Donegal Finance Ltd, a Staffordshire-based credit broker and debt collector which used the trading names Donegal Finance, Donegal Investigations and Donegal Recovery was suspended from trading. Then in July 2013, Andrew James, a Worcestershire-based motor dealer who used the trading name Apex Car Finance, became the second to lose his licence in this way. Another motor dealer, Shropshire-based Jonathan Rochford, trading as Phoenix Car Centre, was subject to this sanction in December 2013. On these three occasions, the OFT also gave no details of the reasons for the action.

Payday lenders can expect tougher regulation once the FCA takes over as their regulator in April. A series of new rules for lenders to follow regarding rollovers, continuous payment authority, risk warnings and treatment of borrowers in financial difficulty have been announced. The FCA has additional resources to supervise firms and can impose a wider range of enforcement penalties.


FCA to consult on credit cost cap

Financial services regulator the Financial Conduct Authority (FCA) says it will conduct a consultation before it sets the level of the cap to be imposed on the total cost of borrowing.

At the same time as it revealed the final rules for consumer credit firms, which come into force on April 1, the FCA revealed that it will conduct a consultation in July 2014 on the issue of limiting the cost of credit.

In late November 2013, the Government announced that it will cap the costs of payday loans. Under the terms of the recently passed Banking Reform Act 2013, this cap must be in place by January 2 2015. The Government has confirmed that it will be up to the FCA to set the level of the cap, and the regulator has indicated that its decision on this will be known by November 2014.

The FCA has promised to take into account views expressed on this topic in previous consultations. It says that the main issues raised so far have been whether the move might increase the cost of credit for many people, as prices move towards the level of the cap; and whether the resulting reduction in access to credit for low-income individuals might lead them to seek out illegal sources of lending.

FCA consultations usually allow submissions to be made by authorised firms, trade associations, consumers and consumer groups.

When the proposal was first announced, the Government stressed that the cap would apply to the total costs and not just to the headline interest rate. “We’re going to have a cap on the total cost of credit – we’re looking at the whole package, not just the interest fee, but also the arrangement fees as well as the penalty fees. This is all about having a banking system that works for hardworking people and making sure some of the absolutely outrageous fees and unacceptable practices are dealt with,” said Chancellor of the Exchequer George Osborne MP.

Other states have already enacted similar legislation. Australia limits interest rates to 4% per month and upfront fees to 20% of the loan. However, the Australian experience was cited by trade association the Consumer Finance Association (CFA) as a reason to be wary of imposing a cap. “If the objective of the proposed cap is to drive out rogue lenders the Australian experience has had some success, however it has not reduced household debt or the need for credit. Instead there has been an increase in the number of people who turn to the growing illegal lending market, which the Australian regulator has admitted is a problem,” said CFA chief executive Russell Hamblin-Boone.


Whatever the rights and wrongs of needing to quote Annual Percentage Rates of several thousand pounds on advertisements, it cannot be disputed that payday loans are an expensive form of credit, and action in this area will happen within 12 months.


OFT now unlikely to process new applications before switchover

February 21 2014 marked another key date in the countdown towards the transfer of consumer credit regulation from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA). This is because if a new application for credit authorisation is submitted after this date, regardless of whether it is from a low or high risk firm, then the OFT does not expect to be able to complete its assessment of the application prior to April 1, when the FCA becomes the regulator.

Nevertheless, any firm seeking credit authorisation before April 1 still needs to apply to  the OFT, as they remain the regulator until the switchover. However, it is likely that what will happen is that the application will be amongst those passed to the FCA by the OFT on the switchover date. The final decision on the application will then be made by the FCA, using its criteria.

Online applications can be made via the OFT website until March 26.

The FCA has not explained the process for applying for first-time credit authorisation with itself, and in view of the above, it is not expected that this will occur until April 1. However, the usual FCA authorisation process involves providing extensive amounts of financial and non-financial information.

All applicants for FCA authorisation will need to meet their existing threshold conditions, which relate to the organisation’s legal status, business model, financial resources and fitness & propriety. Key individuals within the firm will require individual approval to carry out their roles.

In addition, there are of course only weeks left for existing credit firms to apply for interim permission with the FCA, via their website. This is a simple exercise, which takes a matter of minutes, and allows existing Consumer Credit Licence holders to become authorised by the FCA without having to provide large amounts of extra information. The interim permission system can only be used by firms that currently hold a valid licence, and who will continue to do so up until March 31. Firms are also urged to ensure that any maintenance charges due on their licence before the switchover are paid.

Once existing firms have obtained interim permission, they will be given details at a later date of when and how to apply to upgrade their FCA authorisation to ‘full permission’. It is at this stage that firms will be required to provide the comprehensive information normally required with an application to the FCA.

Once authorised, whether they are new to the credit industry or not, firms will need to comply with the FCA’s Principles for Business, and with the requirements of the FCA Handbook. Publication of the new rules is expected in late February or early March 2014.

Many of the rules will be based around the Consumer Credit Act and existing OFT guidance. However, there are a series of new requirements that apply to all credit firms, e.g. the need to submit data reports; and additional requirements for certain types of firm, e.g. rules regarding rollovers, continuous payment authority, affordability checks and promotional material for payday lenders.


200 CMCs lose licence in 12 months

Latest information from the Claims Management Regulator at the Ministry of Justice (MoJ) shows that more than 200 claims management companies (CMCs) lost their licences for breaches of regulatory requirements during 2013.


The total number of authorised CMCs in the UK is now reported as 2,254. This figure peaked at 3,367 in 2011.


The MoJ has recently been given additional resources to supervise firms, but even with its previous level of resource, the percentage of companies being banned was astonishingly high. The 2013 figure of around 200 means that almost 10% of the companies in the industry were deemed to be unfit to trade during the past year. When we than consider that the number of CMCs banned by the MoJ since 2007 stands at more than 1,100, it can be seen that a very large proportion of the CMCs that have operated in the UK have been forced to cease trading against their will.

Whilst most of the banned firms operate in the personal injury arena, CMCs handling payment protection insurance claims and other financial matters cannot afford to ignore the latest regulatory developments. The regulatory landscape is changing all the time for CMCs, and new regulatory requirements have been imposed on a regular basis in recent years.

2013 has also seen saw CMCs subject to new requirements regarding: displaying terms and conditions on their websites, a ban on verbal contracts, the need to alert customers within 14 days if they are subject to regulatory enforcement action, a ban on issuing advertisements that offer cash inducements and a ban on receiving referral fees.

Forthcoming changes are expected to include: a requirement to establish that claims have a realistic chance of success before submitting them; new obligations to provide evidence to back up claims; and the need to conduct thorough audits of data obtained, e.g. sources of marketing leads.

With all the new rules and the additional regulatory scrutiny, now is a good time for CMCs to have a comprehensive independent audit of their practices and procedures.

Kevin Rousell, head of the Claims Management Regulation Unit, said of the latest data: We have made it very clear that it is our absolute priority to protect customers and help organisations and businesses that are on the receiving end of high volumes of speculative claims which can clog up the system. We are making certain that firms are following the rules at a time of major change for the claims management industry. We do not tolerate bad practice and are continuing our work to drive malpractice out of the industry.”

Justice Minister Shailesh Vara MP added: “With rigorous new measures being brought in across the board, we are taking strong action to rein in the rogue firms operating in this sector. Continued action to remove licenses from companies with poor practices alongside forthcoming Claims Management Regulation reforms, proves just how much work is going on to get tough on companies that defy the rules and bombard the public with unwelcome calls and misleading information.”


Advisers suggest more than 25% of turnover is spent on regulation

Retiring IFA, an organisation which assists financial advisers to find partner companies for mergers and acquisitions, has responded to the call from the Treasury Select Committee (TSC) to demonstrate the cost of being regulated.

In January 2014, TSC chairman Andrew Tyrie MP challenged financial advisers to produce “reliable figures” which could be presented to the Financial Conduct Authority (FCA), politicians and consumers.

Retiring IFA duly surveyed 221 adviser firms and presented the results in February 2014. Most of the firms were directly authorised as opposed to being members of networks. The survey found that, on average, firms spend 27.45% of their turnover on regulatory requirements – this is merely the share of turnover, and the amount by which profits reduce as a result of regulatory costs is even more significant.

Retiring IFA founder Stephen Hagues has now written to Mr Tyrie, describing the costs as “shockingly high.” His open letter has been published on his personal website, and points out that regulatory costs are inevitably passed on to clients, forcing them to pay higher advice fees. He warns of the possible consequences if this issue is not addressed by saying: “If the treasury chooses (by abdication) to handicap the advice sector and allow a regulator to take over a quarter of business turnover (in addition to HMRC and local government levies) then it will kill the sector without giving the profession the opportunity to adapt to current market changes.” Mr Hagues also points out that many of the recent regulatory problems have been caused by the actions of product providers such as Keydata and Arch Cru, and not by financial advisers.

Chris Hannant, director general of the trade association the Association of Professional Financial Advisers, welcomed the report but suggested there was a need for a more scientific assessment of the costs incurred by his organisation’s members.

Advisers need to pay authorisation fees to their regulator, the FCA; salaries to staff and/or fees to external consultants to manage their internal compliance; training costs to ensure advisers maintain competence; and levies to fund the Financial Ombudsman Service, Money Advice Service and Financial Services Compensation Scheme. In addition, they must meet stringent requirements on capital adequacy.

The costs of regulation have been cited as one reason why it is difficult for new advisers to enter the industry. In January 2014, Mr Hagues referred to “owner-managed sole traders struggling to sustain profitability in an era where being an independent financial adviser is becoming less viable.”

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