European legislation to give consumers increased time to refer complaints

Financial services firms are alerted to the fact that the length of time customers will have to refer complaints to the Financial Ombudsman Service (FOS) will increase within the next 12 months or so.

At present, the FOS will not consider a complaint, unless there are exceptional circumstances, if it is more than six months since the date of the firm’s final response letter. However, the European Parliament has now passed the Alternative Dispute Resolution (ADR) Directive, and all European Union (EU) member states, including the UK, have until July 9 2015 to implement the provisions of the Directive.

Amongst other changes to the Financial Conduct Authority (FCA)’s complaints rules, firms will need to give their customers at least 12 months from the date of the final response to refer the matter to the FOS. Exact details are still to be finalised, but the new timescale may apply to complaints submitted before the change, not just to new grievances.

The Government’s Department for Business Innovation and Skills will announce shortly how it intends to implement the Directive, and the FCA will then conduct a consultation in autumn 2014 on the proposed changes to its Dispute Resolution (DISP) rules.

The FCA says that no action is required from regulated firms at present.

The provisions of the Directive are also likely to apply to other dispute resolution and Ombudsman schemes, such as the Legal Ombudsman. A central aim of the Directive is that no EU consumer should have to go to court to resolve a dispute with a supplier.

Another requirement of the Directive is that the dispute resolution service will be subject to a 21 day deadline should it wish to refuse the complaint. It is unclear how the FOS will be able to implement this, given that it receives some 500,000 complaints a year, and often takes many months, and sometimes a few years, to reach a final judgement.

In the foreword to a Government paper on the subject, Jenny Willott MP, the Minister for Employment Relations and Consumer Affairs says:

“The UK currently has several established and well-regarded ADR schemes in regulated sectors including financial services, where the Financial Ombudsman Service deals with a huge volume of disputes. The ADR Directive gives us the chance to examine the UK landscape and ensure we have a system which works for both consumers and business.”


FCA Fines Credit Suisse & YBS over Promotions Issues

In June 2014, the financial regulator, the Financial Conduct Authority (FCA), imposed a fine of £2,398,100 on Credit Suisse International and a fine of £1,429,000 on Yorkshire Building Society for breaches of the FCA rules and principles regarding financial promotions and client communications.

The Yorkshire had been distributing promotional material from Credit Suisse which promoted Cliquet, one of the Swiss bank’s structured products. The Cliquet investment promised to protect customers’ initial capital and provide a minimum additional return of between 4% and 23.5%, while there was a chance of additional returns on top of this minimum return dependent on the performance of the FTSE 100 index. Cliquet was sold under the product names Protected Capital Plus Account, Guaranteed Capital Account, Protected Capital Account, Capital Plus Account, Guaranteed Capital Plus Account and Guaranteed Investment Account.

The FCA found that Credit Suisse’s product brochure, which the Yorkshire approved for distribution to its customers, and the Yorkshire’s own promotional material both over-emphasised the maximum possible return, which could be as much as 72%. It was extremely unlikely that this return would be achieved, and there was almost a 50% chance that the product would only provide the minimum return.

For a period of several months, the Yorkshire’s direct mail letters concerning Cliquet gave this maximum return figure “significant prominence on the front page”. On some of its promotional posters, the maximum figure was displayed in “distinctive colours, in bold fonts and in significantly larger font sizes than anything else on the page,” according to the FCA’s Final Notice. Credit Suisse’s brochures were said to have given practically the same prominence to both the minimum and maximum return figures.

In September 2010, the Yorkshire changed its promotional material so that the maximum return was given reduced prominence. This came after consumer group Which? had contacted them with its concerns over the marketing of the product. However, the 72% figure was still clearly visible to anyone who read the promotion closely, and the FCA says that after this time, the Yorkshire continued to give a misleading impression of the probability that the maximum return would be achieved.

Some 83,777 customers purchased the Cliquet product, investing a total of £797,380,716. Around 75% of the sales were made via the Yorkshire. These clients, most of whom were said to be inexperienced investors, will now be contacted by the firms concerned and offered the chance to withdraw from the product without incurring the usual exit penalties. An additional interest payment will also be made to those who take up this option.

Tracey McDermott, the FCA’s director of enforcement and financial crime, said that the firms had

“let their customers down badly.”

The Yorkshire cancelled its distribution agreement with Credit Suisse in December 2012.

All firms should note the content of the disciplinary notices issued to Credit Suisse and the Yorkshire. FCA Principle 7 requires all financial promotions and other communications with customers to be “clear, fair and not misleading.” There is no indication that any of the communications in this case contained any statements that were factually incorrect, yet the FCA still has grounds for taking action. The FCA has a set of detailed rules regarding financial promotions, including a number of requirements as to how information should be displayed and communicated.


FCA rejects authorisation application from general insurance sole trader

On June 19 2014, the Financial Conduct Authority (FCA) announced that it had refused an application for authorisation from Paul Catterall. Mr Catterall had intended to offer insurance advice and other mediation services under the trading name Deal Direct Insurance Bureau in the Bolton area.

The refusal of the application was due to Mr Catterall’s failure to disclose previous convictions, concerns over his level of experience and deficiencies in his financial situation.

Any firm or individual considering applying for FCA authorisation is advised to read the judgement made regarding Mr Catterall, as it provides an excellent example of some of the issues which are likely to be viewed unfavourably by the regulator.

Mr Catterall said on his application he had no previous convictions, in spite of having signed an accompanying declaration acknowledging that it may be a criminal offence to make a false declaration. In fact, he has a criminal history spanning a 29 year period, with many of his 17 offences relating to dishonesty. Previous criminal convictions do not automatically prevent an application being accepted, but the FCA will regard any non-disclosure as a very serious matter.

Mr Catterall also claimed to have over 20 years’ experience in the insurance industry. However, whilst the FCA did not doubt this assertion, the applicant himself admitted that he had not worked in this area since 1996, and in the intervening period, the regulatory landscape has changed considerably. In its Final Notice, the FCA said it was “not satisfied that Mr Catterall has relevant and up to date experience to advise on general insurance.”

Another key area of concern was that the FCA was not satisfied that Mr Catterall had adequate financial resources. When asked for a breakdown of his personal assets and liabilities, he merely provided a valuation statement relating to some items of jewellery.

Mr Catterall also failed to provide a business plan, or any financial forecasts, such as a cash flow forecast and projected balance sheets and profit and loss accounts.

On January 31 2014, the FCA issued a Warning Notice to Mr Catterall, informing him that they were minded to refuse his application, and giving him the chance to respond to their concerns. The FCA never received a response to this Warning Notice, and Mr Catterall did not refer the subsequent refusal of his application to the Tribunal.

In summary, Mr Catterall did not demonstrate that he met the FCA’s Threshold Conditions – a set of basic requirements all regulated firms must meet. 

These conditions include:

  • To have a head office and registered office in the UK
  • To be established as a body corporate, or as a partnership or sole trader
  • Not to have close links with another organisation that would prevent the FCA supervising the firm adequately
  • To maintain adequate resources
  • To have a business model that promotes both the interests of consumers and the integrity of the UK financial system
  • To be fit & proper – assessment may cover areas such as: any previous dealings with regulators; the quality of internal systems & controls; the skill levels present within the organisation; and the financial crime risk posed.

Firms and individuals who wish to become authorised are urged to read the Getting Authorised pages on the FCA website. Potential applicants need to start preparing the required information well in advance.


MoJ warns CMCs over mis-representation

The Claims Management Regulator at the Ministry of Justice (MoJ) has warned of a number of claims management companies (CMCs) who are mis-representing the services they offer in some way.

This mis-representation centres around two main issues. Firstly, some CMCs are contacting prospective customers saying they can offer them a ‘financial review’, when in fact all they can offer is a claims management service. The phrase ‘financial review’ is normally associated with financial advisory firms who can offer advice in a range of areas such as protection, mortgages, pensions and investments.

Secondly, a number of CMCs are still reported to be sending marketing messages which falsely state that a specified sum of money is definitely available for the customer to claim. The message is often little more than a general marketing message, and the CMC cannot state with certainty at this stage that any claim would be successful, never mind know for sure the sum that would be due in compensation.

CMCs are reminded that promotional material and other information provided must be “clear, transparent, fair and not misleading”.

The MoJ also makes CMCs aware of a number of other areas of concern. CMCs have been warned that they must only request updates on the progress of complaints referred to the Financial Ombudsman Service in “exceptional circumstances”.

Some CMCs are said to be insisting that customers put complaints about their services in writing before they are looked at. The MoJ requires CMCs to investigate such complaints regardless of the form in which they are received, so complaints made by email, telephone or personal visit must be treated in the same way as if the same concerns had been raised in a letter to the CMC.

Finally, the MoJ warned CMCs to seek legal advice before using the logos or trademarks of any other firm. It is not uncommon for a CMC’s website to list banks and other firms that they have pursued claims against, and sometimes the logos of the firms in question are displayed alongside their names.

Failure to comply with the MoJ’s rules can result in enforcement action being taken. The MoJ took the ultimate step of withdrawing the authorisation of over 200 CMCs in 2013.

The regulatory landscape for CMCs is constantly changing. Recent months have seen the introduction of new rules, the MoJ gaining the right to use a wider range of enforcement penalties and the MoJ taking on additional staff to give it more resources to supervise CMCs. Now is therefore a good time for CMCs to have an external audit of their practices and procedures to ensure they are meeting their requirements.


Firms to Pay Lower FSCS Levies than Expected

Contrary to earlier expectations, the UK’s financial institutions will collectively be paying less to fund the Financial Services Compensation Scheme (FSCS) in the 2014-2015 financial year than was the case in 2013-2014.

Lower than Expected Levy

The FSCS provides compensation to customers who would otherwise lose money should their financial firm become insolvent. Its only source of funding is a levy on regulated firms, so effectively the well-behaved, solvent firms are subsidising the rest.

The FSCS levy for 2013-2014 was £285 million, and for 2014-2015, this will reduce to £276 million. This differs from the £313 million figure predicted in the FSCS Annual Budget. Back in November 2013, the FSCS even indicated it was likely to need to charge an interim levy to allow for unexpected costs, but this charge was never imposed.

Primary Reasons for the Reduction

The main reasons for the reduction are said to be the increase in successful recoveries by the FSCS, particularly relating to Keydata Investment Services, and the significant indications that claims for mis-sold payment protection insurance (PPI) have peaked. PPI is the most mis-sold financial product ever in the UK, yet the Financial Conduct Authority’s complaints data shows that PPI complaints in the second half of 2013 were 1,390,756, a reduction of 22% from the first half of the year.

However, for investment intermediaries, the 2014-2015 levy has risen to £112 million from the predicted £105 million. This is said largely to be due to the cost of claims against Catalyst Investment Group Limited, which was declared insolvent in October 2013 after it incurred significant losses through sales of investment bonds from unauthorised Luxembourg-based firm ARM Asset Backed Securities SA.

Predicted Expenses on Compensation in 2014-2015

The total of £276 million is made up of a £112 million levy on investment intermediaries, £71 million on general insurance providers, £38 million on general insurance intermediaries, £33 million on life and pension intermediaries, £16 million on deposit takers and £2 million on home finance intermediaries, plus £4 million of base costs.

The FSCS has predicted that it will need to spend £324 million on compensation in 2014-2015.
Firms can expect to receive their FSCS levy bill from July 2014, and the sum due will be payable within 30 days.

FSCS Chief Executive, Mark Neale, said of the figures: “There is good news today for many firms. Our overall levy for the coming year is down from earlier indications. That partly reflects an expectation of lower claims volumes. But fund managers and investment intermediaries are also benefiting from our success in making recoveries. We have secured many millions of pounds for them and will continue to pursue recoveries wherever it is cost-effective to do so.”

For more information on IFA compliance support services for all credit firms in the UK, contact us and we will provide assistance.


Clients of advisers paying £170 a year for regulation

Adviser trade association the Association of Professional Advisers (APFA) has suggested that financial advisory firms are being forced to pass on soaring regulatory costs to their clients.

APFA has published results of research which suggests that the UK’s financial advisers are collectively paying around £460 million each year towards the costs of regulation. This is said to equate to approximately £170 per client, based on there being 22,000 financial advisers in the UK who each have an average of 125 active clients.

APFA surveyed 74 firms between March and May 2014.

It appears that the smaller the firm, the greater the share of revenue that is spent on regulation. For firms with annual income of up to £1 million, an average of 12% of revenue is spent on regulation, while for those with income between £100,000 and £250,000 the equivalent figure was 19%. When we look at those with annual income of £100,000 or below, the figure rises again to 20%.

Those in the first category (up to £1 million) were said to represent 90% of firms surveyed. Here the 12% figure is made up of 3% on fees and levies and 9% on other costs. Spending on compliance was said to be 5% of revenue on average.

Common issues cited by respondents included the time it takes to review all of the regulatory policy documents and other papers, the costs of professional indemnity insurance and the complexity of required data returns.

The costs of regulation borne by a firm might include:

  • Fees to apply for authorisation with the Financial Conduct Authority (FCA), and to remain authorised in future years
  • Levies to fund the Financial Ombudsman Service, Financial Services Compensation Scheme and Money Advice Service
  • Salaries of internal compliance staff
  • Fees for the services of external compliance consultants
  • Training costs
  • Examination fees for staff sitting professional qualifications
  • Professional indemnity insurance premiums

APFA Director General Chris Hannant commented on the research findings by saying:

“As individuals face greater responsibility for managing their financial affairs, they will need affordable advice. It needs to be easier for advisers to operate and serve their clients. This isn’t about compromising on standards, this is about cutting the burden of compliance and the cost to clients.”

Mr Hannant says that APFA has written to the FCA with its findings. He went on to suggest some steps that could be taken to reduce costs, by saying:

“[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”][The FCA] should find a way of streamlining the data it asks advisers to provide, and give them more time to provide it. It needs to simplify and consolidate the sheer amount of information advisers have to get through in order to be compliant, via the handbook, seminars and elsewhere. We also need to see clear action on introducing a long stop, to help reduce the cost of PI insurance.”

Striking the right balance is always tough in a matter such as this. For most advisory firms, their main (if not only) source of revenue will be the advice fees paid to them by clients, so the only way to recoup the costs of regulation would be to increase these fees. Yet without a robust regulatory system, clients have no protection against poor advice and unscrupulous practices that some advisers might employ.

In January 2014, Treasury Select Committee chairman Andrew Tyrie MP challenged financial advisers to produce reliable evidence on the subject of the costs of regulation, which could then be presented to the FCA.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]


Adviser trade body criticises proposed credit authorisation fees for financial advisers

Adviser trade association the Association of Professional Advisers (APFA) has said it believes that the consumer credit authorisation fee to be charged to financial advisers by the Financial Conduct Authority (FCA) is unjustified.

Clarification has recently been issued to investment advisers as to whether they require consumer credit permissions from the regulator. It has been known for some time that any firm that offers the option for a customer to pay an advice fee in four or more instalments would require this permission. More recently, it has been confirmed that any advisory firm who gives advice to a customer on one or more specific debts also requires credit permissions. An investment adviser might be expected to recommend that a customer pays off a particular debt before considering investing a lump sum, and doing so is deemed to be ‘debt counselling’.

The FCA now proposes to charge advisory firms an authorisation fee of £300 for this consumer credit permission. However, APFA has questioned whether this is an appropriate charge, given that the additional regulatory burden placed on the FCA by the change in the firms’ permissions will be negligible, and that these firms will receive no revenue from credit activities. APFA says in its paper: “It is therefore difficult to know what regulatory costs a £300 annual fee is intended to cover,” and goes on to suggest that a much reduced charge of £25 or £50 would be more appropriate.

APFA also highlighted the issue of firms with this permission needing to pay a larger levy to fund the Financial Ombudsman Service. The Association believes this is unnecessary given that consumer credit complaints against investment advisers are “extremely unlikely.”

APFA Director General Chris Hannant commented:

“We … do not believe that the £300 consumer credit fee proposed by the FCA is justified when the vast majority of adviser firms are only obtaining consumer credit authorisation to ensure they do not fall foul of the unclear rules. We urge the FCA to significantly reduce this charge.”

Mr Hannant also added:

“We are also disappointed that the FCA is not continuing with its fundamental fees methodology review.”

This refers to the fact that APFA has for some time called for a wide-ranging review of the authorisation fees system, to reflect their belief that financial advisory firms present a much lower risk to the regulatory system than other types of regulated firm.

However, APFA did welcome the changes made by the FCA to the fee structure for firms in blocks A12 and A13, which respectively encompass advisory firms that hold client money and those who do not; and to the arrangements for funding the Money Advice Service, and said firms’ costs should reduce as a result.


FCA calls on logbook lenders to improve as research results are published

In early June 2014, financial watchdog the Financial Conduct Authority (FCA) issued the results of its research into consumer experiences of logbook lenders, payday lenders and debt managers.

The research was conducted on the FCA’s behalf by research agency ESRO in November and December 2013, which was before the Office of Fair Trading’s compliance review into payday lending, and before the FCA assumed responsibility for regulating the areas covered by the study and introduced new rules. Nevertheless, firms in all three sectors are advised to take note of the findings and consider whether any of the same criticisms might be made of their firm.

ESRO surveyed 15 payday loan customers, 20 logbook loan customers and 25 debt management customers (including nine customers of non-fee charging debt management providers) located throughout the UK.

Following this research, it was logbook lenders who came in for the strongest criticism from the FCA.  

Christopher Woolard, director of policy, risk and research at the FCA said:

“People who use logbook loans are often in difficult circumstances with few other borrowing options. The last thing that should be happening is for them to be squeezed yet more or even threatened, but that is what our research has found. Our new rules give us the power to tackle those firms found not putting customers’ interests first and remove them from the market if they don’t improve. Logbook lenders should consider this as fair notice to improve and put their customers first or we won’t hesitate to take action.”

Evidence was found of logbook lenders:

  • Conducting inadequate affordability checks
  • Encouraging borrowers to fabricate income details
  • Unfairly pressurising customers to take out loans
  • Failing to disclose required information such as Annual Percentage Rates (APRs)
  • Concealing key information in small print within lengthy loan documentation
  • Adopting overbearing practices when trying to re-possess vehicles – one extreme example cited in the report is that of a customer who had their car re-possessed while driving and was left stranded at the roadside.

The majority of logbook loan borrowers surveyed said they experienced difficulties in meeting their repayment obligations.

Issues identified regarding debt managers included:

  • Poor levels of training and competence within firms
  • Unsuitable or poor advice being given
  • Failing to explain charges sufficiently clearly

Issues identified regarding payday lenders included:

  • Unwanted marketing messages
  • Inadequate affordability and credit checks – indeed some respondents suggested that the most thorough check carried out by the lender was to ensure that their debit card details were correct, and some suggested that the process of obtaining a loan was surprisingly easy
  • Encouraging customers to roll over and extend loans
  • Not engaging sufficiently with customers in financial difficulty
  • Customers managing to obtain payday loans while drunk
  • Imposing unfair terms and conditions, such as requesting that the loan is excluded from any future debt management arrangement

Very few payday loan customers said they paid attention to the APR when considering a loan, and instead focussed on the level of the final payment due. Speed and convenience were more important than any cost information for many borrowers.

Many respondents were using payday loans to meet regular expenditure, something which gives rise to concerns over borrowers becoming trapped in a debt cycle.

No figures are contained in the report as to exactly how many customers had the experiences described, and in most cases the report uses the terms ‘some customers’ and ‘many customers’ when describing the findings.


Credit card PPI holders may have lost £1 billion in compensation

A study by the BBC has suggested that people who complained about the sale of credit card payment protection insurance (PPI) could have collectively been deprived of around £1 billion in compensation, as a result of the failure of the providers to consider charges incurred on the account when calculating compensation amounts.

Compensation should involve a refund of the premiums paid and any interest paid on these premiums, plus 8%, as with other forms of PPI. Credit card PPI customers should also receive additional compensation based on the assumption that had they not been paying for PPI, they would have used the same monies to reduce their card balance.

However, the additional issue identified by the BBC is that compensation has not been paid in many cases where the addition of a PPI premium meant that a customer exceeded their borrowing limit. In these circumstances, extra charges would be incurred, and if the PPI was mis-sold, the customer is entitled to compensation for these charges.

The issue is said to concern credit card PPI sold by Lloyds Banking Group, Barclays, MBNA and Capital One. The financial watchdog, the Financial Conduct Authority (FCA), has said it is in discussions with the providers concerned over this issue.

The BBC report highlights the case of Mark Pascoe, who received £5,800 compensation from MBNA in February 2014. However, if the extra charges he incurred had been accounted for, the payout would have been in excess of £13,000. Martin Baker, managing director of Mr Pascoe’s claims management company (CMC) Renaissance Easy Claim, described it as “another way by which the banks and lenders were trying to reduce their compensation bills.”

MBNA responded by saying:

“It is not and never has been our practice to refund these fees.”

They have also asserted that:

“PPI could never cause our customers to be over limit or cause the fee to be applied.”

The credit card issuer added that its methods of calculating PPI compensation had been

“independently reviewed.”

These findings serve as a reminder to customers and their CMCs to check redress calculations on credit card PPI claims to ensure that these charges have been included. A final response letter from a firm should explain the rationale behind the amount of compensation awarded. If there is reason to believe that these charges have not been considered, then the decision can be referred to the independent Financial Ombudsman Service (FOS).
The FOS confirmed to the BBC that these fees should be included in the compensation amount. “If a fee is the result of the mis-sold PPI, it should be given back, and if it’s not included, that would be a mistake,” said Principal Ombudsman Caroline Wayman. Consumer website Moneysavingexpert.com also claims to have received confirmation from the FCA that these charges, plus interest, should be refunded.

Gillian Guy, chief executive of national advice charity Citizens Advice, said:

“Firms should not be short-changing people on their PPI payout. It’s not for banks or credit card companies to pick and choose what they provide compensation for. If people have been mis-sold they deserve a full payout which covers all of their losses. This is yet more evidence of banks and card providers’ utter failure to put things right for PPI customers.”