Compliance Audit and Review – Making Sure You are Ready for the FCA

The Financial Conduct Authority (FCA) classifies each of the firms it regulates into one of four categories – C1 to C4 – depending on the level of risk each firm may present. If you are a small firm, it is likely that you will be placed in the C4 category. But, even though C4 firms may only be assessed once every four years, and even then the assessment might be conducted via telephone or online rather than via a firm visit, all regulated firms must be ready to be inspected by the FCA at any stage.

In addition to the regular programme of firm assessments, the FCA may decide to visit your firm as part of a thematic review. Here, information is collected on a selection of firms to assess their conduct standards surrounding one specific issue. Alternatively, they may visit after seeing information in a regulatory return, which leads them to think that your firm poses an increased risk.

Therefore, all firms must consider this question: If the FCA walked in to your premises today, would they like what they see?

No matter how it uncovers the issue, if the FCA finds fault with your firm, it can refer the matter to the Enforcement Division for a formal investigation, and disciplinary action may follow. You are advised to have a regular internal audit of your compliance arrangements and engage a third party consultant to conduct their own compliance review. By doing this, any issues can be identified and corrected before your next FCA assessment.

A compliance audit should cover issues such as:

  • The quality and number of file reviews being undertaken, and whether there is an appropriate system for selecting which files are reviewed
  • Whether your customers are being treated fairly
  • The quality of the information provided to your clients
  • Your training and competence arrangements
  • Your documented compliance procedures
  • The content of your website and marketing material

We at Scott Robert have many years’ experience of carrying out audits of firms’ compliance arrangements. Contact us today to see how we can help.


Which? calls on FCA to act over payday loan default fees

Consumer organisation Which? has called on the Financial Conduct Authority (FCA) to act over the issue of default fees – fees imposed for missed repayments – being charged by payday lenders. Back in January 2014, a Which? investigation revealed that of the 17 lenders surveyed, 10 were charging fees of £20 or more. Four charged £25 or more and one (Wonga) charged £30.

Which? has even asserted that the fees being charged are illegal, in that the Unfair Terms in Consumer Contracts Regulations 1999 prohibit default fees being charged that are disproportionate to the administrative costs incurred by the lender as a result. It cites guidance from former consumer credit regulator the Office of Fair Trading that default fees should be no higher than £12 for credit card defaults, unless there are exceptional circumstances. None of the 17 lenders charge less than £12, however four charge exactly this amount.

Which? notes that 56% of payday loan borrowers incur some form of late payment fee.
Which? wrote to the lenders asking them to take action, but the organisation says it has not received commitments from any lenders to reduce their fees. It adds that the lenders

“failed to produce any evidence to justify their excessive fees since we challenged them.”

Which? first asked the regulator to intervene back in February 2014, and repeated its call in July 2014, shortly after Wonga was ordered by the FCA to pay £2.6 million in compensation to customers who received debt collection letters purporting to come from one of two law firms, firms which in fact did not exist.
One of the consumer body’s ideas is that a cap on the size of default fees could be introduced as part of the forthcoming limit on the total cost of credit.

Which? executive director Richard Lloyd commented:  

“The FCA must now start with default fees charged by some payday lenders to show it is serious about getting a fairer deal for borrowers.”

The regulatory landscape for payday lenders continues to change. The FCA has taken over regulation of consumer credit, and has introduced new rules regarding matters such as rollovers, use of Continuous Payment Authority and promotional material. The regulator is also carrying out a series of monitoring visits to lenders both large and small.

In January 2015, the FCA will impose a limit on the total cost of credit, the level of which is yet to be confirmed. In addition, the Competition and Markets Authority is investigating various competition issues regarding the payday loan market, and has already revealed provisional results suggesting that there is a lack of effective price competition in the market, which is driving up the costs of loan repayments.


PPI redress reaches £15 billion

April 2014 saw another milestone in the payment protection insurance (PPI) mis-selling saga, as the total compensation paid to victims of the scandal passed £15.1 billion.

The regulator, the Financial Conduct Authority (FCA), continues to publish monthly figures for the amounts of PPI compensation paid by the 24 firms who account for 96% of complaints about the product. The latest available figures run to April 2014, and in that month £410.3 million was paid in compensation. This is the highest monthly figure to date in 2014, but the overall trend is downwards – the highest monthly amount was the £735.3 million paid in May 2012, and the highest in 2013 was £528 million, in July.

This trend corroborates figures from both the FCA and the Financial Ombudsman Service (FOS), which acts as an independent arbitrator on financial complaints, with these organisations reporting significant falls in PPI complaint numbers over the last 12 months or so.

Some previous estimates suggested that the industry’s final PPI compensation bill could be as much as £40 billion, but with numbers now tailing off, it appears that a figure closer to £20 billion might be more realistic.

Complaint numbers are inevitably falling, as it is now six years or more since most of the mis-sold policies came into force.  However, as the FOS will accept complaints until ‘three years from when the consumer knew, or could reasonably have known, they had cause to complain’, PPI complaints can certainly still be made. Many PPI policyholders did not realise just how unsuitable their insurance was, and in some cases were unaware they even had the cover, so it is considered that these customers will meet the above criterion.

In January 2013, the trade association the British Bankers Association suggested a time limit on when a PPI complaint could be brought, but in February 2014 the FCA said it was not convinced that this would be in the interests of consumers.

PPI is quite simply the most widely mis-sold financial product ever. It is designed to protect loan repayments should a borrower suffer accident, sickness or unemployment, but around seven million consumers have submitted complaints about the sale of the product, and a significant majority of these have ultimately been successful. The UK’s financial institutions have been forced to set aside massive sums in order to pay compensation to affected customers – £9.8 billion in the case of Lloyds Banking Group alone. The saga has put massive strain on the FOS, who saw their annual complaints workload increase more than tenfold between 2009 and 2013, almost solely due to PPI grievances.

The reasons why PPI may have been mis-sold are varied. Some customers were sold PPI they were unlikely to be able to claim on due to their employment status or medical history. Sometimes PPI was sold without the firm checking that the customer was eligible, or whether they already had adequate insurance. Highly pressurised, target-driven sales cultures were commonplace, and significant numbers of policies were added to customers’ loans without their knowledge or consent.


FCA suggests fraudsters have cloned an authorised credit firm

The Financial Conduct Authority (FCA) publishes warnings on its website almost daily about firms suspected of carrying out financial services activities without its authorisation. The first such warning about a consumer credit firm was posted on April 4 2014, only days after the FCA took over as consumer credit regulator, and a number of other warnings have been posted since.

However, on July 3 2014 a more serious warning was posted about an authorised credit firm who may be using the identity of a bona fide FCA-authorised firm. The warning concerns a firm calling itself UK Fast Loan Limited. There is an authorised firm by this name, which is based in Welwyn Garden City in Hertfordshire, however now another firm is also using this name, and is also using the same trading address and FCA interim permission registration number.

What is especially worrying is that the FCA’s warning says that the ‘clone firm’ is using the name UK Fast Loan to conduct a scam, whereby customers pay advance fees for loan applications but the loans are never granted.

The genuine firm also uses the trade names www.fast-loan.co.uk and Fast Loan UK.

Consumers are regularly advised by the FCA to deal only with authorised firms that appear on their Register. However, if another firm is using the identity of an authorised firm, then this advice is of little benefit. The best advice to anyone contacted out of the blue by a financial firm that they have not previously dealt with is to say they will ring back. When doing so, consumers should ensure they always phone back on the number given on the FCA Register, not on any other number which they may have been given. They should also check that they get a dial tone before making the call, as the scammer may have stayed on the line.

The FCA and other organisations have information about common financial scams on their websites. Consumers are advised to read these, and financial advisers may also have a part to play here in educating their clients.

Firms are advised to look out for any signs that they may have been cloned, and if so to contact the FCA for advice.

Customers who do business with unauthorised firms will not be able to make a complaint about that firm to the Financial Ombudsman Service, or make a claim to the Financial Services Compensation Scheme if the firm becomes insolvent.

As part of its enforcement activities, the FCA seeks to prevent firms carrying out regulated activities without its authorisation. Doing so is a criminal offence.


FCA suggests enforcement action may follow for swaps mis-selling

The Financial Conduct Authority (FCA) has suggested that it may yet use its regulatory enforcement powers against firms who have mis-sold interest rate hedging products (IRHPs). So in addition to the significant sums paid in compensation, the UK’s banks could yet need to pay large fines over their conduct when selling this product.

Nausicaa Delfas, head of the supervision department at the FCA, told the Treasury Select Committee of the House of Commons in early July 2014 that such action may follow once the FCA’s customer compensation scheme regarding these products has ended. The UK’s banks were asked to complete the redress process by May 2014, but many institutions have missed this ‘deadline’.

The review is focussed on smaller businesses that do not pass the ‘sophistication assessment’ – an assessment of whether they were likely to have understood the complex nature of the product.

The latest FCA figures, published on May 31 2014, show that of 29,490 claimants, some 18,964 have been classed as ‘non-sophisticated’ and 10,475 as ‘sophisticated’, while a further 51 are still awaiting their assessment.

Of the completed investigations, 13,060 sales have been classed as non-compliant and only 1,134 as compliant. Any decision by a bank to reject a claim must be verified by an independent reviewer.

Of the 18,964 claimants accepted as non-sophisticated, around 2,000 have since opted out of the review and their cases will not now be considered, which still leaves almost 3,000 investigations outstanding.

12,690 offers of compensation have been made, of which 6,726 have so far been accepted, resulting in total compensation of around £1.1 billion. However, not all customers have received monetary compensation, and almost 50% have instead been offered a different type of IRHP, deemed to be more suitable than the one originally sold.

11 high street banking groups were required by the FCA to review their sales of IRHPs, including all of the largest banks. IRHPs are designed to protect against rises in interest rates on business loans, however interest rates have been at a historic low for many years, meaning that the products have been of little value recently. Many businesses have been hit with significant fees and exit costs as a result, and many have said that they have experienced significant financial problems or even gone bust as a result.

In an echo of the payment protection insurance mis-selling scandal, many purchasers of IRHPs allege they were pressured into buying the product, or were told that taking out the product was mandatory.

Companies who are not eligible for the review as a result of being classed as sophisticated, but who still believe they have a case for mis-selling, need to make a complaint in the usual way. This means they must complain to the firm that sold the product, and then appeal to the Financial Ombudsman Service if necessary. In June 2014, the Independent newspaper suggested that once compensation to ‘sophisticated’ customers – whose losses may be much higher on average – had been taken into account, that Lloyds Banking Group alone could be faced with paying out as much as £5 billion to affected customers.

Even for customers classed as ‘non-sophisticated’
, the battle may not be over. Over 2,000 mis-selling victims have signed up to the Bully Banks project, and this group is threatening legal action after claiming that the compensation payouts are inadequate.


FCA launches enhanced supervision regime

On June 19 2014, the Financial Conduct Authority (FCA) released a statement entitled ‘Tackling serious failings in firms’. In the statement, the regulator gave details of a new approach known as ‘enhanced supervision’ that it intends to adopt in exceptional circumstances.

Essentially, when there is a serious failure at a regulated firm, and the FCA’s normal procedure would be inappropriate to deal with the issues identified, then the enhanced supervision procedure may be initiated.

Circumstances in which enhanced supervision may be appropriate include:

  • A large number of conduct failings within a firm, or failings that are especially significant or occur on a regular basis
  • Conduct failings within several different business areas in the same firm
  • A firm has a Board of Directors that fails to challenge senior managers over conduct issues
  • A key business area within a firm such as Risk, Compliance or Internal Audit has poor management, insufficient resources or insufficient weight to influence the Board
  • Other issues regarding how a firm’s Board views the corporate culture

Once a firm has been placed under enhanced supervision, the procedure may involve:

  • A review of the firm’s supervision arrangements
  • Formal commitments being sought from the firm’s board of directors that certain issues will be addressed and certain actions carried out
  • Formal undertakings under section 55L of the Financial Services and Markets Act 2000 for the firm to take a particular course of action, or to cease a particular activity. These are known as Own Initiative Requirements (OIREQs)
  • Forcing the firm to vary its FCA permissions in some way, known as an Own Initiative Variation of Permission (OIVOP)
  • Preventing the firm from dealing with its assets
  • Use of section 166 reviews – indeed the FCA already uses this tool, which involves either the regulator or the firm commissioning a ‘skilled person’ to conduct a review of the firm’s arrangements and identify the extent of the risks posed by the firm

Issues in firms that are subject to enhanced supervision will be reported to the FCA’s Executive Committee on a monthly basis. Enhanced supervision may be followed by an enforcement action, although it will still be the case that enforcement action will often be taken without enhanced supervision having been initiated.

This announcement follows a recommendation from the Parliamentary Commission on Banking Standards that the FCA introduces a new ‘Special Measures’ tool, which would be something of a halfway house between the usual FCA supervision regime and formal enforcement action. The Commission identified that many of the recent problems in the UK banking industry were caused by a failure of corporate governance.

Although the enhanced supervision regime has been developed in response to a review which focussed on the banking sector, the FCA reserves the right to use this approach in respect of all types of regulated firm in the future.


Barrister suggests FCA has mis-interpreted its own rules over independence

Barrister Peter Hamilton has said that firms should ignore a recent piece of guidance from the Financial Conduct Authority (FCA) regarding adviser independence requirements. Mr Hamilton believes that the FCA has mis-interpreted its own rules on the subject.

In March 2014, the FCA published a thematic review on the subject of whether firms were meeting the new independence definition introduced in the Retail Distribution Review (RDR). This definition requires firms to consider a wide range of different products in order to be considered independent.
In the review, the FCA said individual advisers could not consider themselves to be independent if they passed on certain cases to other advisers, whether inside or outside the firm. The only permitted exceptions are occupational pension transfers and long term care insurance cases, where advisers may pass the case on to ‘specialists’ in these areas without contravening independence requirements. The review also said that advisers could seek the assistance of colleagues, provided that the final advice was still given by the original adviser.

The review summarises the situation by saying: “Every adviser in an independent firm must give advice that meets the independence rule if the firm holds itself as being independent.”

However, the relevant section of the FCA Handbook reads

“A firm must not hold itself out to a retail client as acting independently …”

which suggests that under its rules, it is the firm that the independence definition applies to, not the individual advisers. So one possible interpretation could be that, provided the advice is still given by the original firm, it can still be considered independent advice even if the original adviser passed the matter on to a colleague.

Mr Hamilton certainly takes this view, and has said:

“The FCA has treated the rule as if it applies not to firms but to individual advisers. The test has to be whether the quality of advice given by the firm is independent.”

Boldly, he calls on firms to fight the FCA over this should they be held to account.

“If the FCA tries to discipline advisers for this then firms should stand up to the regulator,” added Mr Hamilton.
Chris Hannant, director general of the trade association the Association of Professional Financial Advisers, indicated concern over what the March 2014 guidance means for firms taking on trainee advisers, and also expressed his frustration with the general lack of clarify from the FCA on the subject of independence.”

“A lot of our members are saying if you are a small firm and you take on a trainee member of staff, as soon as that person starts giving a bit of advice on one area the firm is no longer independent. The fact we are still having these conversations a year and a half on from the RDR and the industry is still struggling to understand the rules suggests the advice labels independent and restricted have failed a very basic test: to convey to clients what type of service they will receive,”

commented Mr Hannant.

Other legal professionals urged firms to treat Mr Hamilton’s remarks with caution. DWF Fishburns partner Harriet Quiney said:

“To ignore the FCA’s guidance on the basis you think it is wrong is risky and firms do so at their peril,” while Pinsent Masons senior lawyer Michael Ruck said: “It is going to take a brave firm to ignore the thematic review.”