FCA amends permission of credit broker over its misconduct

The Financial Conduct Authority (FCA) has acted to ban a consumer credit firm from entering into any new regulated credit agreements, and from engaging in credit broking activities.

The South West England based firm is a distributor of vacuum cleaners and is therefore one of the many thousands of firms who required FCA authorisation for consumer credit even though financial services was not their main business activity.

The firm cannot now lawfully offer regulated credit agreements to finance the purchase of vacuum cleaners, although it is entitled to appeal the ruling to the Upper Tribunal (Tax and Chancery Chamber).

The reasons for the regulator’s action include:

  • The firm sold credit agreements during cold call visits to customers’ homes even though its permissions prevented it from soliciting business in this manner
  • The firm did not carry out adequate affordability checks on customers’ ability to repay credit. In at least two cases, the firm went as far as to enter into a consumer credit agreement even though the customers had told the firm that they could not afford the credit
  • The firm misled the FCA
  • The firm is closely connected with another firm whose consumer credit licence was revoked by the Office of Fair Trading under the previous regulatory regime

The second of these is one of the fundamental requirements of any firm that offers any form of credit agreement – no customer should be granted credit without a rigorous check being carried out as to whether they are likely to be able to afford the repayments. The third point in this list directly refers to one of the FCA’s 11 high-level Principles for Business – all authorised firms must be open and co-operative with the FCA and other authorities.

The FCA has advised customers who have existing contracts with the firm to consider getting legal advice from a solicitor, legal advice centre or Citizens Advice Bureau.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article


FCA issues final rules on creditworthiness assessments

July 2018 saw the Financial Conduct Authority (FCA) issue a Policy Statement entitled ‘Assessing creditworthiness in consumer credit’, imposing new rules on lenders and peer-to-peer lending firms.

Firstly, regarding creditworthiness assessments, firms must make a reasonable assessment of creditworthiness before they agree to grant credit to an applicant, or to or significantly increase the amount of credit available to an existing borrower.

One of the key things the FCA wants to see is that firms carry out a reasonable assessment of whether customers can afford to make the required repayments without significantly affecting their wider financial situation. Simply assessing whether the customer is likely to make the required repayments is not sufficient, as it may be the case that the customer is making significant financial sacrifices to ensure that their loan repayments are met, or worse, is taking out credit to repay credit.

The FCA does not set out in detail exactly what information a lender should assess when determining affordability, nor does it impose prescriptive rules on whether the lender should verify the accuracy of this information.

The document does stress though that lenders can use non-employment income in affordability assessments, provided that the firm can reasonably expect such income to be available to the borrower for repayment of the credit. The firm should work on the assumption that repayments will be made out of the customer’s own income, unless the customer clearly states that they intend to repay using savings or other assets. Firms will also be able to take account of other income, including from other household members, where they can once again reasonably expect this to be available to the borrower for repayment of the credit.

Unless it is “obvious” that the credit is affordable, the FCA expects firms to take reasonable steps to determine, or estimate, the customer’s income. They are also required to establish or estimate non-discretionary expenditure.

Firms should also consider whether it can reasonably be foreseen that income may reduce, or non-discretionary expenditure might increase, over the period of the credit.

Where running-account credit with no fixed term is offered, the FCA says it is reasonable for firms to assume that the customer will draw down the entire credit limit at the earliest opportunity and repay by equal instalments over a reasonable period.

Guarantor lenders will be required to consider the potential for the repayment obligations to have a significant negative effect on the guarantor’s financial situation.

Firms should undertake periodic reviews of the effectiveness of their affordability assessment procedures, and changes should be made to address any deficiencies.

The new rules come into force on November 1 2018.

In issuing these new rules, the FCA notes that for a number of firms, they have little incentive to assess the effect that granting credit would have on customers’ wider financial situation, as these customers would remain profitable for the firm in any case.

The regulator also acknowledges that some customers are being “granted credit that is predictably unaffordable at the point it is taken out.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article


Adviser trade body research indicates ‘urgent need’ for pension education

The Personal Investment Management & Financial Advice Association (PIMFA) has published the results of research it carried out in partnership with The Wisdom Council, and which it claims highlights an “urgent need for consumer pension and savings education.”

The Association, a trade body representing financial advisers and wealth managers, says that the main reason people are saving too little for retirement is that “the consumer pension and savings market still feels alien to them.”

The press release accompanying the release of the study notes that financial education was added to the UK schools’ curriculum in 2014. However, PIMFA adds that, not only is this education confined to people of school age, but also 75% of teachers have reported that financial education has had little or no positive impact as the teachers had not been trained on the subject prior to delivering their teaching (according to a 2016 Money Charity survey).

PIMFA is also concerned about a gender gap, with women showing lower degrees of confidence in their financial knowledge. It adds that a recent Guardian article claimed that the average single woman receives £85 per week less in retirement income than the average single man.

The PIMFA and Wisdom Council study surveyed around 2,000 individuals. Almost two fifths (39%) of respondents said that the principal source of their retirement funding would be the equity in their house. Despite all the pressures preventing people from putting aside sums for retirement, more than 60% anticipated retiring before they reached age 70.

PIMFA was concerned by the lack of knowledge of some respondents from the millennial generation. Approximately 40% of respondents from this age group believe that their pension provision includes benefits from a final salary scheme, but the Office for National Statistics suggests the true figure is closer to 20%.

The survey also comments on “a lack of understanding of the benefits” of auto-enrolment schemes and says that this is a reason why people may choose to opt out of their workplace pension.

Across all age groups, there was evidence amongst respondents of being unwilling to make pension provision in the usual way due to a lack of trust in the financial services industry. Millennials are still wary of the financial system following the crisis of a decade ago, and also see financial advisers as “expensive and motivated by the desire to make money first and foremost.” Generation X still clearly remember the pensions mis-selling scandal of the 1990s.

PIMFA CEO, Liz Field, said:

“For a large proportion of respondents the main methods of saving for retirement remains in an over reliance on their house and holding cash.  Risk aversion remains an issue with few individuals balancing this equation by taking calculated risks to grow their pot.

“Engaging and relevant education is key to helping consumers see the wider picture and how investment and financial advice can benefit them when planning their personal financial futures – there is a lot of work still needed to change these basic views”.

Anna Lane, CEO of The Wisdom Council, said:

“We see growing differences in life stages between generations and shifts in retirement patterns. The ‘grey glide’ is the new reality – have manufacturers caught up with the need to refresh and innovate to allow that flexibility? We think there is more to do on that score and our study raises some of those questions.

“Ultimately, customers want clarity, simple products that flex with them and communication that speaks to them as human beings. Perhaps digital delivery, machine learning, behavioural science and creative product innovation could be the perfect storm that finally makes long-term saving not only accessible but exciting”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article


Four former directors of online consumer credit broker banned for misleading customers

Four individuals have been banned from carrying out any role in regulated financial services, as a result of their conduct while serving as directors of an online credit broker.

The Financial Conduct Authority (FCA) says that the individuals’ actions displayed a lack of honesty and integrity. Their conduct included:

  • Incorrectly informing new applicants that they had been ‘approved’ for a loan, when in fact the applications had not even received pre-approval at that stage
  • Providing a list to applicants which the firm claimed was a list of pre-approved loan offers, when in fact it was nothing more than a list of links to lender website homepages
  • Taking fees without the knowledge of the applicants, who were asked to enter their payment card details, supposedly in order to ‘verify their account’, but in fact payments of between £39 and £69 were taken at this stage
  • Misleading the FCA by informing them that they had taken down the firm’s four websites, when in fact they had merely disabled the home page, knowing that the majority of customers arrived on the sites via other pages – pages that were still live
  • Charging a monthly site membership fee, and backdated this to March 2014, even though the director involved with this action was aware that doing so was a breach of customer terms and conditions
  • Arranging for customers clicking on lender icons in the membership areas of the site to be redirected to other fee-charging credit broker websites. The sale of customers’ personal data to third parties led to some customers receiving multiple marketing calls or texts.

The four men had already been disqualified by the Insolvency Service from acting as directors for periods of between five and eight years.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:

“These four individuals consistently misled vulnerable customers into paying money for worthless services and into believing SMM had found them a loan, in addition to selling on their data. They showed complete disregard for the consequences of their actions. We have taken the strongest action possible to prevent them from working in financial services again.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article


FCA publishes new proposals for loan crowdfunding

It may have reviewed the sector as recently as December 2016, but the Financial Conduct Authority (FCA) has now opened a formal consultation on further rules it is proposing for the loan-based crowdfunding (peer-to-peer (P2P) lending) sector.

The regulator says that the new rules “are designed to address the ways in which the loan-based crowdfunding model has developed since the FCA last reviewed the sector” and adds that the business models used by firms in this sector are becoming increasingly complex.

The FCA is concerned about the evidence it has found of customers buying inappropriate products, and of them otherwise being treated unfairly.

Specifically, it remains concerned that investors may not:

  • Receive clear or accurate information from firms in this sector
  • Understand or be aware of the risks involved with this type of financial product
  • Receive fair remuneration for the risks they are taking
  • Understand the consequences for them if their peer-to-peer platform fails
  • Appreciate the true cost of their investment

The proposed new rules include:

  • All platforms that set the price of the agreement must have a robust risk management framework that gathers sufficient information from the borrower to fully assess their credit risk, and then sets a price that is fair and appropriate, and reflects the risk profile of the borrower
  • If a platform offers investors a target rate of return for a P2P portfolio which it assembles or manages, then it should have a reasonable basis to conclude that the return it is advertising can reasonably be achieved
  • Where a platform chooses which loans to facilitate for an investor it should ensure that investors are only exposed to loans that, at the point they are allocated to an investor, meet the risk parameters advertised
  • Firms will be required to have risk management policies which allow them to identify, manage and monitor risks associated with their business model
  • Firms must have an independent compliance function, and where proportionate to the size of the firm, the function must not be involved in the services or activities they monitor, and must be remunerated in a way that does not compromise their objectivity
  • P2P platforms that communicate direct offer financial promotions will only be able to target individuals who are sophisticated, or high net worth, or confirm they will receive regulated investment advice, or confirm they will not invest more than 10% of their net investible portfolio in P2P agreements
  • A platform must have wind-down arrangements in place to ensure that P2P agreements facilitated by it will continue to be managed and administered in accordance with the contract terms should the platform be unable to do so
  • P2P platforms who offer home finance products will be subject to the affordability assessment requirements of Chapter 11 of the FCA’s Mortgage Conduct of Business rules, and the requirements for the treatment of borrowers in arrears documented in Chapter 13

Christopher Woolard, executive director of strategy and competition at the FCA, said:

“When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop. The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections.”

The consultation closes on October 27 2018 and final rules will be published in a Policy Statement later this year. The rules would then come into force six months after the publication of the policy statement.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article



Results of FCA satisfaction survey published

For the second time, the Financial Conduct Authority (FCA) has teamed up with its own Practitioner Panel to assess how the regulator is perceived by the firms it authorises.

26% of firms replied to the survey, compared to 21% last year. The average satisfaction rating amongst all firms is 7.6 out of 10, up from 7.5 last year. The satisfaction rating amongst smaller firms – who generally have much less in the way of personal contact with the FCA – rose from 6.9 to 7.3. Amongst consumer credit firms, the satisfaction rating was largely unchanged at 7.5, and the highest score was obtained from the retail lending sector, where it was 7.7.

When asked to rate the quality of the communications they received from the FCA, the average score was 7.4 out of 10, up from 7.0 last year. 93% thought that the level of communication they received from their regulator was “about right”. 64% believed that the level of data requests made by the FCA was also “about right”.

In the introduction to the report on the findings, the FCA says it is aiming to enhance its engagement with smaller firms in various ways, including:

  • The ‘Live & Local’ national outreach programme
  • Improvements to direct digital communications such as the monthly Regulation Round Up
  • Greater use of webinars

Firms were more confident that the FCA can meet its strategic objective of ensuring that financial markets function well (86% of respondents) than they were regarding whether it can meet another of its objectives, that of promoting effective competition (72%). The equivalent figures in 2017 were 79% and 60%.

The FCA is pleased that there has been a significant increase in the proportion of respondents who said that they could recall some form of FCA enforcement action in the past two years that was relevant to their business. This figure rose from just 31% last year to 56%. It can be vital for firms to be aware of the reasons why other firms have been subject to action, if only to make sure that the same failings are not replicated in their own organisation.

84% of firms said they made use of the FCA ‘Regulation Round-up’ email and 81% claimed to visit the FCA website.

38% of retail lending firms and 61% of retail investment firms said they were using some form of external assistance, such as a compliance consultant.

Some of the most negative results surrounded whether the regulator is doing well enough on the international stage. Firms were slightly less likely than they were last year to agree with the statement “the FCA is sufficiently leading developments in international regulation”. Only 28% of respondents thought the FCA had provided sufficient communication to firms on Brexit-related issues, although it should be noted that as many as 50% indicated ‘neither agree or disagree’ to this question.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article


FCA publishes its approach to consumers

The Financial Conduct Authority (FCA) has published its ‘approach to consumers’, explaining a variety of ways in which it seeks to protect the interests of consumers.

In introducing the document, chief executive Andrew Bailey noted that two of his organisation’s operational objectives are directly connected with the interests of consumers. These are:

  • Securing an appropriate degree of protection for consumers
  • Promoting effective competition in the interests of consumers

The document describes the following characteristics of well-functioning markets:

  • Consumers can easily access relevant information
  • Consumers can switch products where it is in their interests to do so
  • A range of good quality products and services is available that meet consumer needs and which represent value for money
  • Consumers are not unduly excluded from financial services
  • Basic financial services are available to all
  • The needs of all consumers, including vulnerable consumers, are taken into account
  • Consumers are not exposed to deceptive or unfair practices by financial services firms
  • Consumers are provided with the appropriate level of protection against fraud and scams
  • Systems are in place to provide redress to disadvantaged customers where necessary
  • Consumers are prevented from taking out products that carry a high risk of detriment

The FCA promises to “ensure an appropriate level of protection for all consumers.”

Firms were warned to have measures in place to protect vulnerable customers. On this subject, the approach document says:

“We expect firms to pay attention to indicators of potential vulnerability and to have policies in place to deal with consumers who may be at greater risk of harm. For example, we will intervene by taking enforcement action where vulnerable consumers are deliberately exploited.”

This has relevance to all authorised firms, but especially for the consumer credit sector.

The next section notes that, while the requirement to treat customers fairly in Principle 6 is well-known, the interests of customers/consumers are in fact referred to in five of the FCA’s 11 high-level principles:

  • Principle 2: Skill, care and diligence – A firm must conduct its business with due skill, care and diligence
  • Principle 6: Customers’ interests – A firm must pay due regard to the interests of its customers and treat them fairly
  • Principle 7: Communications with clients – A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading
  • Principle 8: Conflicts of interest – A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client
  • Principle 9: Customers: relationships of trust – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment

The regulator notes that where it finds evidence of consumer harm, it can take action on several levels, including:

  • Issuing consumer warnings about certain markets or products
  • Taking enforcement action against individual firms
  • Taking action across a market to protect consumers from practices that carry a risk of harm, e.g. imposing a payday loan cap

The document also warns firms that their applications for authorisation will be refused if they cannot demonstrate that they will operate in the interests of consumers, and that senior management have an important role to play in ensuring the firm’s culture protects the interests of customers.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article


FCA issues annual report

The Financial Conduct Authority (FCA) has issued its Annual Report for the financial year 2017/18. The regulator says that the ‘highlights’ of the year were:

  • Preparations for Brexit
  • Various work on high-cost credit and other consumer debt issues
  • Preparing to extend the Senior Managers & Certification Regime (SM&CR) to all financial services firms
  • Publicising the payment protection insurance (PPI) claims deadline

The report reminds readers of the five categories of ‘harm’, as defined in the FCA’s Mission document:

  • Market abuse and other conduct undermines market confidence
  • Customers are victims of mis-selling, buy unsuitable products, receive poor customer service or are otherwise treated unfairly
  • Product gaps and consumer exclusion lead to customer’s needs not being met
  • Prices are too high, or quality is too low
  • Crime and terrorism has a major impact on the wider economy

On the subject of firms’ governance and culture, the report says:

“We place a high priority on ensuring that individuals, especially senior managers, are accountable for their behaviours and are fit and proper for their roles. We also focus on ensuring remuneration and other staff rewards do not create the wrong incentives.”

Specific mention is made of the new rules on how consumer credit firms should manage risks arising from the way they reward their staff.

Regarding SM&CR, which will be extended to all authorised firms from December 9 2019, the report warns that:

“The regime makes it clear that every individual in a firm is responsible and accountable for their own behaviour and that Senior Managers are also responsible and accountable for taking reasonable steps to ensure good conduct in their areas of responsibility. Finally, the regime is designed to ensure that those individuals with the greatest potential to do harm are fit and proper.”

All firms should also take careful note of the section on resilience, given the growing cyber threat. The report highlights the need to have “appropriate governance, risk management, and incident response arrangements.”

Some of the most important messages in the report concern consumer credit. The FCA highlights that its new rules require firms to take steps once a customer has been in persistent debt for over 18 months. Once a consumer has been in persistent debt for 36 months, then appropriate forbearance measures need to be considered, which may extend to reducing, waiving or cancelling interest, fees or charges.

Some of the other key messages in the report regarding retail lending include:

  • Where a customer falls into arrears in the first six months, it could be an indication that an unsuitable product was sold
  • The CEOs of second charge mortgage lenders have recently received a letter from the FCA asking them to confirm that their affordability assessments are adequate
  • Regarding high-cost credit, the FCA has unveiled a package of proposals to reduce costs, improve sales practices and protect vulnerable consumers. The regulator is considering the introduction of a price cap on rent-to-own products

Andrew Bailey, Chief Executive of the FCA said:

“While this Annual Report illustrates the wide range of our activities, there are three key areas that particularly define our work this year.

“The first is our work to prepare for the UK’s withdrawal from the EU.

“The second is regulatory change: this year we have applied legislation which will have profound implications for firms’ transparency, the way they treat consumers and in some cases even their business models. This has included MiFIDII, the second Payment Services Directive and preparing for the extension of the Senior Managers and Certification Regime to all firms.

“And the third area is ensuring that firms treat consumers fairly. Our work this year has sent a clear message to firms that, if they do not treat customers fairly, then we will take action.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

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