Author: scottrobert

The Financial Conduct Authority has admitted that around 4,000 mostly small and medium sized firms within financial services could be at risk of failure as a result of the pandemic.

The FCA says these 4,000 firms have “low levels of financial resilience” and that 1,200 of these firms could cause “a higher degree of harm” to the market were they to fail. Only around 800 of these 1,200 firms would be covered by the Financial Services Compensation Scheme were the worst to happen. The FCA made these admissions in an exchange of letters between its chief executive Nikhil Rathi and Treasury Select Committee chairman Mel Stride MP.

These estimates were made at the end of October, and the regulator hopes that the position has improved slightly since then and will continue to improve. October 31 saw the announcement of increased Government support, and the massive nationwide vaccination programme is about to commence.

In his letter, Mr Rathi writes:

“In response to the crisis, we are monitoring the effects of economic downturn on firms’ solvency through 1) existing regulatory reported data; 2) enhanced data purchased from a third-party provider, 3) in-depth analysis of liquidity for a large number of the most significant firms and 4) data collection on the impact of Covid-19 on cashflow and income from 23,000 firms through our financial resilience surveys.

“We have rapidly increased our available data. We have used this to provide more granular monitoring across the majority of 49,000 firms we prudentially regulate to give an early warning about firms’ financial resilience.

“Alongside assessments of financial resilience, we have considered which types of firms could potentially cause the greatest economic harm in failure.

“We have prioritised consumer harm through loss of client assets or segregated funds, failure to pay redress claims/Ombudsman award and lack of FSCS cover.

“We are also considering the potential loss of access to services for particularly vulnerable markets and are generally concerned about any threats to competition and the effective functioning of markets.”

The FCA has been speaking about the importance of financial resilience since the start of the health crisis. On March 26, it told firms they should be “taking appropriate steps to conserve capital, and to plan for how to meet potential demands on liquidity,” advice which certainly remains every bit as relevant today.

Unfortunately, the FCA cannot intervene to assist firms who may be struggling. Its focus remains on protecting the interests of consumers, such as the obligation for mortgage and credit providers to grant additional payment deferrals to borrowers. Where a firm does fail, the FCA will seek to protect the interests of the firm’s customers and investors as much as possible.

On September 24, at the regulator’s annual public meeting, the FCA’s then interim chief executive Christopher Woolard said bluntly:

“We expect to see a number of business failures”.

On November 12, Mr Rathi gave his first speech since taking the permanent CEO role, and said:

“The financial impact of the pandemic is being felt by the firms we regulate. Ultimately, we can’t intervene to stop firms from failing in the face of economic distress and sadly we do expect a significant number of regulated firms, particularly smaller firms, to fail in the months ahead.”

The Financial Conduct Authority has frequently spoken of the importance of consumer credit firms having robust procedures for assessing affordability and for fair treatment of customers in arrears. These are once again the main areas of focus in the Portfolio Letter sent by the FCA on December 2 to all firms in the Mainstream Consumer Credit Lenders portfolio.

The letter acknowledges that coronavirus has increased the operational and financial pressures faced by many lenders. The FCA says that, prior to the pandemic, it had already identified four principal ways in which the actions of credit firms could lead to harm for customers, but that Covid-19 has only increased the risk of unfavourable customer outcomes. These four scenarios are:

• Inadequate affordability checks, leading to over-indebtedness
• Firms not having clear, effective and appropriate policies and procedures for customers in arrears, resulting in poor outcomes for those in financial difficulties
• Poor outcomes for credit card customers when their cards are inappropriately and expensively used for long-term borrowing
• A potential lack of transparency in the pricing structures and features of products

The FCA says the customer outcomes it wishes to see include:

• Customers are treated with forbearance and due consideration
• Customers are provided with sustainable arrangements, which take into account their other debts and essential living costs and which give them a reasonable opportunity to repay their debt
• Customers are not pressurised into repaying their debt within an unreasonably short timeframe
• Customers are protected from escalating debt once they have entered into an affordable forbearance arrangement
• Firms recognise vulnerability and respond to the particular needs of vulnerable customers. Firms have clear, effective and appropriate policies and procedures for dealing with customers in payment difficulties and for those who the firm understands or reasonably suspects to be vulnerable. Firms have adequately trained staff who can provide customers with the help they need
• Customers are allowed time to consider their options and, if necessary, seek debt advice
• Customers are referred to debt advice if this is appropriate

Specifically regarding affordability assessments, the FCA says that firms’ business models must be designed to deliver good customer outcomes. The regulator says it is concerned by firms whose business models appear to be based on over-ambitious lending growth targets; and those who emphasise to prospective applicants how quickly and/or easily they can approve their loan, perhaps by using automated tools, without the need for the applicant to provide detailed information regarding their income and outgoings.

Regarding customers in arrears, the letter says the FCA is concerned about the adequacy of firms’ monitoring arrangements where they have outsourced arrears management activities such as debt collection and/or debt administration.

The letter also advises firms to ensure they are fully aware of how Brexit and the end of the transition period on December 31 will affect them.

The Financial Conduct Authority has published an evaluation of the impact of two of its recent initiatives – the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR).

RDR, where most of the requirements came into force in 2012, required investment and pension advisers to obtain a suitable Level 4 Diploma qualification. It banned advisers from receiving commission for investment and pension advice and imposed new disclosure rules.

FAMR, commissioned in 2015, sought to improve consumer access to financial advice.

The FCA says it has observed these positive developments:

• 1 million UK adults (6% of the total) received professional financial advice in 2017, but this has since risen to 4.1 million (approximately 8%)
• 56% of those who have received advice in the 12 months prior to the review said they were satisfied with that advice, up from 48% in 2017
• Total adviser numbers have risen 4% between 2012 and 2019, from 35,000 to 36,400
• More firms are developing automated advice models. Estimated assets under automated advice models rose by a factor of eight between 2016 and 2019, from £400 million to £3.2 billion. 19% of consumers say they are now aware of automated advice services, compared to just 10% in 2017. 32% of consumers with £20,000 or more in investible assets have indicated they would be prepared to take digital advice in the future

However, the regulator says the following challenges remain:

• Many consumers are still holding large sums in cash and are not receiving advice that could enable them to make better investment decisions. 54% of UK adults with £10,000 or more of investible assets (around 8.4 million people) did not receive any formal support to help them make investment decisions over the last 12 months. Of those consumers with more than £10,000 of investible assets, 37% did not have any investments at all and were holding their assets entirely in cash, and a further 18% were holding more than 75% of their investible assets in cash
• Of those consumers who hadn’t received professional financial advice in the last 12 months, 67% said it was because they didn’t think they needed any advice. Only 11% said they hadn’t sought advice because they had concerns over being able to afford it
• There remains significant clustering around certain service types and price points
• Greater innovation in services could help drive greater competition between firms across the market
• More tailored guidance services and simpler advice services could help to attract more consumers receive the assistance they require

(The evaluation exercise was completed prior to the Covid-19 pandemic)

Sheldon Mills, Interim Executive Director of Strategy and Competition at the FCA, said:

“We want consumers to have access to high-quality advice and guidance at the right time in their lives, to give them the confidence to make better investment decisions.

“Our evaluation has found the advice and guidance market is moving in the right direction, but still has further to go. We will play our role to support the market to improve further, in the interest of more consumers. We will use the evidence base this evaluation has given us, along with the responses to our Call for Input on consumer investments, to shape our work to improve the market.”

Scott Robert are experts in FCA Authorisation and can help your company with regulatory advice.

FCA says it believes that rent to own price cap has been effective in reducing prices

The Financial Conduct Authority has claimed that its price cap for rent-to-own products has delivered significant cost savings for consumers since it was first introduced in April 2019.

The FCA says that the average prices charged by the two largest firms in the sector have fallen by 19%. It also claims that the highest prices being charged in the market have fallen by 36% – prior to the cap some firms’ financing prices were 3.6 times the average retail price of the goods, but this has now fallen to 2.3 times average retail price. It says that these reductions are in line with what it expected to see when the cap was proposed.

The regulator adds it has seen no evidence of firms increasing other prices and charges to compensate for revenue lost as a result of the price cap.

The FCA’s statement concludes by saying:

“We continue to supervise high-cost credit firms carefully and the consumer credit market remains a key priority for the FCA.”

The price cap requires that:

• Total credit charges do not exceed the cost of the product
• The cost of products is ‘benchmarked’ against the prices charged by three other retailers. Only one of the three can be a catalogue credit retailer, and the other two must be mainstream retailers. Firms are unable to charge more than the median average of the prices offered by these retailers (if one of the three was a catalogue credit firm), or the highest of the three prices (if none of the three was a catalogue credit firm)
• Customers are not charged higher prices for insurance premiums, or for going into arrears, purely with the aim of recouping reductions in revenue caused by the price cap. If a firm wants to raise its charges, it must prove that this is a legitimate business need

Rent-to-own products are included in the programme of assistance announced by the FCA for borrowers who have been affected by coronavirus. Borrowers have until March 31 to apply for payment breaks – they can receive six months’ worth of payment deferrals, and anyone who already has a three-month payment deferral can apply for an additional three-month holiday. Deferrals can last until July 31, provided these payment breaks cover consecutive payments and cover no more than six payments in total.

Areas of concern the FCA has identified in the rent-to-own market in the past include:

• Firms failing to carry out adequate affordability checks
• Some customers being charged late fees for arrears on their insurance contracts, even though this was contrary to the firm’s own policy
• Some customers being required to pay for insurance before receiving any goods
• Other customers not receiving a refund of their first payment where their agreement with the firm was cancelled before the goods were delivered

Scott Robert are compliance consultants delivering solutions to regulated businesses.

FCA highlights to firms there is only one month to the end of the Brexit transition period and explains the actions to be taken by firms

We are now into the final month of the Brexit transition period. December 2020 will be the last time that UK firms will be able to trade with their EU counterparts on the same terms that existed when the UK was a member of the Union.

At the time of writing, it was still unclear whether the two sides would strike a trade deal, or whether the UK would exit the transition period on ‘no deal’ / World Trade Organisation terms.

However, regardless of the outcome of these final negotiations, the UK financial services industry must be prepared for significant changes, as any trade deal will not provide arrangements similar to the passporting and equivalence regimes that have been in force in the financial sector for many years now.

The Financial Conduct Authority’s statement, issued on December 1, says:

“When the transition period ends at 11pm on December 31, firms will need to be prepared for a number of changes to the regulatory environment in which they operate. EU laws will no longer apply and passporting will end.

“If a firm currently relies on a passport to provide services to or from the UK, and proposes to cease those services at the end of the transition period, the FCA expects them to ensure the right outcomes for their customers, and provide timely communications to enable them to make appropriate decisions.”

Nausicaa Delfas, Executive Director of International at the FCA, said:

“With just a month to go until the end of the transition period, firms need to make sure they are prepared for the end of passporting, and for the new financial services landscape after the end of the transition period.

“To help minimise disruption, we have onshored EU legislation and established temporary regimes to allow non-UK firms and funds to operate in the UK after 31 December 2020.

“We remain committed to open markets, international co-operation and high international standards of regulation.”

The FCA has announced it will make use of the Temporary Transitional Power (TTP), which will hopefully make life easier for many firms over the next 15 months. The TTP will apply from the end of the transition period until March 31 2022. This means firms do not generally need to make preparations for imminent changes to regulatory obligations. However, the TTP will not apply in a number of areas, and here firms should expect their regulatory obligations to change from the start of next year. These include:

• Transaction reporting
• Rules relating to handling of client assets
• Use of credit ratings for regulatory purposes
• Payment services
• Mortgage lending secured on property in the European Economic Area

The FCA’s Temporary Permissions Regime (TPR) allows an EU firm to continue operating in the UK within the scope of its current permissions for a limited period after the end of the transition period. While the firm operates under the TPR, it can then arrange its application for full authorisation from the FCA to operate in the UK in the longer term. The TPR covers both a firm’s pre-existing business and any new business activities it may enter into during the TPR period.

UK firms wishing to operate in the EU from 2021 onwards need to investigate whether other national regulators have their own arrangements of a similar nature to the TPR.