19Aug

Interest rate linked car finance commission to be banned from next year – FCA also announces commission disclosure changes for all credit brokers

The FCA is to go ahead with its previously announced plans to ban car finance commission arrangements where the level of commission can be set by the broker, although the changes will not now come into force until January. The regulator has also announced changes across the credit sector in the way firms will need to disclose commissions in financial promotions and other areas.

Following a previous consultation in October 2019, the Financial Conduct Authority has confirmed it is to go ahead with a ban on ‘discretionary commission’ models in the car finance sector.

These arrangements involve commission being linked to the interest rate that customers pay, thus creating an incentive to sell more expensive credit to some customers. One of the features of this type of arrangement is that the broker can effectively set the interest rate that the finance provider charges.

Quite simply, the FCA has now outlawed any form of commission arrangement where a broker is rewarded for adjusting the price a customer pays for motor finance. This includes arrangements where the broker can decide or negotiate any element in the total charge for credit and is remunerated on that basis, so the ban does not just apply where the broker might have influence over the interest rate.

The FCA believes that the changes will save consumers £165 million per year as there will no longer be a financial incentive for brokers to increase the interest rate that a customer pays; and lenders should have more control over the prices customers pay for their motor finance, which should lead to improved competition.

The new rules will not prevent firms from continuing to link loan commissions to the amount being borrowed, e.g. charging a percentage of the loan amount as commission.

Personal Contract Hire arrangements are not covered by the ban, but the FCA says it will act if it has evidence that similar commission models exist in the consumer hire market and are leading to harm.

Within the same Policy Statement, the FCA has also confirmed it is going ahead with two rule changes relating to commission disclosure. These changes will apply across the entire consumer credit sector and not just in motor finance firms.

Firstly, firms will be required to disclose the nature of any commission they will receive in their financial promotions, whereas previously they might only have disclosed this at point-of-sale.

Secondly, firms will also need to prominently disclose the existence and nature of a commission arrangement where the commission amount might vary depending on the lender, product or other pertinent factors. This disclosure must explain how the commission arrangements could affect the price payable by the customer.

The changes will come into force on January 28 2021, which is three months later than was originally proposed. Later in 2021, the regulator will carry out supervisory work and mystery shopping to ensure firms are complying with the new rules.

Christopher Woolard, the FCA’s Interim Chief Executive, said:

“By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.”

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

18Aug

One sixth of advice firms obtain a government coronavirus loan

A Freedom of Information request from trade publication Money Marketing has illustrated the effects of the coronavirus pandemic on advisory firms in the UK. Around one-sixth have sought government support and two-thirds expect short-term reductions in income, but very few firms expect their long-term future to be at risk.

Financial Conduct Authority data shows that 16% of financial advisory firms have accessed a Government-backed support scheme such as the Bounce Back Loan Scheme since the start of the pandemic.

The FCA surveyed 13,000 firms in July to assess their financial resilience amid the inevitable disruption caused by Covid-19.

38% of firms said they had been forced to furlough at least one member of staff.

Perhaps the over-riding theme of the survey results is that most firms expect any financial effects of coronavirus to be relatively short-term. 68% of respondents said they would expect some form of reduction of net income, but 87% of these said that their reduction in income over the next three months would be 25% or less.

53% of firms said that the overall effect of Covid-19 on their business model would be ‘neutral’ and just 1% of advisory firms believed that the pandemic threatened their survival.

6% of respondents said they had either negotiated extensions with creditors or delayed payments such as rent.

Whatever sector of financial services a firm operates in, the last six months or so may have been a tough time. Revenues have reduced in many cases, and in the mortgage and credit sectors, all firms have been forced to offer significant forbearance in the form of payment freezes, interest free overdrafts, etc.

For others, coronavirus might have led to an increase in complaints from customers in adverse financial circumstances.

Some firms might now be under additional scrutiny over how they treat their vulnerable customers – Covid-19 will only have increased the number of vulnerable consumers in the UK.

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

14Aug

FCA consults on new vulnerable customer guidance

The Financial Conduct Authority has highlighted to firms that there are 24 million potentially vulnerable adults in the UK and calls on these firms to do more to help their vulnerable customers. The four key concepts the FCA wants firms to address are:

  • Recognising vulnerability and understanding customers’ needs
  • Recognising the value of sympathy
  • Understanding the importance of empowered and knowledgeable staff
  • Meeting vulnerable consumers’ communication needs

The FCA wants firms to be in no doubt that there are a great many vulnerable and potentially vulnerable customers in the marketplace and that the effects of coronavirus will only increase both the number of vulnerable customers and the potential extent of their vulnerability.

The FCA says that the four main drivers of vulnerability are:

  • Health – health conditions or illnesses can affect a person’s ability to carry out day-to-day tasks (6% of UK adults fall into this category)
  • Life events – major life events such as bereavement, job loss or relationship breakdown can certainly make individuals vulnerable (20% of UK adults have experienced one of these events within the last 12 months)
  • Resilience – some people will have a limited ability to withstand emotional or financial shocks (21% of UK adults fall into this category)
  • Capability – certain consumers will have limited knowledge of financial matters or low confidence in managing money. Others might lack literacy or digital skills (20% of adults)

Many consumers will exhibit more than one of these vulnerable characteristics.

The paper suggests that vulnerabilities can lead to various personal and behavioural consequences that make financial management more difficult. These include:

  • Increased stress levels
  • Increased time pressures due to increased responsibilities
  • Being preoccupied with other issues
  • Being unable to put things in perspective and make accurate comparisons
  • Becoming more reckless or careless

On one hand, the paper highlights the responsibilities of senior management to ensure that the firm has a culture that promotes fair treatment of vulnerable customers, but it is also mentioned that staff at all levels have a role to play here. On this subject, the paper says:

“Senior leaders in firms should create and maintain a healthy culture in which all staff take responsibility for reducing the potential for harm to vulnerable consumers.”

The paper not only provides some guidance for firms but also gives details of some actions the regulator has taken in the past when firms have failed to treat vulnerable customers fairly. These include:

  • Action to stop a credit broker charging upfront fees when it failed to explain these fees transparently
  • A fine for mis-spelling of mobile phone insurance
  • A fine for a bank over its treatment of customers in mortgage arrears

The FCA invites responses to the consultation until September 30 2020.

Christopher Woolard, interim Chief Executive at the FCA, said:

“Today’s guidance sets out what firms should do to ensure vulnerable consumers are being treated fairly. We know many more customers will be struggling with their finances as a result of the impact of coronavirus. Supporting vulnerable consumers is a key focus for the FCA, and the coronavirus crisis has only highlighted its importance.

“While many firms do excellent work to support their vulnerable customers, we will not hesitate to step in where others do not.”

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

14Aug

FCA says only exceptional circumstances should stop firms failing to complete complaints investigations within eight weeks

The Financial Conduct Authority says “firms have now had enough time to embed new ways of working” and that only in exceptional circumstances should the coronavirus pandemic be used an excuse for failing to conclude an investigation into a customer complaint within the usual eight-week period.

The FCA updated its complaints guidance for firms on July 31. Back on May 1, when you could have said Covid-19 was at its peak, the regulator recognised that the pandemic could have posed a number of operational challenges for firms and that the length of time it took to resolve customer complaints could have been affected by these challenges. Now, the FCA has toughened its stance, and expects firms to conclude complaints investigations within eight weeks in all but “exceptional circumstances”.

The FCA’s update reads:

“When we first published this statement on 1 May 2020, we recognised that operational challenges could result in some firms finding it more difficult to meet certain requirements in DISP 1.6. In particular, the requirement to provide a final response to complaints within 8 weeks of receipt (15 business days rather than 8 weeks for payment services or e-money complaints), or a holding response explaining why they’ve been unable to provide a final response within the timeframe.

“We consider that firms have now had enough time to embed new ways of working, and, accordingly, a failure to comply with DISP 1.6, or other complaint handling requirements, should only arise in exceptional circumstances connected to the impact of Covid-19.”

Any firm that is still experiencing difficulty meeting the eight-week deadline in some cases is expected to inform the FCA – via their usual supervisory contact if they have one, or via an email to the Firm Queries email address if they do not. When making contact, the firm should inform the FCA of the steps it is taking to address the problem.

Where a firm’s complaint handling capacity remains stretched as a result of coronavirus, the FCA expects them to give priority to:

  • The payment of redress from upheld complaints, whether these are cases upheld by the firm or by the Financial Ombudsman Service
  • Complaints from vulnerable customers
  • Complaints from micro-enterprises and small businesses who are likely to face serious financial difficulties if their complaint is not resolved promptly and fairly

The FCA has identified four key drivers which may increase the risk of vulnerability. These are:

  • Poor health, mental or physical health
  • Low levels of financial or emotional resilience
  • Experiencing adverse life events such as bereavement or divorce
  • Low capability – this is a very wide-ranging definition that could encompass poor communication skills (including a limited ability to communicate and transact online), limited language or cognitive skills, or low financial capability

The pandemic could itself have exacerbated vulnerability in certain individuals, or even caused new vulnerabilities, for example:

  • Loss of income from losing employment or being furloughed
  • The impact of isolation on mental and physical health and people’s ability to work and care for others
  • Particularly in the case of some key workers, the impact of extremely demanding working conditions and greater exposure to the virus itself

The FCA also stresses that it expects firms to maintain the same quality of complaint handling. Firms are still expected to:

  • Inform customers of their complaint procedures and those of the Financial Ombudsman Service
  • Enable consumers to submit complaints via a variety of methods, although here the FCA recognises it may be necessary to give certain customers priority when it comes to the use of telephone lines, for example, customers who find it difficult to use digital communication channels
  • Acknowledge receipt of complaints
  • Co-operate fully with the FOS

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

 

14Aug

Adviser trade body holds podcast on protecting firms’ reputations during Covid 

Some firms may be conscious of the direct commercial impact the coronavirus pandemic could have. Fewer will have considered the reputational risk posed by the current health emergency.

The Personal Investment Management and Financial Advice Association (PIMFA) recently held a podcast examining how firms can manage, protect and enhance their reputations during the period of coronavirus disruption. The special guest on the podcast was Alex Just of Montfort Communications, a barrister who has advised a number of firms and public organisations on reputational issues when they have been faced with disputes and other issues.

Mr Just urged firms to consider not just their communications to clients but also their internal communications, saying it was vitally important that staff understood both their responsibilities and how the firm was adapting to Covid-19. It may also be important to ensure messages are communicated swiftly to investors, regulators or other parties in a reputational damage situation. The alternative could be more damaging if information leaks out before the firm has had a chance to give their official version of events.

Some of his key requirements for a firm at the present time are:

  • Resilient – the firm is able to react to things it did not necessarily expect to happen
  • Robust – the firm can continue to operate, and its supply chain and communication channels remain operational

Mr Just remarked on a recent trend for individual executives of larger financial firms to be required to appear before parliamentary committees, and when this occurs, reputational damage can obviously follow.

The speaker asked Mr Just how the Senior Managers & Certification Regime had affected reputational risk, and Mr Just agreed that this had been a ‘game changer’. When reporting a conduct rule breach to the FCA, the way the conduct was described, as well as the conduct itself, could have an impact on the firm’s reputation.

Mr Just said a “crisis” was just “an event that had been handled badly”, and in these circumstances, the quality of the response is vital. He said that the current circumstances may require some smaller firms to seek external help, especially if they lack experience of communications management or of dealing with the media.

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

14Aug

Credit union issues data showing who is the typical furloughed employee 

t is no exaggeration to say that, just a few months ago, very few people knew what ‘furlough’ meant. Now of course things are very different, and an estimated 8.9 million UK workers have been furloughed by their employer.

A new report by credit reference agency TransUnion looks at who the typical furloughed employee is, and what impact being furloughed might have on someone’s finances.

The case study used in the report is for an individual with the following circumstances:

  • Married, but responsible for all household bills
  • Receiving healthy net income per month from employment of £3,732 (pre-lockdown)
  • Monthly expenditure is £3,602, so with so little surplus each month, the family typically use savings for big-ticket spending and emergencies
  • However, the individual in question works as a senior hotel manager and so was placed on furlough earlier this year. His income reduced to around 60% of its normal level (the Government was paying 80% of the first £2,500 of monthly earnings, and his employer did not top up the remainder)
  • In spite of his apparently high income, he was forced to pause his mortgage and credit card repayments
  • Although he is now working again, his company is struggling, and he is worried about his long-term job security and is considering options such as releasing equity from his home

The report also acknowledges that 45% of respondents in TransUnion’s most recent Financial Hardship survey said their household income hadn’t been impacted by Covid-19. Others said their financial situation had actually improved, perhaps because they had switched to working from home with no loss of income, whilst saving money on travel, socialising and luxury spending.

Brendan le Grange, Head of Research and Consultancy at TransUnion in the UK, commented further on the issue of inequality, saying:

“Younger consumers are more likely to be impacted than older ones. But it’s not just about who is more or less likely to be initially impacted by the crisis, we also need to consider who is more or less well-equipped to weather the storm.

“Here, access to savings is a useful proxy. We asked those consumers who were feeling a financial pinch how they’d try to close the gaps in their budget, and while overall savings are the most common answer, it once again varies with credit risk. Whilst 1 in 4 of who self-report a ‘good’ or ‘excellent’ credit score say they’ll use their personal savings, only 1 in 6 of those who self-report a ‘bad’ credit score feel they have ready access to the same.”

The report goes on to list the loans and bills consumers are most worried about repaying at present. Top of the list are:

  • Credit cards (mentioned by 37% of survey respondents)
  • Utilities (31%)
  • Rent (27%)
  • Personal loans (26%)
  • Mortgages (24%)

However, Generation Z are most worried about personal loan repayments (33%), followed by rent (32%).

Millennials are most worried about utilities (37%) and credit cards (34%).

28% of Generation X are worried about paying utility bills, but by far the biggest concern in this age group is credit cards (48%).

Credit cards and utilities both score 37% amongst the baby boomer generation, well ahead of all other categories.

The financial effects of coronavirus have led to many borrowers being offered payment freezes. Whether or not someone has been furloughed, lenders will need to carefully consider what additional forbearance may or may not be appropriate when these payment freeze periods end.

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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