On 16 June 2016, we hosted the latest in our series of Digital Financial Services seminars: Payments and regulatory matters. Matthew Gough, Head of Digital Financial Services, Geraint Thomas, Head of Retail Finance and Jo Owens, Principal Associate in Retail Finance were joined by Dan Rawling from the Payment Systems Regulator.
Geraint Thomas and Jo Owens provided an update on regulatory developments affecting digital financial services in the last year. Geraint and Jo also touched on some of the key questions they have received from clients.
FCA’s call for input on its review of the retained provisions of the Consumer Credit Act 1974 (CCA)
The call for input is a scoping paper, in which the FCA is asking a number of questions as to how it should conduct its review of the retained provisions of the CCA and report back to HM Treasury by 1 April 2019. These include, for example, whether the FCA should review the retained provisions of the CCA in full or in part.
Eversheds’ high level views in relation to the call for input are:
- that the CCA is a complex regime, particularly when applied to digital financial services. Our preference is to have a regime that is fit for purpose where the overall focus is on substance rather than form.
- the review should be used as an opportunity to tidy up the retained provisions, addressing overlap and complexity where possible, to ensure the regime is simplified and therefore easier to understand for all.
- the FCA should review all of the retained provisions, although we would support a staged review where the FCA focus on provisions according to priority.
Key digital challenges in the CCA
- Multiple agreements – compliance should be based on the substance of the agreement rather than the form;
- Modifying agreements and variations – challenges often arise where the firm and customer want to agree mutually beneficial changes to the agreement but where the CCA mandates that a specific form of agreement is used to document that variation.
- Unenforceability – the CCA regime goes beyond the requirements of the FCA regime for other regulated products and often results in courts having to get involved in making enforcement orders for minor and technical breaches. This may no longer be required if customer protection could be maintained via other means (e.g. section 138D of FSMA).
- S176A consent and ‘appropriate method’ – if lenders want to rely on this provision then they need express consent from the customer. Given recent FCA statements, it may not be sufficient to simply cover this by including a term in your credit agreement. Also many of the CCA provisions required that a customer is ‘given’ documents during the life of the credit agreement. Under the CCA, this means the customer must receive it. Uncertainty can arise with the delivery of documentation by some digital channels in terms of whether the document has been sent by appropriate method and therefore “given”.
- Post-contractual communications – this links with the bullet point above and the risks involved in the electronic delivery of some post contractual documents by some digital channels. The default notice and certain termination notices must also be given in paper format and cannot be given digitally.
Digitalisation in the wider market
In relation to mortgages, Geraint explained the challenges of transacting digitally due to the need for every mortgage sale to be advisory. If a lender wants to deliver a digital solution it would need to build an online advisory model.
Recent publications and research in relation to digitalisation
The FCA, in its Business Plan and Risk Outlook 2016/2017, strikes the balance of supporting innovation whilst addressing any risk. Some key areas of FCA focus are:
- operational resilience
- financial inclusion
- the use of smart data and advanced analytics
- automated advice.
Jo and Geraint also discussed other publications including the FCA Discussion Paper: Ageing Population and Financial Services and the FCA Occasional Paper 17: Access to Financial Services.
The FCA and Project Innovate
Matthew Gough provided an overview of the FCA’s Project Innovate. The aim of Project Innovate is to assist new and established businesses, both regulated and non-regulated, to introduce innovative financial products into the market. This will be of particular interest to firms testing new, innovative, digital ideas.
Project Innovate has three main strands:
- Core inputs
- Regulatory Sandbox
Matthew focused on the Regulatory Sandbox. The Sandbox is a safe place for firms to enter the market and experiment with ideas “in a live environment” without immediately incurring the normal regulatory consequences.
Critically, the Sandbox is a testing place with real customers and so firms will have to fulfil regulatory criteria before testing in the Sandbox. It is a great opportunity for regulated firms but is also open to non-regulated and FinTech firms.
Matthew discussed the eligibility criteria for the Sandbox, which include whether there is genuine innovation and customer benefit. Each test will be looked at on a case by case basis. The FCA can assist during a Sandbox test by:
- providing an interpretation of its rules in the context of the firm’s test
- waiving or modifying a rule where it is unduly onerous or not achieving its intended purpose
- agreeing to issue no enforcement letters.
Matthew concluded by explaining the monitoring for the Sandbox and the journey firms will take if they want to participate in the Sandbox. In summary the journey is as follows:
- firm will submit a proposal to use the Sandbox
- the FCA will assess this proposal
- the firm and FCA will agree testing approach
- the Sandbox option will be delivered;
- this option will be tested and monitored
- the firm will submit a final report to the FCA for review
- the firm decides whether to offer the solution outside of the Sandbox.
The first cohort of the Sandbox is open for applications until 8 July 2016. The second cohort will be open for applications from November 2016 to mid-January 2017.
An update on payments and the IFR
Dan Rawling provided examples of innovation in payments. These include digital wallets, mobile banking and contactless. Dan explored the multiple legal regimes within payments and why they matter. In particular, Dan discussed the role of the Payment Systems Regulator (PSR) and its competition powers.
Dan’s update focused on the Interchange Fee Regulation (IFR). Phase one of the IFR came into force on 9 December 2015, while phase two came into force on 9 June 2016. Dan explained some of the provisions of the IFR, including the caps it sets on interchange fees paid by acquirers to issuers (both for cross-border and domestic transactions). This provision came into force on 9 December 2015.
The IFR also contains various ‘Business Rules’ provisions, including the Honour All Cards rule (Art 10) that came into force on 9 June 2016. This rule gives firms greater freedom to decline to accept certain types of payment cards.
Dan ended by stressing that the PSR is the competent authority for the IFR, although the FCA has a role to play. Anyone wishing to complain about suspect non-compliance should feel free to contact the PSR.
Has Eversheds received any specific queries on financial exclusion from clients?
Jo Owens: We have not yet received a specific question on financial exclusion but we have been receiving wider queries that would incorporate this. For example, in relation to TCF and the delivery of documents.
How can mental incapacity be picked up when a customer is transacting digitally?
Jo Owens: It is impossible to pick up with any degree of certainty unless systems are savvy enough to identify triggers that may highlight mental incapacity - for example, the length it takes a customer to complete an application or if the system can flag errors in the application which would cause you to think they may not have understood the questions or the responses given.
Is it likely the FCA will amend the rules after the Regulatory Sandbox?
Matthew Gough: This is unlikely.
Why would unregulated firms want to participate in the Sandbox if they need to fulfil regulatory criteria before testing?
Matthew Gough: The start-up cost is a lot lower and the process is still easier than launching a product in the market place. The FCA will however be encouraging unregulated firms to use an alternative virtual (non-live) sandbox or an umbrella sandbox (where a firm uses its authorisation for unauthorised firms to use), when these options become available.
How is the PSR driving innovation in Digital Financial Services?
Dan Rawling: The PSR is driving this through a package of work streams, including its work on access to and governance of payment systems. Also, the PSR set up the Payment Strategy Forum. This forum enables the payments industry to work together where innovation depends on collaboration. The Forum will announce its strategy in July 2016.
How should charge cards described or marketed in the IFR that do not fall within credit, debit, prepaid or commercial be categorised?
Dan Rawling: The IFR talks about these categories and the approach set out in the PSR's draft Guidance for consultation is that cards need to be labelled accordingly. However, the IFR doesn't limit the other forms of description or marketing that can appear on payment cards. The PSR welcomes views as part of its consultation, which closes on 8 July.