Quick links for this month:
- Regulation roundup
- ESMA updates
- Consumer finance
- Payment services
- General insurance
- Fines and enforcement
FCA publishes discussion paper on fair pricing in financial services
On 31 October 2018 the Financial Conduct Authority (FCA) published a discussion paper (DP18/9) on the fairness of certain pricing practices in financial services. DP18/9 seeks to launch a public debate on the fairness of certain pricing practices in financial services, with particular focus on price discrimination and inertia pricing.
'Price discrimination’ is where firms charge different prices to different customers, who cost the same to serve, based on differences in the customers’ price sensitivity. A form of price discrimination is 'inertia pricing', which is the practice of firms charging existing customers more for a product than they charge new customers.
In DP 18/9, the FCA considers in more detail the factors that may cause price discrimination and inertia pricing, the fairness issues associated with each in different markets, and proposes what remedies may be introduced if the FCA were to take action in the market.
PRA publishes updated version of its approach on banking and insurance supervision
On 31 October 2018 the Prudential Regulation Authority (PRA) published its updated approach to banking supervision alongside a separate PRA approach on insurance supervision.
The documents set out how the PRA carries out its role in respect of deposit-takers and designated investment firms. It is designed to help regulated firms and the market understand how the PRA supervises these institutions, and to aid accountability to the public and Parliament. In relation to Brexit, the PRA notes that it will not alter its approach to advancing its objective as the UK withdraws from the EU.
The PRA's approach to insurers makes reference to the upcoming extension of the Senior Managers and Certification Regime (SMCR) to insurers on 10 December 2018. The PRA expects firms to identify the most senior individuals responsible for key areas and activities, including the delivery of supervisory priorities, and to document their responsibilities.
The annex to the approach documents outlines the amendments made from the previous version of the documents.
PRA Structural Reform updates
On 31 October, the PRA published the 'Ring-fencing: Summary of regulatory reporting requirements’ pack which summarises the new regulatory reporting, and reporting system requirements in relation to ring-fencing. The pack is aimed at UK banking groups in scope of structural reform requirements that will be required to submit ring-fencing regulatory returns from 1 January 2019.
The PRA has also published Policy Statement 28/18 which includes final rules for the Leverage Ratio, Public Disclosure, Reporting Leverage Ratio, and Ring-fenced Bodies Parts of the PRA Rulebook; as well as updates to two supervisory statements on the UK leverage ratio.
Finally, the PRA published Consultation Paper 29/18 in which it proposes minor updates to its Statement of Policy ‘The PRA’s approach to the systemic risk buffer’. This consultation closes on Thursday 6 December 2018.
Retail and Wholesale Banking: review of firms’ whistleblowing arrangements
The FCA has published a new webpage outlining its findings from a recent review of firms’ whistleblowing arrangements, which included a range of retail and some wholesale banks. The review found that:
- new rules are helping to ensure that firms have implemented whistleblowing arrangements and manage whistleblowing cases and concerns raised by their employees fairly, consistently and in a way which protects the individual whistleblower;
- non-executive directors appointed as whistleblowers’ champions are providing independent oversight and accountability and helping to raise the profile of whistleblowing;
- key areas for improvement are most apparent in the provision of whistleblowing training and the requirement to produce an annual report to the firm’s governing body; and
- firms need to better document their whistleblowing investigation process and the practical arrangements and processes for protecting whistleblowers against victimisation.
In addition to its findings, the FCA also sets out areas of good practice and areas for improvement, as well as its expectations for senior management and firms. Firms should review the FCA’s findings and consider the steps they should take to improve their own whistleblowing arrangements.
Official translations of final guidelines on suitability requirements under MiFID II
The European Securities and Markets Authority (ESMA) has issued official translations of its guidelines on certain aspects of the suitability requirements under MiFID II. The guidelines apply to the provision of investment advice, and portfolio management under MiFID II and will apply from 7 March 2019. The guidelines will replace the existing 2012 ESMA guidelines on certain aspects of the MiFID I suitability requirements.
ESMA publishes MiFID II supervisory briefing on suitability
ESMA published an updated version of its supervisory briefing on MiFID II suitability requirements. This publication is an updated version of ESMA’s 2012 supervisory briefing and takes into account the content of ESMA’s guidelines on certain aspects of the MIFID II suitability requirements.
ESMA updates Q&As on BMR
ESMA updated its Q&As on the Benchmarks Regulation (BMR). The updated Q&As provide new clarifications regarding the use of benchmarks in bilateral agreement on exchanged collateral. The purpose of the Q&As is to promote common supervisory approaches and practices in the application of the BMR. ESMA will periodically review the Q&As and update them where required.
Temporary Permissions Regime - PRA and FCA publish direction on notification before exit day
The PRA and the FCA have published separate directions under regulation 14(2) of the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018. The directions concern the notification that EEA firms must make should they wish to obtain a deemed permission or variation under the temporary permissions regime
The notifications must be made by submitting the temporary permission notification form to the appropriate regulator using the ‘Connect’ system. The form should be submitted in the period beginning 09:00 on 7 January 2019 and ending 28 March 2019.
FCA publishes webpage on Brexit implications for consumers
The FCA has published a webpage providing information for consumers on the implications of Brexit on their financial products and services. The update provides general information about how consumers may be affected by the UK’s withdrawal from the EU as well as signposting to further detail. It outlines the different scenarios based on whether an implementation period goes ahead or not, and details how Brexit may affect consumers’ financial protections.
Current account prompts - FCA publishes research report on pilot findings
On 20 November 2018, the FCA published a webpage summarising results of its research into designing effective current account prompts, together with the full report. The research was conducted as a result of banks and building societies committing to deliver a package of prompts to their customers.
The prompts are aimed at increasing consumers’ engagement with their current account, raising awareness of the current account switching service, and highlighting developments in the retail banking market.
The aim of the report is to help firms to design effective prompts that work in practice.
FCA Consultation Paper CP18/33: regular PPI complaints and recurring non-disclosure of commission
The FCA has published a Consultation Paper (CP18/33) containing final guidance on the handling of regular payment protection insurance (PPI) complaints, following a previous Consultation Paper on this topic (CP18/18).
This paper publishes guidance that clarifies the FCA’s expectations about the handling of certain regular premium PPI complaints. It also proposes new rules that would require firms to write to certain consumers whose previous PPI complaints they had rejected, to tell them they can make a new complaint about non-disclosure of commission and remind them of the FCA’s 29 August 2019 deadline for complaining.
The consultation closes on 7 December 2018.
FCA Consultation Paper CP18/35: Rent-to-own and alternatives to high-cost credit
On 22 November 2018, FCA published a consultation paper (CP18/35) setting out proposals to introduce a price cap on rent-to-own (RTO) firms to protect vulnerable consumers from high costs.
The proposed price cap would limit the cost of the product and the charge for credit, under which the charge cannot be more than the cost of the product. In addition, RTO firms would need to benchmark the cost of products against the prices charged by three other retailers. The rules would also prevent firms increasing their prices for insurance premiums (e.g. theft and accidental damage cover), extended warranties or arrears charges in order to recoup lost revenue from the price cap.
The FCA also provides feedback on its extended warranty proposals, which were set out in a May 2018 consultation paper (CP18/12), and an update on the regulator's work on alternatives to high-cost credit.
The deadline for responses to these proposals is 17 January 2019. It is proposed that the cap will come into force on 1 April 2019.
Standards Advisory Panel - Bank of England publishes call for interest
The Bank of England and Pay.UK have issued a call for interest to members of the payments industry who wish to join the newly created Standard Advisory Panel. The Panel will provide input into the implementation of the common global messaging standard, ‘ISO 20022’ and will be jointly run by the Bank and Pay.UK.
FCA publishes report on pricing practices in the retail general insurance sector
The FCA has published a report outlining key findings of its thematic work on the pricing practices of household insurance firms.
The FCA found that some firms may not have consistently and appropriately considered the impact of their pricing decisions on consumers. Further, the lack of effective governance over pricing practices and activities means that firms are unable to reliably assess and evidence whether they are treating their customers fairly.
The FCA also found widespread evidence of differential pricing which supports extensive cross-subsidisation between different consumers. In particular, many long term renewal customers were subsidising lower prices for new customers, who were paying on average 30% below the cost of provision.
Whilst the FCA found no evidence of direct discrimination; it did note that firms were at risk of discriminating against consumers through using factors in pricing based on third party data relating to or derived from protected characteristics under the Equality Act 2010.
FCA publishes terms of reference for general insurance pricing practices market study
Following its thematic review, the FCA concluded that a market study into insurance pricing practices was necessary, and has published its terms of reference for this study. The market study will focus on both home and motor insurance, and will look at the three key areas set out below.
Harm from pricing practices and what drives this
The results of the Thematic Review show that some consumers pay higher prices for home insurance than others. The FCA will seek to understand the scale of any harm created by these pricing practices, as well as what drives firms to price differently. This is essential to inform consideration of whether remedies are needed and if so what they should be.
The fairness of pricing practices
In assessing the fairness of pricing practices, the FCA will look at a number of factors to determine whether the way firms treat customers is fair. The regulator will also examine consumers’ perspectives and attitudes to the fairness of pricing outcomes in general insurance markets, and their understanding of how general insurance pricing works.
The impact of pricing practices on competition
The FCA will seek to determine whether:
- pricing practices increase or restrict consumers’ access to good quality insurance products;
- firms are making high profits from certain groups of consumers;
- the current nature of competition leads to higher or lower costs for consumers in purchasing and firms in supplying insurance products; and
- new firms entering the market have proved successful or faced barriers.
The FCA will also consider all potential remedies that may be required to make the market work well for consumers.
FCA 'Dear CEO' Letter to general insurance firms
The FCA has has written to the CEOs of general insurance firms undertaking pricing activities setting out the issues identified in thematic review (TR18/4), which it believes could cause significant harm and poor outcomes for consumers.
The FCA has also identified potential non-compliance by some firms with its rules on transparency at renewal. Where the FCA has concerns about conduct by firms, it says it will explore all options to address this using the full range of its powers.
Firms are reminded that when considering any pricing issues, they should note the new rules that apply from 1 October 2018 due to the implementation of the Insurance Distribution Directive.
Final PRA Policy Statement on implementing the extension of SMCR to insurers
The PRA has published a Policy Statement (PS27/18) which provides the final set of rules relating to the implementation of the extension of the Senior Managers and Certification Regime (SMCR) to insurers. PS27/18 follows the PRA’s September Consultation Paper CP20/18, in which the PRA sets out proposals for consequential rule changes and administrative amendments related to the extension of the SMCR.
The PRA indicates that PS27/18 should be read in conjunction with its other policy statements on SMCR (PS15/18 and PS26/18) and the FCA’s policy statement PS18/15.
The final rules in this policy statement will apply with effect from Monday 10 December 2018.
Modification by consent: COBS 13 Annex 2 1.9R
The FCA announced a modification to COBS 13 Annex 2R 1.9 which will be of interest to providers of annual statutory money purchase illustrations (SMPIs).
This modification follows the formulation of a simplified annual pension statement intended to enable defined contribution schemes to meet their requirements to provide SMPIs in a way which is clearer and easier for consumers to understand. The modification offered allows providers to include information on how projected benefits might be improved if individual savers were to increase their regular contributions without requiring them to provide projections of benefits using FCA assumptions and, for example, illustrating three different rates of return.
Fines and enforcement
Failures in oversight of mobile phone insurance claims and complaints handling – FCA fines Liberty Mutual Insurance Europe SE £5.2m
The FCA has fined Liberty Mutual Insurance Europe SE (Liberty) £5,280,800 for failures between 5 July 2010 and 7 June 2015 in its oversight of its mobile phone insurance claims and complaints handling processes administered through a third party.
Liberty and the third party had discussed the third party’s compliance plan and made the third party’s commitment to meet UK regulatory requirements a term of the outsourcing arrangement. However, Liberty failed to undertake an adequate risk assessment, review or adequately plan for ongoing monitoring before the commencement of the arrangement.
In addition, there was a lack of oversight from the Board and senior management on the development of conduct risk controls. The FCA suggests that had the Senior Managers and Certification Regime applied to the firm during the relevant period, it is likely that it would have resulted in clearer responsibility for the mobile phone insurance business on the Board, and as a result many of the failings may have been mitigated or avoided.
Liberty settled at an early stage of the investigation which meant a 30% discount was applied to the penalty. Without the discount, the penalty would have been £7,544,000.
FCA decision to fine and ban former Keydata executives upheld (Upper Tribunal)
The Upper Tribunal has upheld the FCA's decision to fine and ban two former members of Keydata Investment Services Ltd's (Keytada) senior management: Stewart Ford (former chief executive) and Mark Owen (former sales director).
In November 2014, the FCA issued decision notices to Mr Ford and Mr Owen, setting out its decision to fine Mr Ford £75 million and Mr Owen £4 million and to ban both men from performing any function relating to any regulated activity. The FCA's view was that both men had acted without integrity and had failed to deal with the FSA, the FCA's predecessor, in an open and co-operative way. Mr Ford and Mr Owen referred the decisions to the tribunal.
The Tribunal found that certain structured products produced and distributed by Keydata were missold, that Mr Ford used a company owned by him to extract substantial fees that could not be justified commercially and that Mr Owen received over £2 million in undisclosed commissions from Mr Ford. Further, the Tribunal found that both Mr Ford and Mr Owen had made false statements to the FCA in compelled interviews and had failed to instruct Keydata’s compliance officer not to mislead the regulator.
The Tribunal ruled that both men had acted without integrity and that it was appropriate to impose financial penalties. The Tribunal directed the FCA to fine Mr Ford £76 million and Mr Owen £3,240,787 and agreed that both should be prohibited from performing any role in regulated financial services.
The FCA has published a press release welcoming the Tribunal's decision.
PRA imposes fine for failure to disclose information
The PRA has published final notices imposing fines on Mr Akira Kamiya and Mr Takami Onodera of £22,700 and £14,945 respectively. This follows the PRA's final notice of 9 February 2017 imposing financial penalties on The Bank of Tokyo-Mitsubishi (BTMU) and MUFG Securities EMEA plc (MUS EMEA) for not disclosing a $315m fine which it received from the New York Department of Financial Services (DFS) in 2014.
The DFS found that BTMU had pressured a consultant to water down a supposedly objective report on its dealings with sanctioned countries which was submitted to the US regulator. On 18 November 2014 the DFS published a consent order, fining BTMU and requiring it, and its affiliated companies, to prevent Mr Kamiya from conducting any of its US banking business in the future. Mr Kamiya was Chair of MUS EMEA at the time of the order.
Mr Kamiya and Mr Onodera (the former Non-Executive Director of MUS EMEA) failed to disclose to the PRA the possibility that Mr Kamiya would be restricted from conducting US banking activities, although both were aware of the DFS action and its potential implications for Mr Kamiya personally in advance of 18 November 2014. The PRA was therefore unaware of the DFS action and its implications for Mr Kamiya ahead of the public announcement by the DFS. The PRA was unable to consider, make or supervise any necessary contingency plans.
As such, the PRA concluded that both individuals breached the PRA’s Senior Manager Conduct Rule 4, which includes a duty to make disclosures in the absence of any request or enquiry from the PRA.
CMA launches investigation into suspected anti-competitive arrangements in financial services
On 13 November 2018, the Competition and Markets Authority (CMA) launched an investigation into suspected anti-competitive arrangements in the financial services sector. The investigation was launched under Chapter I of the Competition Act 1998, which addresses price fixing and attempts to control markets.
The case is at an early stage and as such the CMA has not reached a view as to whether there is sufficient evidence of an infringement of competition law for it to issue a statement of objections to any of the parties under investigation.
FCA prohibition orders
On 2 November 2018 the FCA issued a final notice prohibiting the ex-Barclays trader Jonathan Mathew from performing any function in relation to any regulated activity. The prohibition follows Mr Mathew’s 2016 conviction and sentencing for LIBOR manipulation.
On 13 November 2018 the FCA issued Prohibition Orders against Russell Taylor and Alan Taylor in respect of their activities at their investment firm Taylor and Taylor Associates Ltd (in liquidation). Earlier this year both men were convicted of conspiracy to defraud, after defrauding nearly 200 people out of almost £17m. The FCA concluded that they were not fit and proper persons to perform any function in relation to any regulated activity carried on by an authorised person, exempt person or exempt professional firm.
On 15 November 2018 the FCA issued a Prohibition Order against Andrew Hind and Martyn Dogson. In 2016 both men were convicted of conspiring by insider dealing to acquire price affected securities on a regulated market and sentenced to imprisonment. The FCA concluded that Mr Dodgson and Mr Hind were not fit and proper persons to perform any function in relation to any regulated activity carried on by any authorised person, exempt person or exempt professional firm.
Maintaining market confidence: an update on Brexit
Nausicaa Delfas, the FCA’s Executive Director of International, has given a speech on preparing for a no-deal Brexit. Among other things, Ms Delfas provided an update how the FCA is preparing for Brexit, its approach to regulation after the UK leaves the EU and what this means for financial services.
The speech covered:
- the FCA’s preparations for a no-deal exit scenario;
- the Treasury’s proposal to give financial services regulators the power to phase in changes;
- how firms should prepare for a no-deal Brexit; and
- managing cliff-edge risks.
Fairness, flexibility and the long-term view: the FCA's vision for the mortgage market
Christopher Woolard, Director of Strategy and Competition at the FCA, has delivered a speech on the FCA’s vision for the mortgage market.
Mr Woolard referred to the interim report of the FCA’s mortgage market study which concluded that the mortgage market was working well but could still be improved. Mr Woolard focused on the challenges relating to
- mortgage prisoners, who took out mortgages before lending regulation and practices changed following the financial crisis and are unable to switch mortgage providers; and
- the growing proportion of life time mortgages and the importance of ensuring that firms match the right products to the right consumers.
Artificial intelligence and financial crime: silver bullet or red herring?
On 21 November 2018, the FCA published a speech delivered by Rob Gruppetta, Head of the FCA's Financial Crime Department, on using artificial intelligence (particularly machine learning algorithms) to tackle financial crime.
Mr Gruppetta noted that, whilst the building blocks of artificial intelligence have begun to emerge, sound principles for putting them together haven’t been developed. As such innovation (especially new technology lacking sound design principles) should not be embraced without scrutiny, particularly as financial crime does not lend itself well to statistical analysis.
He also mentioned the importance of the FCA’s financial crime data return (introduced in 2016) which has provided a collective industry view of the financial crime risks that criminal's pose to society and how UK firms are responding. Other data gathered by the FCA has enabled the regulator to focus its supervisory efforts on areas of higher risk.