TRANSFER OF CONSUMER CREDIT REGULATION FROM OFT TO THE FCA
On 19 February 2014, the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2014 (SI 2014/366) was published together with an explanatory memorandum. The Order relates to the transfer of consumer credit
regulation from the OFT to the FCA. It was made on 13 February 2014 and to the extent not already in force, came into force on 1 April 2014, which is when responsibility for consumer credit transfers to the FCA.
Among other things, the draft Order:
amends the Financial Services and Markets Act 2000 (Regulated Activities)
Order 2001 (SI 2001/544) (“RAO”) to:
specify additional credit-related activities as regulated activities;
provide for exclusions from certain regulated activities; and
provide that local authorities are only required to be authorised if they undertake credit-related activity that is within the scope of the Consumer Credit Directive (2008/28/EC) (“CCD”).
makes consequential amendments to other primary and secondary legislation, including the Financial Services and Markets Act 2000 (“FSMA”), the Consumer Credit Act 1974 (“CCA”) and the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (“FPO”).
provides for the FCA to undertake a review of the CCA to consider whether the remaining provisions of the CCA in force after 1 April 2014 could be replaced by rules or guidance made by the FCA under FSMA. The draft version of the Order was published on 15 January 2014.
FIRST COMPETITION-BASED MARKET STUDY INTO INSURANCE ADD-ON PRODUCTS
On 11 March 2014, the FCA published a report (MS14/1) setting out the provisional findings from its market study into general insurance add-on products. The aim of the study was to test whether competition in the add-ons market is effective or not and, if not, to understand why this might be the case. The FCA analysed a range of information from insurers and intermediaries, including product literature and data relating to sales. It carried out both quantitative and qualitative consumer research. Using behavioural economics as a key tool during the study, consumers’ reactions to the add-on mechanism were tested in a simulated environment.
The market study into general insurance add-on products is the first of its kind by the FCA. In future, these studies will form the mainstay of how the FCA gathers evidence to assess competition problems, and where it can intervene to promote better outcomes for consumers.
Generally, the FCA found that competition in the market for general insurance add- ons is not effective. This can lead to poor consumer outcomes, with many consumers not getting value for money when they buy products as add-ons. The FCA has used the claims ratio (that is, the proportion of the premiums consumers pay that is paid out in claims) as its core measure of value. It estimates that consumers overpay for the add-on
products considered during the study by around £108 million to £200 million per annum. As a result, the FCA believes there is a clear case for it to intervene to make competition in the market for general insurance add-ons more effective for consumers. A number of proposed remedies are set out in the report, including:
Banning pre-ticked boxes (known as “opt-outs”) to ensure consumers actively choose to buy an add-on, and are clear when and how they purchase a product.
Requiring firms to publish claims ratios to highlight low-value products.
Mandating that the sale of guaranteed asset protection (“GAP”) insurance cannot be concluded at the point of sale of the car or car finance, but only at a later point (known as the “deferred opt-in”).
Improving the way that add-ons are offered through price comparison websites, focusing on what information consumers can access about add-ons and when this is introduced.
Comments can be made on the provisional findings and proposed remedies until
8 April 2014. The remedies will be further refined and subject to cost-benefit-analysis. The FCA plans to publish its final findings from the study in due course, and to publish its consultation on remedies before the end of 2014. However, it intends to introduce its remedies on GAP insurance on an accelerated timetable.
FCA’S NEW COMPETITION ROLE
On 11 March 2013, the FCA published a speech by Christopher Woolard, Director of Policy, Risk and Research at the FCA on ‘Promoting competition in the financial services sector’.
Since the FCA was created in April 2013, it has had a new competition duty – an objective to promote effective competition in the interests of consumers. Since April, the FCA has evolved as a regulator to meet this objective and grown into its new competition skin. In a short period of time, the FCA has brought to life its competition objective and started to take action where it saw that markets might not be working in the interests of consumers. To achieve this, it has steadily built its competition resources.
The FCA has established strong working relationships with the Office of Fair Trading (“OFT”) and the new Competition and Markets Authority (“CMA”). In July, the FCA confirmed its first market study – looking at the issue of competition in the general insurance add-ons market (see previous article). In September, the FCA built on this to announce a full suite of market studies. On 11 March 2014, the FCA has announced the next step on that journey: the first results of its work – into the general insurance add-ons market.
Mr Woolard asks himself what competition looks like through an FCA lens. He mentions that it is not distinct from the FCA’s other regulatory objectives and functions. Issues that the FCA spots through authorisation, supervision and during enforcement investigations will inform its work in competition. The same is true in reverse: insights from the competition department will help inform thematic work, supervisory action and other policy interventions.
During the course of our market studies we will be looking to promote competitive markets; protect consumers and help firms by building trust in the markets they rely on for growth. And this is where today’s study enters the picture.
On 21 March 2014, the Association of British Insurers (“ABI”) published a paper on
the FCA’s competition role. In the paper, the ABI considers the importance and potential implications of the FCA’s new role to promote competition. It notes that the FCA has already launched a series of market studies and thematic reviews in insurance markets where the FCA considers there may be issues with the operation of competition. The ABI considers the impact of the studies and offers some challenges and recommendations
to both the FCA and the industry to ensure that the new regulatory objectives can be pursued in a way that delivers on the common goal of making competition work in the interests of consumers.
The ABI notes that it is still early days in assessing how the FCA’s new objective will impact on its overall approach to regulation. However, it considers that the FCA’s new competition role means an increased focus on market dynamics, such as the benefits of innovation in
the market, market entry and exit, the prevalence and ease of consumer switching, and the extent to which consumers can access products that meet their needs. In addition, the FCA is placing a greater scrutiny on pricing, value for money and profitability.
FCA SPEECH ON REGULATION OF CAPITAL MARKETS
On 12 March 2014, the FCA published a speech given by David Lawton, FCA Director
of Markets, on regulatory developments and the changing market structure.
In his speech, Mr Lawton considers the “big picture” for capital markets. Of particular
interest are his comments regarding:
The global perspective
Mr Lawton states that “regulators must increasingly face outwardly to the international
stage if they are to build and support resilient and stable financial sectors in their
own jurisdictions”. He points out that the balance of regulation for capital markets has shifted from the domestic to the international, and that there have been some successes in managing this change in emphasis. An example of this is the work on EU and US cross border regulation, such as the July 2013 “Path Forward” agreement between the European Commission and the Commodity Futures Trading Commission (“CFTC”).
The EU perspective
At EU level (and also globally), some clear themes have emerged in the direction of capital markets regulation, namely increased transparency, reporting, and higher
standards of risk management. Mr Lawton notes that, in this context, regulators have started to lead discussions around standards in market data reporting and quality. More broadly, regulators have a growing role in the development of key reference data standards and ensuring they are appropriately defined.
The domestic perspective
Mr Lawton mentions the FCA’s “significant” domestic agenda, including its renewed focus on wholesale conduct regulation, because poor conduct in wholesale markets results in poor outcomes in retail markets. In this context, he refers to the FCA’s work on its client assets regime, dealing commission, and the listing and sponsor regimes.
CO-OPERATIVE AND COMMUNITY BENEFIT SOCIETIES AND CREDIT UNIONS REGULATIONS
On 11 March 2014, the Co-operative and Community Benefit Societies and Credit Unions (Investigations) Regulations 2014 (2014/574), and explanatory memorandum, were published.
The Regulations were made on 10 March 2014 and come into force on 6 April 2014. They repeal section 48 of the Industrial and Provident Societies Act 1965, replacing it with more extensive powers for the FCA to investigate co-operative societies, community benefit societies and credit unions where circumstances suggest their behaviour may be improper or unlawful.
The Regulations apply provisions of Part 14 of the Companies Act 1985 to societies and are intended to create a level playing field with the requirements that companies face and increase confidence in the co-operative and community benefit society form. Among other things, the Regulations include a requirement for the FCA to appoint an inspector if a court instructs them to do so, and give the FCA power to appoint an inspector to investigate the affairs of a society. Other powers include those relating to the expenses of the investigation.
The Regulations are made under section 4(1) and (2)(a) of the Co-operative and Community Benefit Societies and Credit Unions Act 2010 (2010 Act), which gives HM Treasury the power to apply Parts 14 and 15 of the Companies Act 1985 to Co-operative and Community Benefit Societies, with modifications. The Regulations also contain amendments to other legislation consequential on the repeal of section 48. Under the 2010 Act, industrial and provident societies (“IPSs”) are to be re-named community benefit or co-operative societies from 1 August 2014
FCA BANS AND FINES TRADER £662,700 FOR MANIPULATING GILT PRICE
On 20 March 2014, the FCA published the final notice it has issued to Mark Stevenson, a bond trader with nearly 30 years’ experience and formerly employed by Credit Suisse Securities (Europe) Limited. The FCA has imposed a prohibition order on Mr Stevenson and fined him £662,700 for behaviour amounting to market abuse, particularly market
manipulation within the meaning of section 118(5) of the Financial Services and Markets
Act 2000 (“FSMA”).
The FCA found that Mr Stevenson had deliberately manipulated a UK government
gilt (the UKT 8.75% 2017) on a single day in October 2011, during the second round of quantitative easing (“QE”) in the UK by the Bank of England (“BoE”). UK government bonds are commonly referred to as gilts and are extensively traded, with turnover of
£7.2 trillion in the interdealer broker market in 2011.
By way of background, the government authorised the BoE to run two programmes of QE between 2009 and 2012 to stimulate the economy, with the aim of improving liquidity, and moving inflation towards the 2% target. The BoE was authorised to set
up an asset purchase facility to purchase high quality assets through the program of QE and the assets targeted for purchase in large quantity by the BoE were gilts. The BoE purchased eligible gilts in QE through a competitive reverse auction process and was not primarily concerned with the profitability of its gilt acquisitions, but with the stimulus effect of those trades. As public money was involved (an indemnity was provided by the government to indemnify against losses arising from the asset purchase facility) it was also concerned with QE’s stated aim of injecting funds into the economy. With the BoE entering the market as a large guaranteed buyer of gilts, QE gave market participants an opportunity to sell large numbers of gilts (including less liquid gilts) to the BoE.
Mr Stevenson bought £331 million of the gilt (which was relatively illiquid) in the morning of 10 October 2011. As a direct result of Mr Stevenson’s trading, the price and yield of the gilt significantly outperformed all gilts of similar maturity on that date.
In line with the QE offers for sale process, during the afternoon of 10 October 2011,
Mr Stevenson offered to sell £850 million of the gilt (including the £331 million acquired that day) to the BoE. His offer price was based upon the prevailing market price for the gilt, which had been heavily influenced upwards by his trading that day.
The FCA has concluded that Mr Stevenson’s trading was designed to move the price of the gilt in an attempt to sell it to the BoE at an abnormal and artificial level, thereby increasing the potential profit made from the sale. In the event, the BoE identified the highly unusual price movement of the gilt and, within 40 minutes of Mr Stevenson’s offer, announced that it had rejected all offers received by it in that gilt “ following significant changes in its yield in the run up to the auction”. This is the only time the BoE has taken this step. Mr Stevenson then stopped buying the gilt and, later in the afternoon of 10 October 2011, its intraday performance had completely reversed. Had
Mr Stevenson’s offer to trade with the BoE been accepted, he would have accounted for 70% of the £1.7 billion allocated to QE on that day. If the BoA had accepted his offer any subsequent losses it made would have been indemnified by the government – at taxpayers’ expense.
Mr Stevenson’s behaviour is regarded by the FCA as a particularly serious example of market abuse, in that he sought to profit unreasonably from QE, at the expense of the BoE and ultimately the taxpayer, at a time when the economy was very weak and confidence in the UK financial system was low.
The FCA has determined that Mr Stevenson was solely responsible for the abusive trading and there is no evidence of collusion with traders in other banks. With regard to the fine, Mr Stevenson agreed to settle at an early stage of the investigation, qualifying for a 30% discount. Without this discount, the FCA would have imposed
a fine of £946,800.
An FCA press release reporting on the fine and ban imposed on Mr Stevenson states that this is the first enforcement action for attempted or actual manipulation of the gilt market. This case sends a clear message about how seriously the FCA views attempts to manipulate the market.
FCA BANS FORMER CEO FOR LACK OF INTEGRITY
On 27 February 2014, the FCA published the final notice (dated 24 February 2014) it has issued to Arnold Eber. The FCA has prohibited Mr Eber from performing any function relating to any regulated activity carried on by any authorised or exempt person or exempt professional firm because it considers that he is not a fit and proper person due
to concerns over his integrity.
Mr Eber was the CEO and sole director of CIB Partners Limited (“CIB”) between
5 September 2007 and 15 September 2010. Between September 2007 and mid-2009, CIB was engaged as an adviser to SLS Capital S.A. (“SLS”), a Luxembourg-based special purpose vehicle that issued bonds underpinning investments that were sold to investors in the UK.
The FCA found that Mr Eber demonstrated a lack of integrity in causing CIB to issue inaccurate and misleading (and in two instances false) information and reports relating to SLS. Mr Eber’s conduct gave the misleading impression that SLS bonds were soundly backed assets when he had grave concerns about their viability. In September 2007,
Mr Eber became aware that without continuous cash injections, there was a high risk that the SLS portfolio would suffer from severe liquidity issues within a year, but he still issued a number of misleading documents about the strength of the SLS portfolio.
Mr Eber also failed to be candid and truthful in all his dealings with the FSA (the FCA’s predecessor) and did not inform the FCA of his concerns. The FCA considered the failings to be particularly serious because some of the information was relied on by third parties as giving some assurance that sufficient asset cover was in place for the SLS bonds.
An accompanying FCA press release states that CIB ceased to exist in April 2012 when it was dissolved and struck off the UK company register. It also states that the SLS bonds and asset portfolio underpinned certain products issued by Keydata Investment Services Ltd (in administration).
FCA FINES FXCM £4 MILLION FOR MAKING UNFAIR PROFITS
On 26 February 2014, the FCA published the final notice (dated 24 February 2014) and fined Forex Capital Markets Ltd (“FXCM Ltd”) and FXCM Securities Ltd (collectively “FXCM UK”) £4,000,000 for allowing the US-based FXCM Group to withhold profits worth approximately £6 million that should have been passed on to FXCM UK’s clients.
The FCA has fined FXCM Ltd £3,200,000, together with any redress that remains unclaimed by customers after 15 months from the date of the final notice, for breaches of Principle 6 (Customers’ interests) and the best execution rules set out in section 11.2 of the Conduct of Business Sourcebook (“COBS”) and section 7.5 of the old Conduct of Business Sourcebook (“COB”). The FCA has also censured FXCM Securities for breaches of Principle 6 and COBS 11.2.
FXCM UK placed OTC foreign exchange transactions known as rolling spot forex contracts on behalf of retail clients, which were then executed by another part of the FXCM Group. Between August 2006 and December 2010, FXCM Ltd failed to pass on profits to its customers and instead kept the profits from favourable market
movements between the time the orders were placed by FXCM UK and executed by FXCM Group, while any losses were passed on to clients in full – a practice known as “asymmetric price slippage”. Similarly, limit orders placed by customers were also
treated asymmetrically as positive price movements were retained by the FXCM Group but negative price movements resulted in the customer losing the opportunity to have the order executed.
The FCA decided not to impose a financial penalty on FXCM UK in respect of breaches of COBS 11.2, other than disgorgement of profits, from 13 June 2008 onwards as they were acting in reliance on incorrect legal advice that they received on that date.
The FCA has also fined FXCM UK a joint financial penalty of £800,000 for breaches of Principle 11 (relations with regulators), for failing to disclose to the FSA (the FCA’s predecessor) information of which it would reasonably expect notice. FXCM failed
to inform the FSA that in July 2010 US authorities had begun to investigate the use of asymmetric pricing by FXCM and that FXCM had subsequently settled with the US authorities and paid redress to US customers affected. The FSA only learnt this information in August 2011 from monitoring press coverage.
In the accompanying press release, the FCA states that it is conducting a thematic review of firms’ execution practices including the way services are described to clients and that it expects to publish the results by the end of the second quarter of 2014.
FCA WINDS UP BOILER ROOM
On 20 March 2014, the FCA published a press release announcing that, at a hearing on 18 March 2014, the High Court made a winding up order against First Capital Wealth Ltd (“FCW”). Boiler room operations usually use high-pressure selling techniques
to persuade consumers to buy shares that are often worth very little or nothing at all. Because the people selling shares through boiler rooms do not have permission from the FCA to do so, boiler room scams constitute unauthorised business.
FCW had been promoting the sale of membership shares in a company called Berkeley Brookes LLC without FCA authorisation. The press release states that FCW adopted aggressive and persistent sales practices and made unsolicited calls to investors that, among other things, claimed investors would receive guaranteed returns of between 25% and 128% following investments of one to three years.
The FCA intervened to wind up FCW because it was unauthorised and because it was concerned about FCW’s ability to repay investors. Given that the FCW was unauthorised, customers who invested through FCW had no recourse in relation to their investments. According to the press release the FCA believes that, between June and November 2013, 27 investors which were mainly UK-based consumers together
invested approximately £660,000. The FCA is aware that any consumers invested tens
of thousands of pounds with the company. The FCA obtained a worldwide freezing order against FCW in November 2013.
CONSULTATION PAPER 14/3: FURTHER AMENDMENTS TO DEPP AND EG
On 28 February 2014, the FCA published a consultation paper proposing amendments to the Decision Procedure and Penalties Manual (“DEPP”) and Enforcement Guide (“EG”). The consultation paper forms part of the FCA’s wider work in relation to the transfer of consumer credit regulation from the OFT to the FCA from 1 April 2014 and is in addition to previous amendments made in August 2013 (PS 13/8), September 2013 (CP13/10) and those proposed in FCA CP13/10 and Quarterly Consultation No.3.
In this consultation paper, the FCA proposes to make amendments to the FCA Handbook in light of powers, previously held by the OFT, granted to the FCA to prohibit or
restrict EEA authorised payment institutions and electronic money institutions from undertaking certain consumer credit business in the UK. It follows that EEA authorised payment institutions and electronic money institutions in particular are directly affected by the proposed changes.
The changes relating to DEPP 2 include:
Annex 1 G is amended so that FCA staff under executive procedures will be the decision-maker when the FCA is proposing to refuse an application to vary the period, event or condition of a prohibition or to remove a prohibition, or to vary or remove a restriction; and
Annex 2 G is amended so that the Regulatory Decisions Committee (“RDC”) will be the decision maker where we are exercising our power to impose a prohibition or to impose or vary a restriction under the Electronic Money Relegations 2011 or the Payment Services Regulations. FCA staff under executive procedures will be the decision maket whenever a firm agrees not to contest the imposition of a prohibition or imposition or variation of a restriction.
The changes relating to EG propose to apply the FCA’s current approach to enforcement to the exercise of the new powers and include:
New EG 19.92A is inserted to note the FCA’s new power to prohibit or restrict the
carrying out of certain regulated activities by EEA authorised payment institutions; and
New EG 19.104A is inserted to note the FCA’s new power to prohibit or restrict the carrying out of certain regulated activities by EEA authorised electronic money institutions.
The consultation was open to comments until 14 March 2014.
POLICY STATEMENT 14/3: FINAL RULES FOR CONSUMER CREDIT FIRMS
On 28 February 2014, the FCA published its final rules for consumer credit firms in a policy statement and a guide for firms to help them prepare for the transfer of consumer credit regulation from the OFT to the FCA. These final rules result from the 300 responses received from the consultation (CP13/10) launched in October 2013 and set the scene for the biggest overhaul of the consumer credit industry in the UK in four decades. All companies who supply credit will be affected.
The FCA will take a tough approach to consumer credit with stronger powers to clamp down on poor practice than the previous OFT regime and has, for example, been given the power to ban misleading advertisements from payday lenders.
The new rules will give consumers additional protection from rogue practices and put the onus on credit providers to ensure that they treat customers fairly at all times. Whilst the FCA has carried across many standards from the Consumer Credit Act (“CCA”) and the OFT guidance, higher standards have been set for payday and other high-cost short- term lenders and for debt management firms.
The key changes for payday lenders and debt management companies include:
limiting the number of loan roll-overs to two and borrowers must be informed about
sources of debt advice before a loan is refinanced;
restricting the number of times a firm can seek repayment of a loan using a
continuous payment authority to two unsuccessful attempts;
requiring to provide information to customers on how to get free debt advice; and
requiring debt management firms to pass on more money to creditors from day one of a debt management plan, and to protect client money.
Other changes comprise amendments to the risk warning that high-cost short-term credit lenders will have to include in financial promotions, i.e. in their advertisements, which should now read as follows: “Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk”. In addition, the new rules on continuous payment authorities now allow for high-cost short-term loans to be repaid by instalments.
To ensure a smooth transition to the new consumer credit regime, for those consumer credit firms with an existing and valid OFT licence, an interim permission regime has been put in place between 1 April 2014 and 31 March 2016. It follows that firms with
a licence from the OFT that want to continue carrying out consumer credit activities had to register with the FCA for interim permission by 31 March 2014 or they could be
breaking the law. New entrants to the market after 31 March 2014 will not be able to take advantage of this interim permission regime and will need to apply for full authorisation if they wish to carry on consumer credit related activities after this date. The FCA intends to soon publish more information for firms who obtain interim permission about when they should apply for full FCA authorisation or variation of permission.
POLICY STATEMENT 14/4: THE FCA’S REGULATORY APPROACH TO CROWDFUNDING OVER THE INTERNET
Crowdfunding can be described as a way in which people, organisations and businesses (including business start-ups) can raise money through online portals (crowdfunding platforms) to finance or re-finance their activities and enterprises. Some crowdfunding is unregulated, but if it involves a regulated activity, without an exemption applying, then the FCA is responsible for its regulation. The crowdfunding sectors have grown
in recent years as a result of two key factors: technological innovation and the financial crisis, which has led to constraints on lending by traditional credit providers to the real economy.
The new rules aim to boost consumer protection by ensuring that consumers have access to fair, clear information that is not misleading, when using loan-based, or securities- based crowdfunding platforms. The policy statement outlines the new regime that will apply to firms operating loan-based crowdfunding platforms including peer-to-peer (loans from individual investors to other individuals) and peer-to-business (loans from individuals to businesses) lending platforms. The FCA also updated the regime applying to firms that either operate investment-based crowdfunding platforms (platforms
on which consumers can buy investments, such as equity or debt securities that are not listed or traded on a recognised exchange, or units in an unregulated collective
investment scheme) or carry on similar regulated activities (such as using offline media to communicate or approve direct offer financial promotions for non-readily realisable equity or debt securities to retail clients).
The FCA has replaced the terms “unlisted share” and “unlisted debt security” with a new defined term of “non-readily realisable security” to more clearly describe the
intended scope of the proposed rules. High-cost short-term payday loans are considered to be higher risk than other types of loans, such as those made to borrowers with easy access to credit.
The rules on loan-based crowdfunding focus on ensuring that consumers interested in lending to individuals or businesses have access to clear information, which allows
them to assess the risk and to understand who will ultimately borrow the money. Firms running the loan-based platforms will be required to have plans in place so that loan repayments continue to be collected even if the online platform gets into financial difficulties. New prudential regulations will be introduced over time so that these firms have capital to help withstand financial shocks. This is important as consumers who lend money through these firms will not be able to claim through the Financial Services Compensation Scheme. The FCA believes that loan-based crowdfunding firms pose a risk to consumers, and advocates that the fixed minimum prudential requirements of
£20,000 (for the transitional period) and £50,000 for the final policy are consistent with this risk.
The new rules on securities-based crowdfunding keep the crowd in crowdfunding by allowing anyone to invest up to 10 per cent of their available assets while those who take advice or have the relevant knowledge and experience can invest more. These rules also apply to equity and debt securities such as mini-bonds, which are difficult to cash in.
The FCA ensured that the same level of protection is provided to investors whether they engage with firms online, or offline as a result of the direct marketing or telephone selling.
The new rules come into force on 1 April 2014, subject to certain transitional arrangements. The transitional arrangements will apply to all firms once they become fully FCA-authorised and will do so until 31 March 2017. OFT-regulated loan-based crowdfunding firms will not be subject to FCA prudential standards until they become fully FCA-authorised. As a next step in this area, the FCA plans to review the crowdfunding market, its regulatory framework and the implementation of the new rules in 2016 to identify whether further changes are required.