On March 31, 2014, the Financial Conduct Authority (FCA) published its business plan for the coming year. At the heart of this plan is an emphasis on ensuring that firms put consumer outcomes first, not just in relation to those areas of their businesses that directly face consumers but wherever there is the potential for harm to consumers throughout their business models.
In 2013, the FCA concluded relatively few enforcement actions with significant outcomes in the retail sector and, those that were concluded, focussed on the familiar themes of sales practices, treating customers fairly more generally and systems and controls. The FCA plans a wide range of initiatives for 2014/2015 that go further than the retail sector enforcement and other activities that it has conducted over the past year. The FCA has new responsibilities, such as the regulation of consumer credit firms and it also has to prepare for the launch of the Payments Systems Regulator, so it plans some work to implement these changes. The FCA's planned initiatives include thematic reviews on various aspects of retail banking, and other initiatives relating to the protection of consumers and enhancing market integrity. These initiatives focus on different types of firms, such as insurers, asset managers, firms operating in the wholesale markets and others, where there is a risk of harm to consumers. They also bring into focus different aspects of firms' businesses, such as their strategy, governance, practices and products. In all of these respects the FCA expects firms to adopt a consumer-focused culture putting consumers at the heart of their business models.
In this, the third of six articles on investigations and enforcement topics by Freshfields Bruckhaus Deringer, the authors consider some of these key activities and how firms can prepare for them in advance.
Consumer credit: the new regime and what firms can do
Now that the FCA has taken over regulation of consumer credit from the Office of Fair Trading (OFT), firms carrying out credit-related regulated activities, such as lending and debt management, are subject to a new regulatory regime. They must comply with the general requirements of the FSMA regime (for example, the FCA's high level principles for businesses and the Systems and Controls sourcebook), and a new conduct of business regime set out in the Consumer Credit Sourcebook (CONC).
In its Business Plan, the FCA emphasises the new and more extensive regime which consumer credit firms now face: "We will have stronger powers and more resources than the Office of Fair Trading to regulate this industry and we expect all firms to comply with our principles for businesses from April 1, 2014". These are important developments, especially for those firms not familiar with the FCA regulatory regime.
There are a number of steps that firms can take now. In particular, they should prepare for the FCA's key activities recognising the FCA's plans for the year ahead (and beyond). The FCA has outlined a number of key consumer credit related activities that it will initiate, including:
- Addressing issues with credit cards and overdrafts: the FCA will look at whether competition is effective in the credit card market and accessibility to affordable credit cards that deliver good value for money. This focus on credit cards raises the possibility of enforcement action similar to that taken by the OFT against banks and building societies in March 2014 for breaches of obligations, including those relating to annual statements.
- Improving financial promotions: consumer credit firms need to be aware of the CONC rules relating to financial promotions (Chapter 3). The FCA will be actively monitoring financial promotions. Indeed, the FCA recently reviewed a sample of advertisements and found examples that fell below the standard required by, for example, claiming that a product will help repair credit ratings. As a result, the FCA said that consumer credit firms need to raise their advertising standards and do more to ensure their promotions do not mislead customers.
Despite this being a newly acquired jurisdiction the FCA will apply its full supervisory approach and firms should expect other proactive supervisory measures, as noted in its "Guide for Consumer Credit Firms". These include the FCA visiting the largest firms within certain sub-sectors, including credit cards and debt collection; monitoring of firms' compliance with the Unfair Terms in Consumer Contracts Regulations; and, from October 1, 2014, regular regulatory reporting requirements.
Payment Systems Regulator
The FCA will start to prepare for the new regulator that will oversee the UK's retail payment systems, which is scheduled to launch by April 2015 and which will focus on promoting competition, innovation, and ensuring that payment systems operate in the best interests of consumers. In the short term, the FCA plans to work on the regulatory approach, such as establishing fees and the rulebook, and it will initiate formal consultations on these issues.
Other key activities
The FCA has set out a range of other activities relating to the retail sector. One of the key themes that emerges is the FCA's expectation that firms embed a consumer-focused culture at the heart of their businesses. The key question is how will the FCA test this? Although we await details and timelines of many of the activities set out in the Business Plan, the specific areas of work identified provide a valuable insight into the FCA's priorities in the year ahead.
- As part of its supervisory work, the FCA will look at firms' governance and management processes, the revenues they generate from their existing customers, and how they monitor sales practices, with the focus on ensuring a "consumer-focused culture" in firms.
- The FCA will begin a series of thematic reviews and market studies in different sectors, including:
- Retail banking: the FCA will look at the way firms deal with unauthorised transactions and ensure customers are getting fair outcomes; review the impact of cost-cutting initiatives on customers, such as the withdrawal of paper statements; and, review how banks have implemented the packaged bank account rules introduced in March 2013.
- Mortgages and consumer lending: several reviews relating to mortgages and consumer lending are also planned for this year, such as a review of how firms have implemented rules resulting from the Mortgage Market Review. The focus on mortgages raises the possibility of the FCA identifying issues in firms' processes similar to those that resulted in several banks agreeing to repay more than £8 million in mortgage arrears fees in February 2014.
- Insurance: as noted in the Business Plan, the FCA's work in the general insurance sector will focus more on wholesale activities, recognising that many retail general insurance products come from wholesale insurance providers. The FCA will look at distribution chains in firms that operate in wholesale markets, including the impact on retail customers.
- Investment Management: the FCA will look at how asset managers discharge their agency responsibilities. Earlier this month, the FCA published the results of the review of the disclosure of fund charges. The FCA sampled 11 firms, including asset managers, banks, insurers and wealth managers, and found that some of the information provided to retail investors on fund charges was unclear, referring to multiple charge figures across different documents. The FCA expects firms to consider these findings and review their procedures to ensure charging information is presented clearly.
Points to note
The activities planned by the FCA demonstrate two important points: first, that the FCA will not just be looking at retail banks, but other types of firms such as asset managers and other firms where there is a risk of harm to consumers; and secondly, that firms need to consider their businesses broadly to identify areas of potential harm to consumers, and not just those that directly face the customer.