This month's FS roundup includes mortgage prisoners, discretionary finance commissions, good practice for AFMs, OFSI 2nd Annual Review, PRA focus for General Insurance Firms and more...
Our pick of the biggest compliance news in FS this month
- FCA removes barriers to help mortgage prisoners
- Ban on discretionary finance commissions will save customers £165m per year
- FCA sets out good practice for effective liquidity management to AFMs
- Committee warns regulators to act to reduce IT failures in the financial services sector
- OFSI publishes second annual review
- PRA outlines areas of regulatory focus for General Insurance Firms
FCA removes barriers to help mortgage prisoners
The Financial Conduct Authority (FCA) has confirmed that it has removed barriers that stop some mortgage customers from finding a cheaper mortgage deal.
The FCA’s new rules, which are detailed in Policy Statement 19-27 allow lenders to use a different and more proportionate affordability assessment for consumers who are up to date with their existing mortgage and want to switch to a more affordable mortgage without borrowing more.
“Responsible lending is hugely important, and unaffordable borrowing is a cause of significant harm. Mortgage prisoners are often stuck on more expensive mortgages. We are removing barriers to switching in our rules, and we would like to see firms make changes to their own processes quickly in order that customers can benefit as soon as possible.”
The FCA wants customers to benefit from these changes as soon as possible, so the new rules are coming into force immediately.
- Lenders are now permitted to use a different and more proportionate affordability assessment for customers who meet certain criteria, such as being up-to-date with payments under their existing mortgage and not looking to move house, or borrow more (except to finance certain fees).
- The FCA has simplified the definition of a more affordable mortgage.
- The rules allow eligible consumers to finance intermediary fees, as well as product or arrangement fees, through the new mortgage.
- Customers of inactive lenders and firms not authorised for mortgage lending (who are unregulated) will have to be contacted and told that it has become simpler and easier for them to switch to another lender.
Ban on discretionary finance commissions will save customers £165m per year
The Financial Conduct Authority (FCA) has announced plans to address consumer harm in the motor finance market by banning commission models that can incentivise brokers to increase a customer’s interest rate.
Currently, some motor finance brokers receive commissions linked to the interest rate that customers pay. The broker can set the loan interest rate, and this gives rise to conflicts of interest and creates incentives for the broker to increase the interest rate paid by the customer to earn more commission.
Preventing the use of this type of commission would remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance. The FCA has estimated that its proposed changes could save customers £165 million a year. The changes follow an FCA review of the sector.
The FCA is consulting on the new rules until 15 January 2020 and aims to finalise the rules at the beginning of the 2nd quarter of 2020. Firms would then have three months to implement the proposed ban on discretionary commission models.
- The FCA proposes to ban all ‘discretionary commission models’ in the motor finance market, these include:
a. Increasing Difference in Charges (DiC), also known as ‘Interest Rate Upward
b. Adjustment’ - brokers are paid a fee which is linked to the interest rate payable by the customer. The contract between the lender and the broker sets a minimum interest rate, and the fee is a proportion of the difference in interest charges between the actual interest rate and the minimum interest rate.
c. Reducing DiC – also known as ‘Interest Rate Downward Adjustment’. This is similar to Increasing DiC, except that the contract between the lender and the broker sets a maximum interest rate.
d.Scaled commission models – also known as a variable product fee. The broker is paid a fee which varies (within parameters) according to the interest rate.
- The FCA also proposes to make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These changes would apply to many types of credit brokers and not just those selling motor finance.
FCA sets out good practice for effective liquidity management to AFMs
The FCA has written to the Chairs of Authorised Fund Managers (AFMs) to outline the regulator’s expectations of a firm’s liquidity management practices.
The letter follows action taken by the FCA to strengthen the regulatory framework in this area, including the publication of Policy Statement PS19/24 on illiquid assets and open-ended funds, which sets out several new rules relating to the liquidity management of non-UCITS retail schemes.
The FCA has asked all AFMs to consider their obligations on portfolio composition, asset eligibility and liquidity management and to review their firm’s liquidity management practices against the examples of good practice provided by the regulator.
- AFMs remain responsible for ensuring effective liquidity in funds even if they have delegated investment management to another person.
- AFMs should act now to consider their portfolio composition and the appropriateness of assets they invest in.
- AFMs should review their liquidity management practices against the FCA's webpage entitled ‘Liquidity Management for investment firms: good practice’ and make improvements where necessary. Key features of robust liquidity management include:
a. Processes to ensure that the fund dealing arrangements are appropriate for the investment strategy of the fund
b. Regular assessment of the liquidity of portfolio positions
c. Using liquidity buckets for liquidity risk management
d. An independent risk function that monitors portfolio bucket exposures regularly and reports breaches to the set limits
e. Stress testing by fund managers to assess the impact of extreme but plausible scenarios on their funds.
- AFMs should also follow IOSCO’s 2018 liquidity risk management recommendations.
- While the new rules set out in PS19/24 do not come into force until September 2020, the FCA suggests that fund managers and depositaries may wish to consider adopting some of the measures such as improved liquidity management ahead of that date.
Committee warns regulators to act to reduce IT failures in the financial services sector
The House of Commons Treasury Committee has published a report on the resilience of Information Technology (IT) in the Financial Services Sector, following the inquiry that it launched on this topic in November 2018.
The Committee commented that while completely uninterrupted access to banking services is not achievable, prolonged IT failures should not be tolerated, it says the current level and frequency of disruption and consumer harm is unacceptable.
The report makes a series of recommendations to improve operational resilience, including ensuring accountability of individuals and firms, increasing financial sector levies to ensure that the regulators are sufficiently staffed, and ensuring that firms resolve complaints and award compensation quickly.
The Committee urges regulators to use the tools at their disposal to hold individuals and firms to account for their role in IT failures and poor operational resilience. It recommends that the Senior Managers Regime should be expanded to include Financial Market Infrastructure firms, such as payment systems.
The Committee suggests that the lack of a successful enforcement case under the Senior Managers Regime against an individual following an IT failure may be evidence of an ineffective enforcement regime. It adds: “If future incidents occur without sanction, Parliament should consider whether the regulators’ enforcement powers are fit for purpose”.
Just over a week after publishing its report and in response to the general election on 12 December 2019, the Committee confirmed that it has now closed this inquiry, along with all other ongoing inquiries. Following the dissolution of Parliament on 6 November, all Select Committees will cease to exist until after the general election. If an inquiry on this subject is held in the future, the Committee may refer to the evidence already gathered as part of this inquiry.
OFSI publishes second annual review
The Office of Financial Sanctions Implementation (OFSI) has published its second annual review.
The Annual Review details key areas of OFSI’s work for the last financial year, including:
- Financial sanctions regimes implemented
- Additions to the consolidated list
- 2018 frozen asset review
- Licences and amendments issued
- Reported financial sanctions breaches
This period reported on marked a milestone for OFSI, during which it issued its first monetary penalties for breaches of financial sanctions, and the Financial Action Task Force (FATF) concluded that the UK had the strongest anti-money laundering and counter-terrorist financing regimes. In its Mutual Evaluation Report, FATF recognised the contribution that OFSI has made to effectively implementing targeted financial sanctions against terrorist regimes.
PRA outlines areas of regulatory focus for General Insurance Firms
The Prudential Regulation Authority (PRA) has set out the PRA’s current priorities and areas of supervisory focus for General Insurance firms, following recent supervisory work.
A ‘Dear CEO’ letter from Gareth Truran, Acting Director of Insurance Supervision at the PRA confirms that the focus for general insurance firms regulated by the PRA, will include:
- The adequacy and governance of, and controls around reserving;
- The extent to which firms are demonstrating discipline in underwriting conditions, remediation activity and controls;
- Emerging risk trends and experience in firms’ exposure management practices;
- UK retail general insurers’ responses to the FCA’s pricing practices review; and
- Looking at firms development and maintenance of a culture in which staff feel able to speak up and raise concerns with effective mechanisms in place to support them in doing so.
The PRA encourages firms to assess the points raised, to consider whether they are of relevance to them and where appropriate to analyse the issues and identify whether actions should be taken.
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