Regulatory Horizon for 2019
In this article, we’ll take a look ahead at the upcoming regulatory changes over the next nine months of 2019. In the last two years, firms have dealt with significant new legislative and regulatory rules and guidance, including the Dear CEO letter regarding complaints, the new Pre-action Protocol for Debt Claims, the new rules around Remuneration and Staff Incentives, new rules on Creditworthiness Assessments, and GDPR. Depending on the type of firm, your firm may be embedding SM&CR, or you may be working towards commencement in December of this year.
The landscape over the rest of 2019 is dominated by Brexit and SM&CR, but there are a number of current and upcoming reviews and consultations that firms should be aware of.
Mortgage customers: Proposed changes to responsible lending rules and guidance
The FCA propose a number of new rules that aim to reduce regulatory barriers to consumers who are up-to-date with payments and not looking to borrow more from switching to a more affordable mortgage. These customers are known as ‘mortgage prisoners’, unable to switch because of lending practices that changed after the 2008 financial crisis and subsequent tightening of lending standards. As a result, the FCA are suggesting that mortgage lenders could carry out a modified affordability assessment where the customer has a mortgage on which they are up to date with their payments and doesn’t want to borrow more, but would like to switch to a new deal. Mortgage lenders would need to tell such customers how their affordability has been assessed and provide additional disclosures about potential risks.
Furthermore, inactive lenders would be required to review their customers and contact them to notify them of the rule change, enabling them to take action if they choose to do so.
In practice, this would mean a number of proposed changes and additions to MCOB, including a new rule which would ensure that the interest rate on a mortgage after a discount or introductory period is no higher than the rate currently being applied to the existing contract. Additionally, where a lender uses the modified affordability assessment, the FCA proposes to allow them to disapply specific MCOB rules. Additionally, the FCA are planning to amend rules and guidance to require a lender that undertakes a modified assessment to make additional disclosures.
There would also be changes to how the FCA collect information on lenders’ use of the modified assessment, to enable the regulator to assess whether consumer outcomes have been improved.
After the publication in March 2018 of their initial findings of their motor finance review, the FCA have now published their final report, in which they conclude that there are widespread practices that could be leading to consumer harm on a potentially significant scale. The next steps for affected firms are not yet clear, but firms should read the report and assess their practices, policies and procedures against the regulator’s expectations and to ensure potential for customer detriment is reduced.
The reviews have found that widespread commission arrangements could incentivise dealers to arrange more expensive finance for customers. The final report reveals the use of commission models that allow brokers discretion to set the customer interest rate, which the FCA estimates could be costing customers £300 million more annually than under flat fee models (where there is no broker discretion). The review also found that lenders are not adequately managing the conflict of interests of their brokers. The FCA is considering a number of potential mitigations, including whether to strengthen existing FCA rules or ban certain types of commission model.
The review also discovered the some firms failed to give adequate pre-contract disclosures and explanations, and conduct appropriate affordability assessments. The rules in CONC state that firms must give information sufficiently early to alert customers to potential conflicts of interest, but the FCA found no evidence of compliance with the rules that brokers must disclose their status and remuneration, e.g. the existence of any commission that could affect the broker’s impartiality.
Until further information is published, firms should review their policies and procedures relating to pre-contract disclosures and explanations, and ensure the letter and the spirit of the rules are complied with; namely that information provided is complete and not misleading. They should also review their policies and procedures relating to affordability assessments, particularly the new rules and guidance issued in July 2018, and make changes where necessary.
Brokers and lenders should be mindful of the rules as they currently stand, which require evidence that differences in commission rates are justified.
Debt Management – Thematic Review
The Thematic Review, published on 15 March, considered whether firms in the debt management sector meet the FCA’s standards and are treating their customers fairly. The report found that there have been some improvements since the previous review in 2015, with firms now more focussed on achieving good customer outcomes. The review highlighted, however, that in all of the firms considered inconsistent practices existed and some customers had received poor advice and unsuitable recommendations. They set out two areas for significant improvements:
Advice and recommendations - Where customers were seeking help together or were on a joint debt management plan, some firms failed to consider solutions suitable for each customer individually.
The identification and treatment of vulnerable customers – particularly consideration of how an individual’s vulnerability might affect the delivery and suitability of the debt advice.
The report contains examples of good and poor practice – firms should review their practices and change how they act if there is the potential that customers may not receive the quality of advice or level of service expected.
Preparing for Brexit
The FCA has published a package of documents containing most of the final instruments and guidance; this has been approved by the Treasury and so are now final. In short, the FCA’s approach aims to ensure continuity by applying a ‘standstill’ so that firms can continue to comply with pre-exit rules, in most cases for 15 months from exit day. There are some areas where firms need to comply with rules or changes now; these are set out on the FCA’s website.
Currently, the date the UK will leave the EU has changed to 12 April 2019. Firms that carry out business between the UK and EEA should have plans in place and the FCA have provided specific information for firms in:
General insurers and intermediaries in the UK
Life insurers in the UK
Participants in wholesale markets operating in the UK
Retail investments firms in the UK
Banking and payment sectors in the UK
The Temporary Permissions Regime will allow EEA based firms passporting into the UK to continue new and existing regulated business within the scope of their current permissions while they seek full FCA Authorisation.
All firms should have on their radar:
Passporting – this allows EEA firms to conduct business within other EEA states, and will affect firms based in the UK that conduct business in the EEA and firms based in the EEA that carry out certain types of business in the UK. Firms can find out if they use a passport by checking the Register.
Legislation Changes – The European Union (Withdrawal) Act 2018 will convert existing EU legislation into UK law on exit day. The FCA will amend and maintain EU binding technical standards, and amend the Handbook to ensure it is consistent with changes.
Temporary transitional power – This power gives the FCA some flexibility in applying post-Brexit requirements. Whilst the FCA do not expect firms to have to prepare now to implement post-Brexit requirements, there are a number of areas where the FCA would not make transitional provision, and firms in the following areas should be preparing to comply with post-exit regulatory obligations:
Firms subject to MiFID II transaction reporting regime
Firms subject to EMIR reporting obligations
EEA Issuers that have securities traded
Investment firms subject to the BRRD and that have liabilities governed by the law of an EEA State
EEA firms intending to use the market-making exemption under the Short Selling Regulation
Firms intending to use credit ratings issued or endorsed by FCA registered credit ratings agencies after exit day
UK originators, sponsors or securitisation special purpose entities
The FCA have also published sector specific guidance for the banking sector, UK-based pensions and retirement income firms, general insurance firms, retail firms, wholesale banks, and markets and asset managers operating in the UK.
Senior Managers &Certification Regime
The SM&CR will apply to all firms regulated by the FCA, including consumer credit firms, from 9 December 2019. Affected firms should have their preparations well underway.
Broadly, SM&CR comprises three parts. The Senior Managers Regime covers those individuals who hold specific functions – the most senior people in a firm with the greatest potential to cause harm. Senior Managers need to be approved by the FCA. All other staff that could have a significant impact on customers, the firm or market integrity are subject to the Certification Regime. This covers those with significant influence who do not need approval from the FCA – firms will be required to check and certify that these individuals are suitable to do their job annually. Finally, the Conduct Rules apply to all staff who are not ancillary staff and are intended to improve standards of individual behaviour in financial services from the top down and bottom up.
How the new Regime will apply depends on the type of firm – for solo-regulated firms, the three categories are Core, Enhanced and Limited Scope. Which, and how many, Senior Manager Functions and Prescribed Responsibilities apply will depend upon which category the firm is in. In all firms, each Senior Manager should have:
Statement of Responsibilities – a single document clearly setting out their role and what they are accountable for. Enhanced firms also need to draw up a
Responsibilities Map – a document that sets out the firm’s management and governance arrangements.
The FCA will publish details of key individuals – all Directors and Senior Managers, those certified as fit and proper and those who require a qualification to undertake business with clients – in a Directory to be published in March 2020 that will enable consumers to protect themselves and limit the operation of unauthorised individuals. Firms will be required to submit accurate data on Directory individuals using Connect from September 2019 for banking and insurance firms, and from 9 December for all other firms.