The regulator monthly update on UK regulation relating to securities laws, is provided by Emma Radmore, Legal Director, Womble Bond Dickinson (UK) LLP, and covers UK regulatory developments during May 2020.
Laws, Regulatory Requirements and Consultations
Pay.UK launches rules and standards for Request to Pay. Pay.UK has launched its Request to Pay framework comprising the message standards, rules and terms and conditions for developing Request to Pay services. Organisations can use it to create the first Request to Pay propositions. The launch follows a sandbox testing in which over 400 organisations participated in a live pilot.
FCA updates on CPD and Covid-19. The Financial Conduct Authority (“FCA”) has previously said that is expects firm to be able to show that individuals are competent to carry out their work during the pandemic. It notes that effective and consistent Continuing Professional Development (“CPD”) is a part of this, but that it is, in these exceptional circumstances, allowing firms to defer individuals’ CPD to the next year. FCA notes, though, that most individuals should be able to continue completing CPD when working at home and even while on furlough. It expects firms to support employees on furlough by providing them with appropriate materials. That said, it does recognise the potential difficulties particularly for retail investment advisers who need to complete 35 hours of CPD which is independently verified, and relevant employees within insurance distribution firms who must complete at least 15 hours in any 12 month period. As a result, it is allowing individuals, in exceptional circumstances, to carry over any uncompleted CPD hours to the next year, where the CPD year ends before 21 April 2021. The missing hours must be completed in the next year, on top of the hours required for that year. FCA also gives guidance on what it considers to be exceptional circumstances, which will include when employees need to carry out significant extra work-related duties, have caring responsibilities or have difficulties accessing CPD material, and where in those circumstances it is not realistic to expect the individual to fulfil the requirements. Where firms have made this decision, they should record the reasons for it, but do not have to tell FCA. Independent accredited bodies may also verify compliance with the relevant rules.
Covid-19: FCA publishes proposed updated guidance for mortgages. On 22nd May, FCA outlined its proposed additional guidance (following the original guidance on 20 March) for mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators, in light of Covid-19. The proposal outlines the options firms will be required to provide to customers coming to an end of a payment holiday, as well as those who are yet to request one. As with other recent Covid-19 related guidance, firms have had a small window to provide comments to the FCA – 5pm on Tuesday 26th May 2020. The guidance doesn’t relate to other consumer credit products and the FCA has indicated that such guidance will also be updated shortly. Some of the key considerations are:
- For customers yet to request a payment holiday, the time to apply for one would be extended until 31 October 2020.
- For those who are still experiencing temporary payment difficulties due to coronavirus, firms should continue to offer support, which could include extending a payment holiday by a further three months.
- At the end of a payment holiday, firms should contact their customers to find out if they can resume payments and if so, agree a plan on how the missed payments will be repaid.
- The current ban on repossessions of homes will be continued to 31 October 2020. This will ensure people are able to comply with the government’s policy to self-isolate if they need to.
- Payment holidays and partial payment holidays offered should not have a negative impact on credit files.
- The guidance would not prevent firms from providing more favourable forms of assistance to the customer, such as reducing or waiving interest.
- Firms should consider signposting customers towards sources of debt advice.
- Firms should be particularly aware of the needs of their vulnerable customers and consider how they engage with them including the use of digital channels to request payment holidays.
The new guidance will be kept under review and updated as necessary. Unless renewed or updated, the guidance will expire on 31 October 2020.
UK Finance comments on FCA mortgage proposals. UK Finance has responded to FCA’s consultation on what firms should be doing as the next stage of helping customers in financial difficulties due to Covid-19 with their mortgages. While, of course, UK Finance’s members are committed to helping borrowers, it takes issue with some of FCA’s proposals, and sets out its comments in a detailed response. It agrees that where customers can afford to re-start mortgage payments they should do so, but that for some an appropriate outcome may be a further deferral, but says there should be no presumption that firms should offer borrowers who have opted for a deferral a further 3 month deferral. It says a more tailored approach would be more appropriate. Its data suggests that 60-70% of customers will be able to resume payments, and it may be in their better interests to do so, rather than self-selecting to defer for longer. UK Finance also notes the guidance suggests different treatment for customers who were previously up to date and those who were in shortfall before 20 March. It thinks this may be confusing, and that all customers in payment shortfall should be offered the same treatment. Additionally it notes a key difference between the current and proposed guidance on customers who want a payment deferral for the first time, but thinks there should be no change. Among its other comments are a general support for the extension to 31 October.
FCA consults on safeguarding. FCA is consulting on how firms can strengthen their safeguarding protections during the Covid-19 crisis. The consultation focuses on the provision of additional guidance for payments firms to strengthen the way they look after their customers’ money.
The guidance centers on:
- keeping records and accounts and making reconciliations
- safeguarding accounts and acknowledgement letters
- selecting, appointing and reviewing third parties
- when the safeguarding obligations starts
- unallocated funds
- annual audit compliance with safeguarding requirements
- small payment institutions
- disclosing information on treatment of funds on insolvency to customers
Prudential Risk Management
- governance and controls
- capital adequacy
- liquidity and capital stress testing
- risk-management arrangements
- wind-down plans
The consultation asks:
- ‘Do you agree that we should provide additional guidance on safeguarding, managing prudential risk, and wind-down plans? If not, please explain why.’
- ‘Do you agree with our proposed guidance on safeguarding? If not, please explain why.’
- ‘Do you agree with our proposed guidance on managing prudential risk? If not, please explain why.’
- ‘Do you agree with our proposed guidance on wind-down plans? If not, please explain why.’
The consultation will close on 5th June and following that, the FCA plans to send a Dear CEO letter including the guidance with a full consultation following later in the year.
FCA makes new rules. At FCA’s May Board Meeting it made 3 new sets of rules:
- the Covid-19 Premium Finance Instrument, which took effect from 18 May and introduced the new requirements on payment deferrals and other measures for insurers and premium finance firms;
- the Payment Services Regulations 2017 (Payment Account) Instrument 2020 took effect from 22 May and amends PERG to ensure FCA’s guidance on payment accounts is consistent with an EU judgement on what a PSD2 payment account is; and
- the Supervision Manual (Reporting No 14) Instrument 2020 also took effect from 22 May and amends the firms details form in SUP 15 to align it with the relevant Connect form.
Government publishes draft EU/UK FTA. The Government has published a draft Comprehensive Free Trade Agreement between the UK and EU. Chapter 17 of the agreement relates to financial services, which it defines as “any service of a financial nature, including all insurance and insurance-related service, banking and other financial services (excluding insurance), and services incidental or auxiliary to a service of a financial nature. So for instance, as well as the traditional regulated activities, it will include services like consultancy and actuarial services for insurance, it will include marketing of financial services and agreements concerning any financial product or service. The agreement covers national treatment of cross-border financial services suppliers and includes a clause for the UK to propose text on most-favoured-nation treatment; prohibits any restriction on the amount or value of services that may be provided cross-border; caters for firms wishing to provide new financial services into another jurisdiction and requires mutual appropriate access to payment and clearing systems. It then addresses requirements around management and transparency and sets a mechanism for dealing with non-confirming measures. There is also a carve out to allow the adoption of certain prudential measures necessary to protect investors or the integrity or stability of a financial service suppler or the financial system. The section also addresses the need to allow the provision of back office functions without undue regulatory burden and sets up a Financial Services Committee to consider disputes. Finally, it calls for regulatory co-operation, with autonomy, transparency and information exchange.
JMLSG consults on pooled client accounts. Joint Money Laundering Steering Group (“JMLSG”) is consulting on some new draft text for Chapter 5 of Part 1 of its guidance dealing with pooled client accounts (“PCAs”). JMLSG considers the key risks of PCAs are where a customer’s clients misuse a PCA without the customer’s knowledge and where a customer is complicit in their misuse. It acknowledges that the purpose of a PCA is often self-evident but says firms should take reasonable measures to establish and document their purpose and may need to get information on, for example, the types of clients whose funds will be held, and the level of assets and size of transactions, as well as the possible exposure to high-risk industries and geographies. Many PCAs will be low-risk, for instance if they are the client accounts of legal or accountancy professionals who are subject to the Money Laundering Regulations (“MLRs”), if the funds are backed by government schemes or if the PCA is set up for a limited, domestic purpose. In some cases it will be appropriate to apply SDD, but in other cases the firm must take reasonable measures to identify and verify the identity of the owners whose funds are held in the PCA (this may take the form of a formal reliance agreement), or take other measures such as enhanced monitoring, requesting the customer enhances their practice or restricting the type of customers whose assets are held in the PCA. The guidance suggests that a firm enters into a written agreement with its customer under which the customer agrees to provide information on the owners of the funds in the PCA if the firms requests it. Consultation closes on 10 June.
FCA publishes finalised Covid-19 insurance guidance. FCA has published its finalised guidance for insurance and premium finance firms on dealing with Covid-19 and customers in temporary financial difficulty. The guidance should be complied with no later than 18 May and is aimed at prompting firms to help qualifying customers where possible to reduce the impact of temporary financial distress and ensure customers continue to have insurance that meets their demands and needs. The guidance notes that merely complying with FCA’s (draft) product value guidance due to take effect before the end of the month will not address all customer-level financial difficulties. FCA received 59 responses to its draft guidance and has made a small number of changes as a result. FCA notes the guidance builds on Principle 6 and ICOBS 2.5.-1R and applies to insurers, intermediaries (including ARs), premium finance (by which FCA means any method that provides credit to allow customers to pay a premium by instalments, whether under a regulated credit agreement or otherwise) lenders and brokers, debt collectors and other firms that may be involved in relevant arrangements and in relation to all non-investment insurance contracts, but not re-insurance. It also notes that the elements that apply to insurers and brokers apply only to eligible complainants for the purposes of DISP and that it does not capture lending for business purposes (e.g. regulated lending to a sole trader) – although of course basic TCF principles would continue to apply. Also, as with other guidance, it stresses that customers who were already in financial difficulties before Covid-19 should be assessed under the normal forbearance rules.
- asks firms to focus on cases where a customer contacts the firm because they are in payment difficulties, want to reduce cover or have made other enquiries in the light of Covid-19 or have missed payments during the crisis period;
- asks firms to consider what options they can give to the customer and how to deliver a fair outcome, including:
- reassessing a customer’s risk profile (for instance to offer lower motor insurance premiums for customers not currently using cars for business purposes);
- considering whether other products might meet the current needs better
- working to avoid customers needing to cancel necessary cover because they cannot afford it, by offering payment deferrals, but also not charging cancellation fees if customers decide to cancel and considering their obligations to treat customers fairly if those customers then return to the insurer and
- waiving any fees associated with any qualifications made to a policy;
- stresses the importance of clear communications making options available, encouraging customer contact and making it as easy as possible for customers to contact the firm;
- notes the importance of continuing to ensure cover is suitable, and that it is most unlikely to be fair to customers if any changes result in increased premium;
- highlights that if it is appropriate to adjust cover on a short-term basis, firms must be sure to reassess the situation at the end of the term to minimise the risk of under-insurance;
- confirms FCA’s expectations on firms to grant payment deferrals (without having to ask questions to assess the appropriateness of a deferral) if other options fail and unless it is obviously not in the customer’s interests to do so – this will entail insurers not cancelling policies solely because of non-payment where a payment deferral has been granted. The deferral period would normally be between 1-3 months but could be longer;
- allows customers to request a payment deferral up to 18 August;
- requires firms to consider alternative temporary relief where a deferral is not appropriate, such as reduced payments and extended payment dates – and in any event not charging customers for any deferral or other measure;
- says customers should be given adequate information to understand the implications of deferral, and that firms should engage with customers during a deferral period to understand the likelihood of payments resuming;
- clarifies that if a claim is made during a deferral period or where other forbearance measures are in place, firms can deduct outstanding premiums from sums due;
- urges firm to assess the effects of interest rates; associated with instalments to ensure they meet TCF criteria; and
- notes the need to work with CRAs where firms have not reached an agreement wtih customers who then default on a payment due.
NCA updates guidance on better SARs. The National Crime Agency (“NCA”) has published an update to its guidance on how to submit better quality Suspicious Activity Reports (“SARs”), and a set of FAQs to accompany it. The guidance stresses that a properly made SAR will give the enforcement agencies a quick picture of who is doing what, where, when, why and how and will enable them to prioritise attention to DAML SARs. Most of the guidance is not new, but the messages bear repeating. The guidance reminds reporters that every reporter must submit a SAR as appropriate under POCA or TACT, setting out the reason for suspicion, a description of the relevant property and the prohibited act they wish to carry out (where this is the case), and that there are additional obligations under POCA on those in the regulated sector including providing the identity of the person concerned, the whereabouts of the property and any information they have that might help. Key other pointers include:
- the need to provide as much information as possible, including all available CDD information;
- using the word UNKNOWN where necessary rather than leaving boxes blank or using other characters;
- the need to be clear and concise, not using acronyms and giving a brief description of any relevant aspect of the business of the reporter necessary to help understand the context of the SAR;
- trying to answer all the key questions in the “reason for suspicion” field within the permitted 8,000 characters;
- making sure to fill in the right information in the right fields, including the right glossary codes, otherwise all the FIU systems will not pick up the best information;
- not sending attachments with the SAR;
- making sure DAML requests are clearly marked and properly directed and request consent for a specified activity
Government agrees cross-border information sharing. The Government has endorsed cross-border information sharing within corporate groups as a weapon to combat financial crime. The Government says sharing can help both the private sector and government agencies, but where the information is personal data there must be controls in place to make sure it is kept safely and used responsibly. Treasury and the Home Office have provided guidance to set the expected standards.
FMLC responds on Overseas Funds Regime. The Financial Markets Law Committee (“FMLC”) has published its response to Treasury’s consultation on a new Overseas Funds Regime. It notes:
- the uncertainty around the timing of the start of the new regime – and whether the new regime will overlap with the end of the TPR;
- it is unclear which areas of a third country’s regime will be part of the “outcomes-based equivalence” assessment, what the “additional requirements” will be and which types of vehicles will be eligible;
- clearer timeframes are needed around withdrawal of equivalence;
- it is not clear what the reporting requirements to FCA will be;
- the financial promotion proposals would effectively mean most funds would need to be marketed through UK authorised persons, but this could be avoided if overseas operators were required to comply with COBS rules; and
- while the proposed changes to s272 FSMA are welcome, some more guidance on the timelines for the process is needed.
FCA sets Covid-19 financial crime prevention expectations. FCA has set out the systems and controls it expects firms to have in place to continue to manage their financial crime risks during Covid-19. It appreciates firms will face operational challenges, but also notes that criminals are already taking advantage of the pandemic. As a result, firms must:
- stay vigilant to new threats and frauds and update their control environments accordingly;
- be sure to make timely SARs;
- be careful that any necessary reprioritising of operational issues do not mean they turn off any important triggers or thresholds, or stop sanctions screening, simply to get fewer alerts;
- when deciding to delay certain activities, ensure they do so having considered the risks and always having in mind a strategy to return to business as usual;
- not delay reviews for high risk customers and not weaken controls that detect terrorist financing;
- keep clear records of risk assessments that take place and the decision process behind changes; and
- tell FCA of any material issues that impact the effectiveness of their systems or significantly delay remediation plans.
That said, FCA recognises there should be some flexibility. In particular:
- when collecting information from existing customers make reasonable efforts to think of ways to get any missing information before closing the customer’s account;
- use the variety of methods already permitted for non-face to face verification, such as scanned documents, third party verification, use of due diligence carried out by others, and commercial providers.
FCA also reminds firms that their SMF 17 function holders (money laundering reporting function) should only be furloughed as a last resort
FCA updates on insurance and premises access during Covid-19. FCA has updated its webpage on insurance and coronavirus to include guidance on access to premises. It notes that some consumers may be unable to access their residential properties and some businesses may not be able to access commercial premises because of the Covid-19 related Government restrictions. FCA notes that insurers should take note of any temporary change in access and says it expects insurers to treat customers fairly and not void policies or reduce claims as a result of the inability to access premises.
FCA updates on CBILS and BBLS expectations. On 4 May:
- FCA updated its statement about the Coronavirus Business Interruption Loan Scheme (“CBILS”) and Bounce Back Loan Scheme (“BBLS”) confirming that its position that lenders who comply with CBILS do not also have to comply with the creditworthiness rules in FCA’s Consumer Credit sourcebook (“CONC”) 5.2A.4-34 where the lending is regulated continues to apply after the launch of BBLS. It also restated that individuals who comply with the relevant Scheme rules will be considered to have complied with the relevant provisions of FCA’s Code of Conduct (“COCON”). It also confirmed its previously stated understanding that firms need to balance their financial crime risks against the need for a fast and efficient release of funds – but that nothing should prevent firms carrying out appropriate checks if there are any higher risk indicators; and
- FCA wrote to Financial Ombudsman Service (“FOS”) noting that the vast majority of businesses covered by the CBILS and BBLS will be eligible to complain to FOS and asking FOS to give guidance on how it will view lender behaviour, so that lenders can have clarity over what is expected of them. The letter highlights the changes to the Regulated Activities Order (“RAO”) that will take BBLS loans that would otherwise be regulated credit agreements outside the lending activity, but stresses that debt collecting in relation to regulated credit agreements that are BBLS loans is still a regulated activity. The letter notes FOS will need to take account of the CONC and Consumer Credit Act 1974 (“CCA”) requirements that are (or will be) disapplied, as well as those that continue to apply. In relation to CBILS, it notes that from 27 April, the lender must consider whether the business or its group has a viable business proposition without considering concerns over short-medium term business performance. Again, FCA does not (as noted above) expect lenders to comply with the relevant CONC rules that would otherwise apply if they comply with the CBILS requirements. FCA says it understands FOS will take into account that lenders will have a different approach to lending and will give due weight to the need for lenders to comply with the schemes’ requirements. FOS’ response acknowledged the framework and confirmed FCA’s understanding of how it would approach complaints is correct.
Up next from FCA: Unsurprisingly, FCA’s recent publications have almost exclusively focused on Covid-19. However, in its normal business, it still proposes:
- a consultation on exit fees on investment platforms and comparable firms over the summer;
- a policy statement on fees and levies in July;
- a potential policy statement on general insurance value measures reporting by the end of June; and
- a policy or feedback statement on the single easy access rate (SEAR) by the end of the year.
Covid-19: Treasury amends the Regulated Activities Order. On 1 May, Treasury made an order amending the Regulated Activities Order to remove from the scope of the consumer credit regulatory regime loans of £25,000 or less made by commercial lenders to sole traders, unincorporated associations and small partnerships under the Bounce Back Loan Scheme. These loans will be exempt credit agreements, and lenders will not require authorisation under FSMA in order to make the loans. However, debt collecting in relation to these loans will remain a regulated activity. The instrument took effect on 4 May, breaching the normal rule for it to be laid before Parliament 21 days before taking effect, as to allow the normal time frame would significantly hinder the proper operation of the BBLS which could negatively impact small businesses’ solvency and the UK economy. Treasury will also be changing ss. 140A – C of the CCA as soon as possible, with retrospective effect.
Regulatory speeches, reviews and enforcement action
CMA gets £47m refunds on overdraft charges. The Competition and Markets Authority (“CMA”) has announced that over the past 2 years it has secured more than £47m of refunds for customers in respect of overdrafts where banks failed properly to warn them about unarranged overdraft charges.
It has now taken action against 5 banks for failing to ensure that customers with personal current accounts received text alert warnings of fees before charging them for unarranged overdrafts. The figures include recent refunds secured from RBS and Santander.
OFSI reports on TAFA. The Office of Financial Sanctions Implementation (“OFSI”) has submitted its latest quarterly report to Parliament on the operation of the UK asset freezing regime under TAFA. The report covers the quarter to the end of 2019 and notes:
- only £9,000 of funds were frozen under TAFA and £18,000 under EU Regulation 2580/2001, but £70,000 were frozen under the EU Regulation on ISIL-Al Qaida;
- a total of 46 accounts were frozen at the end of the quarter under the various regimes but only one was frozen during the quarter;
- there was one new public designation and 2 delistings; and
- 2 licences were issued under the ISIL-Al Qaida regime.
FSCS announces 2020/21 levy. The Financial Services Compensation Scheme (“FSCS”) has announced its levy for 2020/2021 at £649m. This is £14m more than forecast in the plan and budget, mainly to reflect estimated compensation costs for the failure of London Capital Finance of £44m which will be borne by the Life Distribution and Investment Intermediation Class, but making savings in other classes so that the overall increase is only £14m.
CMA updates on anti-competitive FS practices. CMA has updated on progress in its investigations on anti-competitive arrangements in the financial services sector. The initial investigation, which started with information gathering in November 2018, and have moved to review and analysis of information, will continue until the end of the year.
Banks look at new ways to deal with SME complaints. The Business Banking Resolution Service (“BBRS”) has carried out a pilot study to look at how disagreements between banks and SME customers could be better addressed. The BBRS has been set up by 7 banks and other stakeholders. The pilot has involved customers registering a complaint, and if the BBRS thinks it suitable for the pilot, it works with the customer to build the complaint and liaises with the bank towards resolution. Among the complaints that formed part of the pilot are complaints that are still unresolved after nearly 20 years as well as some recent ones. The study has taken account of the different circumstances of complainants, and noted, for example, that some may not want to scan and email multiple documents, may have significant difficulties finding old documents and others may not have English as their preferred language. The interim findings of the study show a number of valuable lessons are being learnt.
Statement on impact of Covid-19 on LIBOR transition. Further to their statement on 25 March 2020, the Working Group on Sterling Risk-Free Rates has updated its statement on the impact of Covid-19 on the timeline for firms’ London Inter-bank Offered Rate (“LIBOR”) transition plans. The update states that due to coronavirus, the PRA and FCA suspended transition data reporting at the end of Q1 for dual regulated firms, and cancelled some Q1 firm meetings. In light of the developments since, including the Financial Stability Report (“FSR”) statement on LIBOR published on 7 May 2020, which reported that recent market volatility has reinforced the importance of transitioning to alternative rates by end-2021, the PRA and FCA have decided to resume full supervisory engagement with these firms on their LIBOR transition progress from 1 June 2020, including data reporting at the end of Q2.
LSB publishes business plan and budget. Lending Standards Board’s (“LSB’s”) Business Plan and Budget for 2020/21 has been published. It was drafted before the Covid-19 outbreak, and LSB wants to continue with it so far as possible, while accepting it may need to adapt some of the timings. Its priorities include:
- reviewing the CRM code and updating the Standards of Lending Practice for personal customers;
- undertaking thematic reviews on the use and impact of scam warnings, the information remedies under the Credit Card Market Study, debt sales governed by the Standards of Lending Practice for business customers and implementation of the standards in respect of asset finance;
- targeting around one quarter of firms for compliance exercises;
- considering and consulting on re-introducing an annual, light touch, self-attestation programme;
- reporting on reviews carried out; and
- working to raise awareness of its work and standards.
PRA responds on retirement interest-only mortgages and default. PRA has provided its feedback following responses to its consultation on prudential treatment of retirement interest-only mortgages, and on credit risk: probability of default and loss given default estimation. It has made its final policy, in the form of an update to its supervisory statements on IRB approaches and credit risk – standardised approach, which will take effect on 1 January 2022 in line with the EBA guidelines on the definition of default, notwithstanding that the UK will have left the EU by then. PRA has kept the transition period in mind and has assessed it would not need to be amended under the EU Withdrawal Act.
FCA responds on economic impact of Covid-19. The Treasury Committee has published a copy of a letter from FCA answering its questions on the economic impact of Covid-19. The letter explains:
- the steps FCA has taken to ensure the credit ratings of customers taking advantage of temporary reliefs are not impacted – but noting that other factors during the Covid-19 period may genuinely influence credit ratings, such as where customers require additional forbearance;
- how FCA has made clear that deferrals may not be in the interests of all customers and that it is critical that customers agree with lenders the appropriate way to pay back the amount owed following a payment holiday. FCA does expect the group of people struggling with their finances to grow significantly and will work on supporting these consumers;
- what FCA has done to stress to unregulated firms who have taken over mortgage portfolios that it expects them to follow FCA’s guidance, and how it is monitoring the update of payment holidays and forbearance measures;
- that FCA is keeping under review how firms are deciding when to offer deferrals and what they are doing to judge if payment holidays are in the best interests of customers;
- that FCA will be reviewing its measures after the initial 3 month period to assess what is the appropriate next stage;
- that, with the motor and high cost finance measures most recently introduced there are no immediate plans for more measures, but recognising the need for monitoring the longer term impacts of the virus on society; and
- that the work of the new Small Business Unit will be assessing whether additional protections and support are needed for SMEs, and what it is doing to try to ensure small businesses are getting the best advice on available loans. Again, FCA is gathering data on what small firms are needing and what support their lenders are giving them.
FCA gives lending application guidance. FCA has updated its webpages giving guidance to applicants for authorisation. The latest updated page includes a sample business plan for consumer credit business, with guidance for different types of firms, and detailed guidance on what should be in the business plan for other types of firm. The guidance comes as FCA has found applications are often taking longer than necessary to process because the business plan is not detailed enough.
FCA sets out planned initiatives. FCA has published a grid prepared by the Financial Services Regulatory Initiatives Forum setting out the regulatory pipeline for the next 12 months. The forum comprises FCA, Prudential Regulation Authority (“PRA”), Bank of England (“BoE”), Payment Systems Regulator (“PSR”) and CMA, with Treasury as an observer. The current grid covers a 12 month period, but the intention is to extend this to 24 months. The regulators are publishing this as a pilot exercise and welcome feedback. Key dates in 2020 are the implementation of Open Banking, CRD5 and BRRD2 implementation and of course the end of the Brexit transition period. The grid also includes detail of upcoming deadlines and their impact, and notes where timings have been amended because of Covid-19.
FCA speaks on response to Covid-19 and Brexit. Nausicaa Delfas has spoken on FCA’s national and international response to Covid-19 and Brexit.
On Covid-19, she noted:
- FCA’s priority to keep markets open and orderly, help firms continue to operate, protect consumers and small businesses and maintain high standards of conduct;
- that FCA’s Business Plan focuses on ensuring fair treatment and protection for hte vulnerable while tackling scams, keeping markets working and mitigating firm failures;
- FCA has built a number of “financial bridges” for consumers and small businesses while providing some regulatory flexibility for firms;
- FCA has taken measures to address concerns, such as the recent Dear CEO letter on equity finance business;
- the importance of senior management and continued compliance with the SMCR;
- international work, particularly with the US on measures both the UK and US have taken, and work on the potential implications for the LIBOR transition; and
- FCA’s work with the ESAs and national EU authorities within the new parameters of the Withdrawal Agreement.
On Brexit, she said:
- FCA continues to prepare for all scenarios;
- the transitional regimes for the TPR for incoming firms are all in place and will allow overseas firms continued access, but sadly the same cannot be said for the position of UK firms in other EU jurisdictions, who are at the mercy of national measures many of which are no longer in force – so UK firms must beware;
- there has been significant work on onshoring legislation and rules, and FCA will use its Temporary Transitional Power so that firms generally need not prepare to meet the changes that result from onshoring until 31 March 2022;
- the equivalence discussions continue, with the Government calling for an “outcomes basis”, and the UK of course being the most equivalent of all third countries on “day one” – but not all issues can be dealt with by equivalence, such as broader contract continuity issues and the continued provision of retail financial services by UK firms to EU consumers; and
- firms need to be considering what actions they may need to take, and how their customers will be affected.
Covid-19: access to restricted savings. FCA has updated its Covid-19 information for firms in respect of consumers needing to access restricted savings. Research shows that over 20% of consumers have had to access their savings recently, and that several million people may hold their savings only in restricted savings. If they cannot access these savings, they may need to take on additional debt. If they contact firms asking to withdraw funds from restricted accounts, FCA would expect firms to pay due regard to TCF and the need to communicate in a clear, fair and not misleading way with customers, as well as considering the needs of vulnerable customers. FCA stresses this does not mean firms must offer access to all customers, or offer unlimited access to funds in a restricted-access accounts, but they must form their own case-by-case judgments taking into account their customers’ needs with their own obligations, including managing their prudential risk. Firms will, for example, need to consider why the customer needs the funds and whether they have access to other forms of income. FCA notes that firms are already allowing some access and waiving penalties, which it welcomes.
FCA pilots digital sandbox. FCA has announced a pilot of a digital sandbox to give support to innovative firms that are tackling challenges caused by Covid-19. It is asking for expressions of interest before opening applications later in the summer.
FCA says it had been exploring the concept of a digital sandbox before the pandemic and is now accelerating these plans so it can pilot aspects of them soon.
FCA has found that data access and standardisation are a challenge for many firms and it receives requests for support from firms that do not necessarily fit its sandbox criteria. It is looking at providing access to high-quality data assets, a collaboration platform and observation deck and an API or vendor market place together with regulatory support and identification of regulatory interest where innovation could play a greater role.
FCA seeks court ruling on business interruption insurance. FCA has announced its intention to obtain a court declaration to resolve contractual uncertainty in business interruption (“BI“) insurance cover. It is also proposing a series of measures to support both consumers and businesses who hold insurance products and are facing other issues as a result of Covid-19.
Business interruption insurance
In its statement on BI insurance, FCA says it intends to seek a court declaration due to continuing and widespread concerns about the lack of clarity and certainty for some customers making BI claims, and the basis on which some firms are making decisions to accept claims. FCA is seeking to bring to court what it believes are the key relevant cases which provide the greatest clarity on specific policy clauses. It intends to do this on an agreed basis with the insurers concerned in order to get the fastest possible judgement, and is writing to a number of firms for clarification about whether they are declining, or intend to decline, BI claims. FCA has written to a few firms asking for information on whether they are declining claims and expects firms to reply by 15 May 2020. Based on the information received, it will consider which firms to ask to join the court process. FCA is clear that this action is not intended to encompass all possible disputes, but is intended to resolve some key contractual uncertainties, and will enable the provision of an independent view on disputed policies. It will not determine how much is payable under individual policies, but will provide the basis for doing so.
FCA’s additional guidance proposals on product value will apply to all non-investment insurance products, regardless of customer type, and its proposals on coronavirus and customers in temporary financial difficulty apply to help consumers. The package of measures sets out how FCA expects insurance firms to:
- ensure products continue to offer value and are appropriate for customers, taking into account the impact of Covid-19 and the firm’s ability to deliver the services their insurance covers; and
- help individual customers who may be finding it difficult to pay their insurance premiums or meet their premium finance payments as a result of Covid-19.
FCA is seeking comments on its proposal to help customers in temporary financial distress by 5 May 2020, and on those to assess the value of insurance products by 15 May 2020. If confirmed, the measures will apply shortly after these deadlines. Once implemented, FCA will review this guidance in 3 months and may revise the guidance if appropriate Covid-19: FCA Updates. FCA published the following covid-19 updates in May:
- FCA’s latest edition of Market Watch looks at market conduct and discipline in the context of coronavirus. It stresses particularly the importance of complying with the standards of MAR. Given the likely need for many issuers to seek additional capital, FCA notes the importance of making sure the right controls are in place around market abuse, conduct and managing conflicts, particularly as many people are working remotely and using alternative methods. It recommends focus on:
- ensuring inside information is properly identified and handled;
- ensuring proper disclosure by issuers of inside information;
- maintaining robust suspicious transactions and orders (“STORs”) and market surveillance;
- meeting Short Selling Regulation requirements; and
- identifying conflicts that may arise around capital raising.
FCA will be monitoring primary market and associated secondary market activities and will use its full range of tools to identify and address any behaviours that may impact the integrity and orderly functioning of the market.
- FCA announced further support for customers struggling to pay mortgages due to Covid-19. It is consulting on what options firms will need to provide to customers reaching the end of a payment holiday, while extending the time customers have to apply for one until 31 October. Comments on the emergency consultation were due by 5pm on 26 May.
- FCA is consulting on additional guidance for payments firms to ensure they adequately protect customers’ funds. It has brought this aspect of its work forward because of the pressures Covid-19 is placing on firms’ finances. The guidance deals with FCA’s expectations in respect of safeguarding measures and wind-down plans. It asks for comments by 5 June.
- FCA set out its expectations on how firms should deal with post and paper-based processes during the pandemic. It says it recognises firms will be finding it hard to process post and comply with paper-based processing requirements in a timely manner, but that they should be notifying FCA if they are unable to comply fully with its relevant rules. In particular, firms should try to ensure that all customers are not disadvantaged because of delays and should make particular efforts to contact customers who do not use online services – who are most likely to be vulnerable customers. FCA expects firms to be able to show what they have done to mitigate the impact of non-compliance. They should, for instance, collect post as often as they can, and make sure they return client funds promptly if it is not possible to proceed with a transaction. They should give updates on public channels as to how they will treat post and incoming cheques, update customers on market conditions and explain how customers can check their statements (and warn that they may be late). Firms should be asking customers who have sent instructions and cheques that have not been processed to contact them urgently, and consider how to comply with its client assets rules in respect of unbanked cheques. Firms should still be carrying out suitability assessments, finding alternative methods to face-to-face meetings.
- FCA has updated its webpage on how firms should be handling consumers’ complaints during Covid-19. The page explains that FCA has asked firms to prioritise making payments where consumers have accepted offers or redress, and handling complaints from vulnerable consumers and businesses who are likely to face serious difficulty, in each case if the complaint is not resolved promptly and fairly. It explains what it means by “vulnerable” and urges consumers to tell firms if they meet the criteria when making their complaint.
FCA also warns consumers that firms may not reply within the required deadlines but urges consumers to give firms a reasonable amount of extra time before going to FOS. It notes that FOS may ask you to allow a firm more time, and, anyway, going straight to FOS is unlikely to lead to a quicker solution.
- On 6 May, FCA:
- published a modification by consent and a direction to enable all solo-regulated firms to arrange for an unapproved senior manager to cover SMFs in an emergency, from the normal 12 weeks to 36 weeks, as previously announced. It also says firms can apply for the modification as a precautionary measure, in advance of actually needing it. The modification will take effect from the date a firm applies until 30 April 2021. It has updated its webpage on its expectations of firms under the SMCR accordingly;
- set out its expectations on how firms should apply their systems and controls to combat financial crime during the crisis. Part of the critical controls includes timely making of SARs. FCA stresses that firms should not seek to address operational issues by changing their risk appetite, but accepts firms may have to reprioritise some actions. It says delays would be reasonable so long as they are done on a risk basis and there is a clear plan for return to BAU. FCA recognises firms may need to amend the way in which they verify customers’ identity and consider alternative methods to normal. It also notes its previous advice on alternatives to face-to-face verification and reminds firms that they should furlough their SMF 17 only as a last resort; and
- updated its Covid-19 information page for firms in respect of information security. The new information highlights the risks that cyber crime may render important business services unavailable, and the consequences that may have for firms, markets and customers. FCA says it expects firms to prioritise information security and ensure they have in place adequate controls to manage cyber threats and respond to major incidents. It also reminds firms of their obligation to report significant incidents; and
- On 1 May, FCA:
- proposed guidance for insurers on assessing whether products still offer value and appropriate action to take where they do not;
- proposed guidance for insurers, brokers, premium finance firms and debt collectors on dealing with consumer policyholders in financial difficulties because of Covid-19;
- updated on its work on mortgage prisoners, noting the changes in the mortgage market as a result of the Covid-19 situation – not least difficulties in establishing property prices, the advice to delay house moves and the removal of large numbers of products from the market. It also says lenders have granted 1.6m payment holidays. FCA says that in the circumstances it would be wrong to require lenders to tell customers about switching options at this time and is extending the window for them to do so by 3 months. It is also reminding firms to treat customers fairly when setting variable rates; and
- clarified its position on how it expects firms to handle complaints during Covid-19. Among its expectations are that firms should pay out promptly where redress is due and resolve promptly and fairly complaints from vulnerable consumers and small businesses who may face serious difficulties resulting from lack of fair resolution of the complaint. FCA understands that some firms may find it hard to meet regulatory deadlines and invites them to contact it if this is so. It expects CMCs to give firms some leeway in responding to complaints before referring matters to FOS.
Emma Radmore (legal director) is a member of Womble Bond Dickinson (UK) LLP's financial services team.
Contact her at email@example.com
© Womble Bond Dickinson (UK) LLP 2020. This publication is not designed to provide legal, financial or other professional advice and nothing in it should be construed as such. Please see www.womblebonddickinson.com for legal notices.