Compliance News - 21 October 2011

CC:ME WEEK ENDED 21 OCTOBER 2011

FSA: THE MANSION HOUSE CITY BANQUET SPEECH

In a speech at the Mansion House 20 October, the chairman of the Financial Services Authority (FSA), Lord Turner, said that the reform of the regulatory structure in the UK would help ensure better results than in the past, but also highlighted remaining uncertainties and issues which needed detailed consideration by Parliament and by society at large before legislation was passed into law.

He set out how the new authorities would undertake their roles and the powers they would need to deliver their objectives. He also recognised the constraints they faced and how they needed to be tackled and clearly explained to society.

Lord Turner highlighted the Financial Policy Committee (FPC) as the most important element to address the failures that led to the financial crisis – filling the gap previously left between a central bank and the micro-prudential regulator. He identified two issues that needed careful consideration:

• Forthcoming European regulation, particularly around maximum capital levels, had the potential to reduce the flexibility of the FPC to act according to the needs of the UK; and
• What can be expected on macro-prudential policy and whether that includes policies to tackle downswings in the economy as well the upswings.

Lord Turner said:

''One thing which is crystal clear, but an area of significant concern, is that forthcoming European legislation must allow adequate flexibility for the national variation of macro-prudential tools. European capital adequacy regulation should enforce minimum standards across the European Union, but it should leave national authorities free to exceed and vary them above the minimum. The idea that securing the single market requires the harmonisation of maximum as well as minimum standards is simply wrong and potentially harmful.''

Lord Turner raised the question of whether the FPC should focus solely on financial stability or on the adequacy of credit supply to the real economy as an end in itself, important for macro-economic stability. This would imply making choices about the relative merits of different uses for bank balance sheets.

Lord Turner said:

''Political independence to take unpopular action, to 'take away the punchbowl', is not the challenge today – the party is not so much out of hand as cancelled. And the issue with which the shadow FPC has therefore been wrestling, reflected in the record of the September meeting, is whether macro-prudential policy has any role to play in helping stimulate credit supply and activity in the downswing.

''If credit supply is the focus, it will be difficult for the Committee to avoid making judgements about the relative importance of different uses of bank balance sheets. And if that is the focus, we may need to consider prudential tools which lean far more aggressively than in the past against the proliferation of intra-financial system complexity, the use of balance sheets to support inter-bank position-taking which has been such a striking feature of the last several decades.''

On the Prudential Regulation Authority (PRA) Lord Turner said that the new authority will build on the approaches to regulation and supervision the FSA has put in place over the last few years. He highlighted that there needed to be a clear understanding in society that the PRA’s approach would not be a zero failure approach and argued that there was a real commitment to end the 'too big to fail' issue.

Lord Turner said:

''We are committed, in the UK and globally, to putting a stop to 'too big to fail'’ status, with resolution tools which can deal smoothly with the failure of a bank, however large. The International Financial Stability Board has presented for approval by the G20 in Cannes, measures to ensure that effective resolution regimes are in place in all countries, and that bank-specific recovery and resolution plans are in place for the most systemically important banks.''

On the Financial Conduct Authority (FCA) Lord Turner emphasised that in relation to customer and investor protection, the FCA would need the powers and teeth to act early to intervene and prevent customer detriment from occurring. This new approach would provide a real benefit for consumers. However, he stressed that even in an ideal world, and with those powers, there will still be limits on what can be done and there can never be a no risk or no failure regime.

Lord Turner said:

''In financial services the potential for the customer to be ripped off is simply far greater than in other sectors of the economy – and the consequences potentially more significant.

''The challenge for the Financial Conduct Authority will be how to counter that danger. Parliament will need to equip the FCA with new powers that will be needed to give the new approach effective teeth. For example the powers if necessary to demand changes in product terms or even, in extremis, to ban a product in addition to strengthened powers to tackle misleading financial adverts and requiring their withdrawal if necessary. This new approach, underpinned by some new powers can, I am confident, make a difference.

''However, we also need a realistic understanding that no system of regulation can, or should, try to create a nil risk market environment. So even in the best designed system problems will still emerge.''

Lord Turner concluded by recognising that the move towards the new regulatory structure was taking place against the backdrop of the Eurozone problems. He emphasised that the FSA remained totally focussed on its current objectives of ensuring the UK financial system was robust to withstand challenges, but also made clear it was making good progress towards preparing for the new structure in 2013.

Lord Turner said:

''We have to plan for the future while navigating current concerns. We have a major opportunity to put in place a better system of financial regulation – prudential, macro-prudential, and conduct. But we need to design the details carefully if we are to make the best of that opportunity.''

Source: Financial Services Authority
FSA website 

CML PUBLISHES NEW GUIDANCE ON ARREARS AND POSSESSIONS

The CML has published new guidance to help lenders deal with mortgage arrears and possessions while complying with both the Financial Services Authority’s (FSA) detailed mortgage conduct of business rules and its principles for treating customers fairly (TCF).

The guidance has been published to try to draw together in a single document a composite summary of requirements for lenders on mortgage arrears and possessions emerging from a number of different sources. It summarises for lenders the implications of:

• FSA thematic reviews, published in 2008 and 2009, which uncovered both good and poor practice;

• the regulator’s policy statement on arrears and approved persons, published in 2010, which reinforced the rules in chapter 13 of the mortgage conduct of business (MCOB) rulebook, covering arrears and possessions;

• final guidance from the FSA on forbearance and impairment provisions, published earlier this month;

• the pre-action protocol applying to court cases for possession; and

• requirements and recommendations emerging from bodies including the financial ombudsman, assorted advice agencies, and the courts and tribunals service.

The guidance seeks to set out:

• What lenders need to cover in their arrears management policies. This includes the prudential requirements a lender should consider when extending forbearance to borrowers in arrears. In its prudential guidance, the FSA recommends that firms’ policies should be more joined-up across different teams and management functions. We are therefore urging lenders to re-assess arrears management policies and involve in the process not just collections and litigation managers, but those working in credit risk, finance and internal audit functions, as well.

• What lenders should consider in day-to-day management of forbearance policy and arrangements, including capitalisation, the treatment of shortfalls and upholding the principle that possession is only ever considered as a last resort.

• Other day-to-day practices to ensure that lenders comply with MCOB chapter 13 and TCF obligations, including record-keeping.

• Good practice in the litigation process.

• Obligations that are not specifically prescribed in MCOB chapter 13 but which affect arrears handling.

Source: Council of Mortgage Lenders
CML website 

MP ISSUES FRESH WARNING ON REGULATORY REFORM

Labour MP George Mudie has made a renewed call for caution about implementing regulatory reforms as a result of the Financial Services Authority’s (FSA) ongoing mortgage market review.

Speaking in last Wednesday’s opposition debate in the House of Commons on measures to promote growth and boost employment, Mr Mudie, the MP for east Leeds, aired the problems created for young, would-be first-time buyers by requirements for an average deposit of 20% of the property’s value.

With the Land Registry reporting an average house price in England and Wales of just over £160,000, the requirement for a deposit of £32,000 has "knocked house purchase off the table" for many young buyers, the MP argued. Mr Mudie acknowledged that deposits of a size to "protect people from being irresponsible" were prudent. But he added: "As we are not building social housing, it is a real block."

Mr Mudie urged the chancellor to require the FSA and banks to "look at each case on its merits."

Mr Mudie’s comments are the third occasion on which the MP has voiced concerns about the impact of regulatory reform being introduced by the FSA. A year ago, he blamed a lack of mortgage availability on the uncertainty created for lenders by reforms the FSA may be planning to introduce. 

And, in February this year, he said there was a danger the FSA could over-react to criticism of past regulatory failings by implementing unnecessarily robust reforms that could potentially damage the mortgage industry and "damage young kids getting a start with a new house because of all the regulations."

Source: Council of Mortgage Lenders
CML website 

LENDERS SUPPORT JOINED-UP INITIATIVE TO COMBAT FRAUD

Mortgage fraud has been estimated by the National Fraud Authority (NFA) to total £1 billion, accounting for around 2.5% of the £38 billion annual cost of financial crime in the UK. Fraud targeted against lenders encompasses a wide range of crimes – from submitting inflated claims of income in support of an individual mortgage application to much more systematic and often highly organised criminal behaviour. But lenders remain dedicated to detecting and deterring fraud however it occurs.

In support of the continuing commitment of the wider lending industry and of individual firms to tackling fraud, the CML has added its support to a new initiative to help promote better co-ordinated and inter-linked activity by a range of partners to target financial crime.

On behalf of lenders, the CML is supporting the new Fighting Fraud Together strategy, launched last week by the National Fraud Authority. The CML is one of 37 separate organisations that have joined together in support of this initiative. It is the first time that a range of government organisations, industry representative bodies like the CML, law enforcement agencies, regulators and voluntary groups have joined together on such a large scale to tackle fraud.

Working together

Like other supporters of the initiative, the CML advocates expanding and extending the range of successful activities that already exists in the lending industry to target fraud. The CML also remains committed to sharing intelligence about fraud across different organisations to prevent and disrupt the activities of criminals.

Police, led by the City of London force, will continue to lead the front line in the fight against financial crime. In addition, the new initiative sets out to deliver greater intelligence capabilities to the National Fraud Intelligence Bureau, with the ain of disrupting the activities of fraudsters and rapidly closing down the channels through which they operate and launder money. Other priorities for the initiative include:

• information-sharing between industry and the public sector to help prevent fraud attacks; and

• a new research tool that will help all sectors to provide more targeted prevention advice to the public, particularly vulnerable people, and to develop a better understanding of the vulnerability to fraud of small businesses and the support they need.

The new initiative has also been endorsed by the government. Crime and security minister James Brokenshire said: "I applaud the different organisations and industry groups that have joined together to play their own part in Fighting Fraud Together. By sharing what we know, we will reduce fraud. This new strategy is important to better target, prosecute and prevent it."

The CML recognises that supporting the new strategy, which seeks to integrate and co-ordinate the activities of a large number of different types of organisation, will deliver wider benefits in the common cause of tackling financial crime.

Other anti-fraud measures

Support for the new initiative sits comfortably alongside a series of other activities to tackle financial crime that the CML and individual lenders already pursue – or contribute to in other organisations. These include:

• The Financial Services Authority’s 'information from lenders' scheme, launched in 2006, following discussions with the CML. This scheme provides a channel through which individual cases of proven or suspected fraud can be reported by lenders to the regulator.

One of the advantages of this initiative is that lenders can report snippets of information or even just suspicions to the FSA. An individual lender may not have enough evidence to take further action, but the FSA may be able to pool data from a range of different sources to bring about a successful prosecution or take other disciplinary action.

Last year, the FSA said that, over the preceding four years, the information from lenders scheme hade generated 700 alerts and 100 enforcement cases, resulting in the banning of 80 mortgage intermediaries involved in criminal behaviour and the imposition of fines totalling more than £1 million.

• The activities of the National Fraud Authority (NFA). Set up as an arms length government body in 2007 to provide a focus for co-ordinated anti-fraud activity, the NFA meets several times a year with the CML and other major players working together to target financial crime.

In particular, the CML has supported work specifically to tackle mortgage fraud, on which the NFA published a detailed report that was updated again last year. The NFA has developed a joint plan of action, supported by organisations in the public and private sector, including the CML. This has led to the establishment of a mortgage fraud forum to work across the industry.

The NFA acknowledges that lenders have made a number of operational changes to the way they run their businesses that have helped address some of the problems of mortgage fraud. In last year’s updated report, the NFA’s then chief executive, Bernard Herdan, said: "With the industry pulling together, substantial inroads have been made to tighten systems and controls, regulate professionals and share knowledge."

• The mortgage verification scheme, launched this September in collaboration with HM Revenue & Customs (HMRC). Under the scheme, lenders can refer details of mortgage applications to HMRC, via a secure electronic platform, if, as a result of carrying out their own rigorous checks, they suspect that fraud may be taking place.

Details submitted by a mortgage applicant are then checked against information provided to HMRC in income tax and employment returns, with the lender alerted to any discrepancies. As well as helping detect fraudulent mortgage applications, the scheme also provides data that helps firms lend responsibly and manage risk. Additionally, the information shared with HMRC helps the tax authority assess whether information it has been given is correct.

• Co-ordinated activities with a range of other representative bodies and other agencies to combat fraud by professionals working alongside mortgage lenders. The CML works closely with the Law Society, the Royal Institution of Chartered Surveyors, the Solicitors Regulation Authority, the Council for Licensed Conveyancers, the Land Registry and others on measures to detect and combat fraud committed by solicitors, conveyancers and other professionals working in the housing transaction process.

• Working with other bodies representing lenders to pool information and co-ordinate action against mortgage fraud. The CML continues to share information and monitor developments on fraud with the Building Societies Association and the British Bankers’ Association, as well as with bodies like UK Payments.

• Supporting a wide range of initiatives, based on data analysis and sharing – and sometimes supplied as commercial services to lenders – that help detect and prevent fraud. The CML and individual lenders have worked with a number of different suppliers and other organisations offering services to lenders, including National Hunter, National SIRA, the fraud prevention service CIFAS and a range of commercial providers.

Finally, the CML continues to operate its own financial crime panel, which is made up of a range of members. It meets quarterly to provide a forum for lenders to discuss the latest developments on financial crime and policy, including measures to combat money laundering, identity fraud and a range of other issues.

Conclusion

Mortgage transactions often involve significant sums of money and are therefore an attractive target for criminals, some of whom are well organised and develop sophisticated strategies for attempting to defraud firms. Fraud directed at lenders is increasingly complex, and evolving market conditions and new practices within the lending industry and the professions working alongside it may create new opportunities that criminals may seek to exploit.

However, individual firms, and the CML, are alert to the problems and remain committed to targeting criminal activity in all its forms. The industry works closely with law enforcement and other government agencies, the FSA, professional representative organisations and other trade bodies, and with commercial suppliers of information services and individual firms.

The CML continues to develop new alliances with other organisations and to work on innovative ways of protecting lenders from criminal behaviour, most recently by its support this autumn for the Fighting Fraud Together initiative and its work with HMRC on the launch of the new income verification scheme. It will continue to ensure that tackling mortgage fraud remains one of its highest priorities.

Source: Council of Mortgage Lenders
CML website

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