Compliance News - 3 February 2012
CC:ME WEEK ENDED 3 FEBRUARY 2012
The FSA’s review into sale and rent back has found widespread poor practice and sees the market temporarily closed. The FSA has published a report that shows most sale and rent back (SRB) transactions were either unaffordable or unsuitable and never should have been sold. Following a review of all regulated SRB firms, the FSA has referred one firm to its enforcement division while others have either stopped taking on new business or cancelled their permissions. Effectively, this means the entire SRB market is temporarily shut.
Of the 22 firms reviewed, only nine had been active since the FSA began regulating SRB. Of this nine, five firms have now stopped doing SRB business, two have kept their regulatory permissions but decided not to use them in future, five have agreed to undertake past business reviews (which may result in consumer redress) and one will only purchase second-hand SRB contracts from other firms. If customers with existing SRB agreements have concerns about their agreement they should in the first instance contact their SRB provider, or seek professional advice.
The FSA had previously identified and published areas of concern regarding financial promotions targeting vulnerable consumers. It had also received intelligence from a lender alleging that one firm was arranging SRB transactions as buy to let mortgages where the properties were purchased by the firm at below market value then inflating purchase prices to defraud the lender. Additionally, a study by consumer group Which? in February 2011 found advice to SRB customers to be ‘woefully inadequate’.
In March 2011, the FSA commenced a review of the sales practices of the 22 authorised SRB firms. The most common failings identified by the FSA were:
- SRB firms did not correctly assess appropriateness and affordability, and customers were not given enough time to consider the agreement;
- disclosure of the key facts of an SRB agreement did not follow the correct order, was insufficient and not given at the right time;
- agreements contained incorrect information and did not meet the FSA’s requirements for tenancy agreements;
- sales processes were inadequate and did not allow firms to gather enough information to assess appropriateness;
- financial promotions breached FSA rules; and
- training and competence, compliance monitoring, and record keeping were all inadequate.
The FSA will now focus on working with firms conducting past business reviews to ensure any affected customers are treated fairly. A Consultation Paper has been issued and feedback is requested by 29 March 2012.
Source: Financial Services Authority
The Financial Services Authority (FSA) has announced its proposed Annual Funding Requirement (AFR) for 2012/13. This is likely to be the FSA’s final AFR before it splits into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), in 2013.
The FSA recognises the difficult economic circumstances for many firms and is committed to keeping any essential cost increases to a minimum. The FSA will achieve this by capping staff levels for the second year in a row and restricting core operating costs too, broadly in line with inflation.
The FSA’s core programme for the year includes:
- Maintaining ongoing supervision of firms in a period of continued fragility in markets including business model analysis, capital/liquidity assessments, recovery and resolution planning and the Significant Influence Function regime;
- Continuing to influence the international and European policy forums;
- Implementing the current EU major policy initiatives, including Solvency II;
- Delivering on the principal FSA initiatives to improve consumer protection: the Retail Distribution Review (RDR) and Mortgage Market Review (MMR);
- Continuing to focus on the quality of its staff;
- Continuing to deliver a tough and determined enforcement approach.
In addition to the funding of its core programme a significant part of the increase in this year’s AFR reflects the costs of implementing the government’s reform of the UK regulatory framework. The current £32.5m costs for the restructuring are within the overall estimates set by HM Treasury last year, which equates to 28% of the increase in AFR. The AFR will also cover the costs of modernising the IT infrastructure to ensure it is a suitable platform before the transition to the FCA. This will require a £22.4m increase in the AFR, which equates to 29% of the increase in AFR.
Overall the AFR for 2012/13 is £578.4m, up from £500.5m in 2011/12, a gross increase of 15.6% in overall funding. The increase in fees will be borne mainly by larger firms, reflecting the resources applied to intensive supervision of high impact firms. Medium sized firms will see a proportionate increase reflecting the type of business they conduct. Currently 42% of the FSA’s authorised firms need only pay the FSA minimum fee and for the third year running the gross minimum fee for firms will remain unchanged at £1,000.
Ahead of the split in to the PRA and FCA, the FSA will reorganise internally and move to a twin peaks model that will begin to reflect the shape of the new authorities. This is the first step in moving from an integrated model of regulation to one that divides prudential and conduct regulation, put forward by the Government. This will require a major change programme and a refocusing of resources.
The enforcement fines the FSA imposes during the previous year are returned to the industry by way of discounts to their fees in the following year. This year anticipated financial penalties are estimated to be £58.7m.
Source: Financial Services Authority
This report contains results from the 2011 Financial Services Authority (FSA) Consumer Awareness Survey. They carry this out once a year and it enables the FSA to identify risks and take appropriate action to mitigate risk and improve performance. The main findings are summarised below.
Financial product holding
- One in eight people surveyed have no financial products. Nearly four in five have a bank account, with three in five having a savings account. More than one in four have a tax exempt special savings account (TESSA) or cash ISA.
- One in three has a mortgage of some sort, the same proportion as hold life insurance, but only one in eight holds mortgage protection life insurance. One in six has a personal pension.
- Nearly three in five have motor insurance but fewer than one in two holds contents and/or buildings insurance.
- About one in ten has accident, illness or unemployment insurance, but one in 25 have PPI.
- Financial product ownership is greatest among 35-54 year olds (working; ‘family formation’ decades).
- Saving and pension product take up among 16-24 year olds is relatively low. Profiling by Experian’s Financial Strategy Segments reveals differences between key lifestage and lifestyle groups, with both younger and older less affluent groups being less likely to have financial products or to be aware of the FSA (and therefore financial regulation).
Awareness of the FSA
Awareness of the FSA has remained relatively static among around a third of survey respondents over the lifespan of this survey (nine iterations). Not surprisingly, awareness of the FSA is higher, at nearly one in two, among those groups with greater exposure to financial products, and is higher still among those with exposure to products with a greater risk such as shares and equity ISAs. More than two in five people surveyed have no knowledge of a regulator, but this drops to one in three of those aged 35-64 who are the main users of a wider range of financial products.
FSA responsibilities
- One in three people, overall, thinks that the main responsibility of a financial watchdog should be to ensure that firms treat their customers fairly. One in four thinks that it is to prevent misselling.
- One in six believes that a financial watchdog should ensure that only appropriate people or firms can operate in the market, and one in ten thinks that such an organisation prosecutes firms and individuals.
- Over half of those questioned believe that the FSA regulates banks, with two in five recognising that the FSA regulates the insurance and mortgage markets. Only one in three believes the same holds for investments, and fewer (one in four) for pensions.
- One in five incorrectly believes that the FSA regulates the credit card market. Awareness rises, but not greatly, among those who own relevant financial products.
FSA effectiveness
- Of those surveyed, 60% are confident that the FSA effectively regulates the financial services industry, but only 5% are very confident that it does so. Nearly one in five people are unconfident.
- Confidence has returned after a low of 38% in 2009, despite the prevailing market and economic conditions.
- Sixty two percent are confident that firms follow FSA rules, but only 4% are very confident and 17% are unconfident. Fifty nine percent believe that all or most firms meet relevant authorisation standards (only 6% think all do) or reach prudential standards (10% think all do), and fewer — 51% — believe that all or most firms meet the FSA’s Conduct of Business (CoB) standards, with only 7% thinking that all firms do. Around one in six people surveyed believes that few or no firms reach these standards, slightly more so for prudential requirements. This is higher among those who are unaware of this activity.
Risk profiling
The survey asks people about their risk profile. Overall three in five have no appetite for risk at all on investments, with far fewer — 4% — prepared to take risks to gain higher returns. The population is slightly more risk averse than in the preceding 2010 survey. Spontaneous awareness of the FSA was slightly greater among those who have higher risk products and a greater disposition to risk for gain.
People in this survey do not generally know how to categorise financial products in terms of risk, but this does fall among those who have bought these products. For example 30% of consumers did not know the risk profile of investment with profit bonds, but this falls to 15% amongst those with these products (though still a significant lack of knowledge).
Zero tolerance for failure
Over one in three people surveyed believe that financial services firms are not allowed to go bankrupt because the government or regulator will always bail them out. One in five holds that this is because some firms are too important to be allowed to go bankrupt. Fewer — around one in eight — believe that this is because too many consumers would be affected (12%) or because people lose confidence in the financial system (14%). Only 8% believe that this would be because the government would never allow consumers to lose money.
Treating customers fairly
Fifty five percent of people surveyed are confident that financial firms treat their customers fairly — but only 4% are very confident, and by contrast 13% are unconfident. Comparing year-on-year survey data shows that people think that firms have become ‘less worse’ at treating customers fairly - while less people report that firms are worse, the shift has been to there being no year-on-year change rather than firms showing an improvement. People were comparatively less confident about insurance companies treating their customers fairly.
Switching providers
Consumer switching in financial services product markets remains relatively low — typically around 3-6% in any product in the last year —with the exception of motor insurance (13%), along with levels of consideration of product switching. Where people switch it is generally driven by price and the need for cost savings, followed by standards of service, although the latter drives current account switching more, with the offer of additional benefits (packaged accounts) making more of a difference than for savings accounts or cash ISAs.
Problems with financial service providers
More than one in nine people (11%) surveyed report having a problem with a financial services firm in the previous 12 months. One in three of these problems stemmed from poor customer service, with slightly fewer resulting from handling of complaints. Other problems included money transfer delays (12%); confidence in advice given (9%); being refused service (8%), and pressure selling (7%).
Over half of the people surveyed (55%) were very or fairly confident that complaints would be resolved fairly, but over one in six were not confident of this outcome. Awareness of regulatory bodies does not impact positively on confidence.
Financial advice
More than one in six of those surveyed (17%) had received professional financial advice in the preceding 12 months, nearly half of whom from an independent financial adviser (IFA), and two in five from a bank or building society. Three out of five people receiving advice from an IFA were very confident that the advice was appropriate to their circumstances — compared with 33% of those going to banks or building societies. Most were at least fairly confident of this, irrespective of the source of the advice.
Financial crime
Nearly three in ten people surveyed had suffered from some form of financial crime in the previous 12 months. This has remained unchanged compared with previous surveys. False lottery / prize draw winning was the most common crime (16%) followed by phishing (11%) and foreign country money transfers (10%). Feelings of vulnerability to financial fraud have dropped year on year in the survey, from 27% feeling more vulnerable in 2009, to 17% stating so in 2011. However, feelings that people are less likely to be vulnerable have not changed.
Accessing financial information
Nearly three in five people surveyed feel that they have enough information to protect themselvesfrom becoming a victim of fraud, and would know where to go for more information. However, this leaves over two in five feeling the opposite. More people would go to the internet for information (35%) than to a financial services institution (20%) or government / public body (10%). More would rely on friends and family (15%) than law enforcement (10%).
When prompted with a range of options of who to contact to get more information about financial fraud: over two out of five (45%) of consumers would search using an internet search engine; one in three (35%) would enquire at their bank or building society one in four (23%) would speak to their local police.
About one in four people surveyed say, unprompted, that they shred all unwanted financial correspondence, with over one in four (28%) saying that they avoid giving their details over the phone. Slightly fewer (23%) avoid giving details on the internet, and one in five never writes down their PIN (personal identification number). Fewer, one in six (17%), never write down their passwords. However, even when prompted only one in eight consumers say they regularly update their virus software, and only one in ten avoids emails from unknown sources.
Source: Financial Services Authority
The FSA has announced the appointment of Will Samuel to the role of investment banking senior advisor. Will, who will take up the role from 30 January, has more than 35 years experience in investment banking, most recently as Vice Chairman of Lazard & Co.
Hector Sants, the FSA’s chief executive officer, said:
“I am delighted to announce Will’s appointment as senior advisor to the FSA. Will brings to his role considerable experience of the investment banking sector which will be vital to our work in this area. Senior advisors are a core part of the FSA’s delivery of intensive supervision. The team provides experience on regulatory, market and consumer matters.”
Source: Financial Services Authority
Banks fully support, and have been working towards, the overhaul of banking regulation in the UK the British Bankers’ Association said as a new era in banking came closer with the publication of the Financial Services Bill. The BBA said the Bill was an important step forward and that rigorous ground work by parliament and the industry had contributed to proposals which focused on effective, proportionate banking supervision.
British Bankers’ Association chief executive Angela Knight said:
"Banks understand the need for change and have been working closely with government, parliament and regulators to ensure the industry operates in the best interests of the businesses, their shareholders and all their customers. Good financial supervision is not just about structure - decisions taken made by bankers and regulators matter too. It is vital we take this opportunity to build a system where regulation is both effective and responsive to the challenges we face and can also help attract and retain the best and fittest to the ranks of our regulators.
“Publication of the Financial Services Bill is an important milestone in rebuilding trust in the financial services sector. There are still many issues to work though and we will continue working with government so the new structures, as they emerge, help supervisors improve their decision-making."
Source: British Bankers Association
Gross mortgage lending in December was an estimated £11.7 billion, according to the Council of Mortgage Lenders. This represents a 12% drop from £13.2 billion in November but a 12% rise from December 2010 (£10.5 billion). December was the fifth month in a row of higher year-on-year lending. Lending totalled an estimated £37.3 billion in the fourth quarter of last year, down from £39.2 billion in the previous quarter but 11% higher than the last three months of 2010 (£33.6 billion). For 2011 as a whole, estimated lending totalled £140 billion, slightly above our annual forecast of £138 billion. This is up 3% from £136 billion in 2010.
CML chief economist Bob Pannell observed: "The closing months of 2011 saw stronger mortgage lending activity and housing transactions, despite the fact that short term economic prospects are challenging. There is a glimmer of light ahead for households in that real incomes could stabilise and perhaps even start rising by the end of the year. But, continuing Eurozone problems mean that mortgage funding prospects are uncertain, so overall UK mortgage market conditions for the year ahead remain difficult to call."
Source: Council of Mortgage Lenders
The FOS received around 700 complaints from consumers about travel-insurance claims involving volcanic ash – following delays and disruption to travel caused by a volcanic eruption in Iceland in 2010. In March 2011 the FOS made a key ruling which illustrated many of the issues involved – and found in favour of the consumer in that case.
This did not mean that everyone bringing an "ash-related" complaint had their complaint upheld – or had their claim paid in full. Each individual case needed to be considered on its own particular facts – taking into account specific exclusions, limits and policy terms that applied.
The FOS expected travel insurers to use this ruling as a guide to the ombudsman's general approach to resolving these kinds of complaints.
However, in June 2011 a leading travel insurer launched a legal challenge ("judicial review") against the FOS on this ruling – which resulted in 300 consumers' complaints being put on hold until the legal action was settled.
In January 2012 the Court rejected the insurer’s legal challenge – and the insurer confirmed that they would not be pursuing their legal action. They have said that they will now be handling complaints in line with the ombudsman's decision. The FOS will be in touch with the consumers involved, to update them on their own individual case.
Source: Financial Ombudsman Services
