Compliance News - 19 March 2010
FSA ACTION FOR MIS-SOLD STRUCTURED PRODUCTS
Are you worried that your company will be subject to complaints?Are you concerned about how much time your team will spend jumping through FSA hoops?
Do you need help reviewing cases?
Following the FSA’s review of the marketing and selling of structured products (such as those backed by Lehman Brothers) the FSA intends to take tough and wide ranging action on those providers mis-marketing or mis-selling structured products.
Responding effectively to FSA enquiries requires:
• Robust selling and marketing practices
• Effectively responding to systems and controls for products already launched
• Compliance with FSA’s guidance for new products going forward
Let TCC help — we’ll review 5 cases for the price of 4 for you. For more details of the 5 for 4* offer, please email info@theconsultingconsortium.com or call 020 7645 8808. *20% offer applies to batches of 5 cases being reviewed.
The Consulting Consortium
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FSA Business Plan 2010-2011
The Plan is a demanding programme of work for the year requiring greater policy and supervisory resources, and focusing on a number of key areas:
• Delivering effective supervision backed by credible deterrence in enforcement.
• Continuing to embed the organisational and cultural change needed to implement intensive supervision.
• The policy reform programme driven by the Turner Review and the wider policy agenda mandated by the European Union.
• Playing a role in promoting financial stability should the Financial Services Bill be enacted.
The FSA will be recruiting an additional 460 staff in 2010 to implement Solvency 2, and to deliver the intensive supervisory approach needed for the very largest firms.
In developing intensive supervision the FSA’s regulatory approach has moved from retrospective intervention to proactive challenge. Supervisors now make judgements on firms’ business models; intervening early if they anticipate any risks that may arise from the firms’ conduct, selling practices, senior management competence or product development.
This rigorous approach demands more high quality staff, industry knowledge and the will to challenge the industry robustly where potential threats to consumers or the wider market are identified. These are central to the FSA’s plans and will help deliver better outcomes for consumers. Credible deterrence underpins the FSA’s supervisory approach, and in the last 12 months there have been three insider dealing prosecutions, and a number of other individuals charged with both insider dealing and making false and misleading statements to the market.
The FSA will continue to play a leading role in influencing regulatory reform on the global stage, while ensuring that the UK arrangements on key issues of capital and liquidity are consistent with international standards. This is vital if UK firms are to operate in a consistent way across major financial centres, and London is to retain its place as a major international financial centre.
Although this year’s annual funding requirement has increased by 9.9%, 4% of this is from the supervisory enhancement programme that begun last year. The balance comes from the additional 460 staff to be recruited by the end of 2010.
Source: Financial Services Authority
FSA Website
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FSA REMEDYING PPI MIS-SELLING COULD COST £4 BILLION
The FSA has drastically revised its estimate of what it will cost firms to comply with new guidance on handling and redressing customer complaints about payment protection insurance (PPI).
Last September, the FSA announced proposals to improve the way firms deal with PPI complaints, including a rule requiring firms to review all the PPI mis-selling complaints they have rejected since 2005. Re-opened complaints were to be reassessed and any compensation calculated according to new guidance aimed at ensuring firms gave complaints fair and balanced consideration. The FSA calculated the overall cost to firms of complying with this new regime at between £290 million and £400 million over five years.
However in a paper published last week, it has revised those figures to between £700 million and £1.2 billion over the same period. Added to this is the one-off cost of firms reviewing and redressing PPI sales where no complaint has yet been made, which the FSA now estimates at between £1 billion and £3 billion.
The paper predicts that around 5% to 10% of intermediaries involved in PPI selling could go out of business as a direct result of the costs impact of the new guidance, leaving the Financial Services Compensation Scheme to pick up the bill for around £160 million in redress payments. Industry responses to the FSA's original proposals were almost universally hostile, with firms arguing that the regulator had not demonstrated that there was a genuine problem and that the proposed guidance was unbalanced and retrospectively changed the rules about selling PPI.
In response, the FSA acknowledges that its consultation "substantially underestimated" the cost of compliance, but says it has not introduced requirements that were not already in its Handbook. It still believes its approach is appropriate and proportionate, given the size of the problem.
"We remain of the view that we have well-founded and adequately evidenced concerns about widespread weaknesses in PPI sales practices, and in PPI sales complaint handling, which have given rise to the risk of significant ongoing consumer detriment and that we need to address these in order to protect consumers and meet our statutory objectives," the paper concludes.
Nevertheless, the regulator has revised its proposals to some extent. The rule requiring firms to re-open all rejected PPI complaints has been set aside until the FSA's powers regarding consumer redress schemes have been clarified by the Financial Services Bill, currently before Parliament. Implementation has also been delayed by a further six-week consultation period, which ends on 22nd April. Once the guidance is finalised, the sections on assessing claims will come into effect after one month and the sections on calculating redress after three months.
In addition, the FSA has revised the guidance in some places to make its meaning more clear or to reflect more closely the wording used in the Insurance Conduct of Business Sourcebook (ICOBS). There have also been some adjustments to the way compensation is calculated in the case of single premium PPI, where the firm concludes that the customer would have bought an alternative PPI policy with regular premiums, and (if the customer wants the cover to continue) how future premiums are paid.
The Competition Commission is currently reconsidering its ban on firms selling PPI at the same time as a loan or credit, following a ruling by the Competition Appeal Tribunal last October. It is due to publish its revised proposals in the summer.
Since 2005 the FSA has taken enforcement action against 22 firms and has imposed fines of £11.8 million over poor PPI selling practices. With complaints regarding PPI having increased from 833 in the year 2004/2005 to 31,066 in the year 2008/2009, the FSA see the PPI market as one of the focuses for enforcement, fines and redress exercises in the coming years.
TCC can provide assistance to firms, large and small, who are involved in the PPI market. For more information on how TCC can help you cope please call us on 020 7645 8808 or email info@theconsultingconsortium.com or click here.
Source: Financial Services Authority
FSA Website
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FSA – RETAIL MIS-SELLING
The FSA has, last week, published – jointly with the OFT and the Financial Ombudsman Service – a discussion paper on the fair handling of complaints, the early identification and management of risks from such complaints, and the formation of a co-ordination committee as part of the wider-implications process to improve the identification of risks and the exchange of information.
The key proposals are to identify risks early from complaints data, take early action in relation to the issues causing those complaints, and, in this way, attempt to improve the selling and marketing of financial consumer products. The FSA intends that responsibility for this will lie with firms’ senior management, with the wider-implications process members (the FSA, FOS, and the OFT), and even consumers.
The paper also proposes enhancing the current wider-implications process by the introduction of a co-ordination committee of FSA, FOS and OFT members to identify emerging risks and issues potentially giving rise to mass claims, consider whether regulatory action is required and/or suitable, and liaise with firms and consumer bodies as necessary. The paper also summarises the ongoing initiatives already in place to improve consumer protection and redress channels, including the publication of complaints data and the collective action provisions in the Financial Services Bill.
In some ways, the proposals are a good thing for firms and do not radically alter the landscape currently in place. It is well-established now under FSA’s Treating Customers Fairly initiative and its complaints-handling rules that systemic weaknesses and root causes should be identified from complaints and action taken in relation to non-complainants and processes going forward.
Furthermore, the wider implications process has been in place for a number of years, receiving referrals from FOS and firms alike when a large number of complaints have been received on a particular issue. The emphasis on identifying the risks and necessary action from complaints as early as possible will help firms to maintain customer confidence and reduce the costs of remedial work if issues are identified and action needs to be taken.
The proposals are currently the subject of discussion. If introduced, it remains to be seen whether they will have a significant impact on reducing issues causing large volumes of complaints in the retail sector.
Certainly in the cases where issues do exist and need to be rectified, the emphasis on “early diagnosis” must be good for firms and consumers alike. The benefit in the procedure depends on it being appropriately used in the first place.
Do you and your team have the time or skills to deal with complaints?
TCC do - we deal with the Financial Ombudsman Service (FOS), third party complaint handling companies and directly with customers for a number of high profile clients. We offer a service that takes the pain out of complaints - we can design an end to end process and provide the skilled resources to support your firm.
For more information on how TCC can help you cope please call us on 0207 645 8808 or email info@theconsultingconsortium.com or click here.
Source: Financial Services Authority
FSA Website
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FSA – SPEECH BY CHAIRMAN LORD TURNER
New macro prudential policy tools are almost certainly needed to manage potentially unstable cycles of credit and asset prices and these tools may need to distinguish between different types of credit, according to Financial Services Authority (FSA) chairman, Lord Turner.
In a lecture at the CASS Business School in London, entitled, “What do banks do, what should they do and what public policies are needed to ensure best results for the real economy?” Adair Turner focused on the role that credit can play in driving asset price cycles, which in turn can drive credit supply in a self-reinforcing and destabilising process.
In the case of commercial real estate, for example, he comments that “increased credit extended to commercial real estate developers can drive up the price of buildings whose supply is inelastic, or of land whose supply is wholly fixed. Increased asset prices in turn can drive expectations of further price increases which drive demand for credit; but they also improve bank profits, bank capital bases, and lending officer confidence, generating favourable assessments of credit risk and an increased supply of credit to meet the extra demand”.
However, Adair Turner warned that using a ‘one size fits all’ policy approach to curbing asset price bubbles in commercial or residential real estate could have the unintended consequence of restricting credit to other real estate sectors of greater economic benefit.
He commented:
“There is, therefore, a danger that at some points in the credit/asset cycle, appropriate actions to offset the economic and financial stability dangers of exuberant lending will tend to crowd out lending which funds productive investments”.
Adair Turner concluded:
“There are no easy answers here: but some combination of new macro prudential tools is likely to be required. We need ways of taking away the punchbowl before the party gets out of hand. And a crucial starting point in designing them is to recognise that different categories of credit perform different economic functions and that the impact of credit restrictions on economic value added and social welfare will vary according to which category of credit is restricted.”
Source: Financial Services Authority
FSA Website
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FSA – SPEECH ON INSURANCE BY KEN HOGG
A speech by Ken Hogg, Director, Insurance Sector, FSA at the Insurance Sector Conference covered the following topics:
• Capital and Solvency
• Life Insurers
• General Insurers
• Solvency II
• Insurance Intermediaries
• Consumers
• 2012 and beyond
He closed by saying:
“In summary, whether it’s capital, meeting the needs of consumers or keeping pace with the changing regulatory landscape, risks and challenges abound. As I said at the start, even though you’ve patiently listened to me for nearly half an hour, this was the edited highlights! I’d really encourage you to take the time to read our digest in full and think about the risks your business faces.”
Source: Financial Services Authority
FSA Website
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FOS – OMBUDSMAN NEWS NUMBER 84
This has now been published and covers topics such as:
• An interview with new chief ombudsman, Natalie Ceeney;
• Recent banking complaints involving ‘set off’;
• Investment complaints about property funds, deferral periods and market value reductions (MVRs); and
• Chief ombudsman (interim), David Thomas, on redress, regulation and mass claims
Source: Financial Ombudsman Service
FOS Website
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ABI – RISK INDICATORS FOR CONSUMERS
Moves by European regulators to provide a standard risk rating for investment funds needs further refining to make them truly effective for consumers, according to the ABI and the IMA. CESR, the Committee of European Securities Regulators, put forward its proposals for a standardised risk and reward rating methodology in December 2009. It is now being considered by the European Commission for use when firms produce Key Information Documents (KIDs) for UCITS funds, starting from the second half of 2011.
Joint ABI IMA research shows that 70% of asset classes rated using the proposed method in 2006 would have had their risk categories changed only three years later. The research found that doubling the period of data used when assessing the relative risk of a fund leads to a significantly more reliable risk indicator. Changing from five to ten years reduces the proportion of asset classes that would hve had their risk indicator changed between 2006 and 2009 from 70% to 30%.
The research also found that under CESR's proposed scale of seven risk categories, a third of asset classes and half of all funds would fall into one category alone. The ABI and IMA therefore recommend adjusting the boundaries to give a better spread across the categories and so help consumers to choose between different funds.
Dr Rebecca Driver, Director of Research at the ABI, said:
"Improving the way in which investment risk is explained to consumers has the potential to deliver significant benefits. The rules as proposed do not yet fully deliver that benefit. We hope the research work released will help the Commission as it looks for the best solution."
Dr Julie Patterson, Director of Authorised Funds & Tax at the IMA, said:
“Reducing investment risk to a single indicator for an individual fund is neither easy or a solution in itself to the complex investment decisions that consumers face. Our joint research shows how the workings of the proposed indicator could be improved to enhance significantly its usefulness to consumers.”
Source: Association of British Insurers
ABI Website
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CML – FEBRUARY GROSS MORTGAGE LENDING
Gross mortgage lending in February increased to an estimated £9.2 billion, a 6% rise from £8.7 billion in January, according to new data published by the Council of Mortgage Lenders. An increase in lending in the shortest month is unusual but unsurprising this year, given that the end of the stamp duty holiday distorted lending figures considerably in both December and January.
Lending in February was down 6% on £9.7 billion a year earlier, but the first two months of this year are broadly in line with our forecast for lending of £150 billion for 2010 as a whole.
CML economist Paul Samter commented:
"As we look forward, we expect emerging signs of improvement as confidence in the economy grows and we move past the election. However, the need for the authorities to address fiscal deficit will inevitably slow the economy. At the same time the funding markets, while certainly better than a year ago, remain difficult and will likely limit the flow of available housing finance."
"Given the short-term weakness and distortions in the housing market, in addition to signs of more properties coming onto the market, it was perhaps unsurprising to see falls in some of the monthly house price indices in February. With activity unlikely to pick up much in the short term, we would expect to see further modest volatility in the coming months."
Source: Council of Mortgage Lenders
CML Website