Compliance News - 31 December 2010
A very Happy New Year to all our readers.
This year, The Consulting Consortium plans to bring you not only your usual reliable weekly digest of regulatory news but, in addition, further comment and insight into what regulatory change can and will mean for our colleagues at the sharp end.
On your behalf, we attended a Complaints Seminar held by the FSA and are pleased to report some of the FSA’s comments. We value the positive and constructive manner in which the FSA engages with its regulated firms enabling us to report on the findings of their research. In addition to this leader item, we have set out at the end of this edition of the Industry News Flash the CML response to the Consultative Paper on Complaints, which articulates key points relevant to the whole industry.
The FSA reported that they had undertaken a special review of complaints handling in the banking sector and were confident in extrapolating these findings across other sectors. The review of banking complaints found poor standards including:
- 18% of complaints reviewed showed an unfair outcome for customers
- Weaknesses in bank culture, governance and controls were prevalent
- Five banks had been obliged to follow major change programmes
- Two banks had been referred to enforcement.
Quality of complaints handling by cycle of the complaint featured:
- Failure to recognise complaints
- Inadequate or poor quality investigation, which was at its worst where complaints handling was not a central part of the role
- Mis-use of the 2 stage process
- Poor decision making on the outcome of the complaint
- Inadequate redress payments
- Issues with timeliness and FOS disclosure
- Poor quality correspondence
- Poor record keeping
In terms of complaints culture, governance and controls, the main findings by magnitude were:
- Lack of senior management oversight
- Poor policies and procedures, for example lack of examples of poor and good outcomes for staff to refer to and use a s a guide
- Inadequate controls, especially lack of Quality Assurance
- Remuneration structures driving poor behaviours, such as creating conflicts of interest. In one example, branch managers were remunerated on the level of compensation paid to complainants
- Only 1 bank demonstrated a strong culture
- Limited training and development for staff handling complaints
- Poor quality MI and root cause analysis
- MI focussed too much on metrics not quality evaluation
- Root cause analysis did not lead to changed procedures
- Not taking sufficient account of FOS decisions
The banks have improved since the survey by FSA as follows:
- Improved engagement and accountability for complaints by senior management
- Strong complaints governance with participation of key business areas
- Amended complaints procedures with clear articulation and focus on fair outcomes
- Improved QA and feedback
- Better MI and root-cause analysis
- Remuneration structures driving right behaviour
FSA admitted that some firms have struggled to implement these changes, often due to operational complexity.
Source: The Consulting Consortium
TCC Website
Source: The Consulting Consortium
TCC Website
Senior financial supervisors from ten countries - collectively, the Senior Supervisors Group (SSG) – have issued a report that evaluates how financial institutions have progressed in developing formal risk appetite frameworks and in building out highly developed IT infrastructures and firm-wide data aggregation capabilities.
The report “Observations on Developments in Risk Appetite Frameworks and IT Infrastructures” concludes that, while firms have made progress in developing risk appetite frameworks and have begun multiyear projects to improve IT infrastructure, considerably more work must be done to strengthen these practices. In particular, the aggregation of risk data remains a challenge, despite its criticality to strategic planning, decision making, and risk management.
The report “Observations on Developments in Risk Appetite Frameworks and IT Infrastructures” concludes that, while firms have made progress in developing risk appetite frameworks and have begun multiyear projects to improve IT infrastructure, considerably more work must be done to strengthen these practices. In particular, the aggregation of risk data remains a challenge, despite its criticality to strategic planning, decision making, and risk management.
The observations and conclusions in the report reflect the findings of initiatives undertaken by two SSG working groups. The risk appetite working group conducted a series of interviews with boards of directors and senior management of global financial institutions to gauge progress in risk appetite frameworks, while the working group that focused on IT infrastructure based its views on observations from a number of existing supervisory efforts.
This report represents a joint effort on the part of twelve supervisory agencies: the Canadian Office of the Superintendent of Financial Institutions, the French Prudential Control Authority, the German Federal Financial Supervisory Authority, the Bank of Italy, the Japanese Financial Services Agency, the Netherlands Bank, the Bank of Spain, the Swiss Financial Market Supervisory Authority, the U.K. Financial Services Authority, and, in the United States, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Federal Reserve.
These initiatives were conducted to support the priorities of the Financial Stability Board, whose mission is to address vulnerabilities in the financial system and to promote global financial stability. The report is available below, together with the transmittal letter to the chairman of the Financial Stability Board, which summarizes the report’s key observations and conclusions.
Source: Financial Services Authority
The Financial Services Authority (FSA) and HM Treasury (HMT) have published a joint consultation paper setting out proposals for the implementation of the revised Undertakings for Collective Investment in Transferable Securities Directive, known as UCITS IV.
UCITS IV repeals the current UCITS Directive and must be implemented into national law by all European Union member States by 1 July 2011. This Directive represents an important modernisation of the regulatory framework and procedures for selling retail investment funds cross-border in Europe.
Responses to the consultation paper must be received by 21 March 2011.
UCITS IV repeals the current UCITS Directive and must be implemented into national law by all European Union member States by 1 July 2011. This Directive represents an important modernisation of the regulatory framework and procedures for selling retail investment funds cross-border in Europe.
Responses to the consultation paper must be received by 21 March 2011.
UCITS IV introduces the following changes:
- Introduction of a management company passport: Allows a UCITS management company to operate a UCITS fund authorised in a different EU Member State, without the need to be established in the Member State of the fund;
- Improved investor disclosure: Replaces the simplified prospectus with a key investor information document (KID). This will be a simple pre-sale document giving key facts to investors in a clear and understandable manner. It will assist them in making an informed investment decision;
- Removal of administrative barriers to the cross-border marketing of UCITS: A quicker, more streamlined process will allow UCITS funds to access the market of another member State without delay, once the regulator of the fund has notified the regulator in the Member State where the management company wants to sell its product;
- A framework for mergers between UCITS funds: There will be a single set of requirements in all Member States for authorisation of a cross-border fund merger and the information that will have to be made available to investors about it;
- Provision for ‘master-feeder’ structures: Where a UCITS fund (feeder) will be allowed to invest the majority of its assets into another UCITS fund (master). This creates opportunities to set up more flexible, cost-effective fund structures;
- Improved supervisory co-operation: Measures to improve co-operation between national regulators, particularly in relation to sharing responsibilities where a UCITS manager and the fund it manages are established in different Member States.
Source: Financial Services Authority
The Association of British Insurers (ABI) will establish a new Consumer Forum to help drive its work to improve outcomes for customers which will focus on:
- Regaining trust in financial services.
- Enhancing consumer understanding of financial services products.
- Improving access to advice and products.
The ABI will be inviting key industry consumer representatives and stakeholders to sit on the new Consumer Forum, which will report directly to the ABI Board.
Maggie Craig, the ABI’s acting Director General, said:
Maggie Craig, the ABI’s acting Director General, said:
“It is very important that the ABI and its members play a key role in helping consumers regain trust in financial services. This will only be achieved by increasing understanding of our products and improving outcomes for our customers.”
The ABI will also:
- Review all existing industry Good Practice Guides and develop a new range of Consumer Guides where needed.
- Build upon or evolve existing ABI consumer initiatives ensuring that they are applicable to both the life and general insurance providers.
The Consumer Forum will replace the Customer Impact Panel that provided oversight of the ABI Customer Impact Scheme for the life and pensions market. Results from the 2010 annual survey, due early in 2011, will be the last under the Customer Impact Scheme as the ABI takes forward its new approach to consumer work.
Source: Association of British Insurers
As part of their seasonal year-end round-up, the ABI have, as always, entertained the industry with a few stories about insurance fraud. The serious point is that home insurance is now the number one target for insurance fraudsters according to the hundreds of fraudulent insurance claims exposed every day. The ABI’s latest industry data on fraudulent insurance claims shows that:
- Every day insurers detect 335 fraudulent insurance claims worth £2.3 million.
- Dishonest home insurance claims are the most common: 170 cheating householders are caught out each day. Typically these involve alleged accidental damage to carpets and furniture due to spilled drink, which were in fact caused deliberately.
- Fraudulent motor claims are the most costly: 108 bogus motor insurance claims worth £1.12 million are exposed each day.
The roll-call of insurance cheats exposed include:
- A policyholder claimed on his household policy for the theft of DVDs that he said had been bought locally, despite the fact that they had yet to be released in the UK.
- A policyholder who took his car to participate in a race day at the Nurburgring race track in Germany. He crashed the vehicle causing extensive damage, which he then shipped back to the UK and left alongside a road where it was claimed the damage had taken place.
- A man claimed for head injuries allegedly as a result of falling over a loose paving stone, which were in fact sustained after being hit by a baseball bat during a fight.
- A woman reported her husband for exaggerating injuries received in a car accident after he walked out on her having collected £385,000 compensation. For three years he had pretended to be crippled.
- A man, who claimed to be unable to walk following an accident, was photographed in his local newspaper collecting an award for the leading goal scorer in his local football team.
- A car owner claimed his car had been stolen. However, he had in fact pushed it over a cliff and planned to use the insurance payout to meet his outstanding HP repayments on the vehicle.
Source: Association of British Insurers
The BBA has published a revised version of the cross-industry Cash ISA to Cash ISA Transfer Guidelines which build on best practice Guidelines introduced by the industry in 2008. The revised Guidelines implement the following key changes which come into effect on 1 January 2011:
- The maximum time taken for a typical Cash ISA to Cash ISA transfer is cut from 23 to 15 business days
- The new provider will backdate interest to the first day where interest no longer accrues on the funds being transferred from the customer’s existing Cash ISA
- The new provider will start paying the new interest rate from day 16 at the latest, regardless of whether the transfer has completed within the standard 15 business day timeline (pended cases excepted)
Banks' performance for meeting the new transfer timescale will be monitored by the BBA and a summary of the results provided to the FSA. The guidelines the industry produced two years ago have helped to drive transfer times lower and these new industry commitments will bring added benefits to customers.
The BBA are continuing to look at ways at which the process can be made even faster, including how supporting data can be transferred electronically. A revised customer-friendly version of the transfer guidelines has also been published.
Source: British Bankers’ Association
As promised at the start of this edition, we have set out in full the response to the joint FOS and FSA Consultative Paper on complaints by the CML as, of all the responses we read, it best summarises the key issues and sets out highly articulate input that will be of interest across all sectors. Consultation has now closed, with final rules being published in April 2011 and implementation in stages up to July 2012.
Introduction
1. The Council of Mortgage Lenders (CML) welcomes the opportunity to respond to the joint FOS and FSA consultation paper. The CML is the representative trade body for the first charge residential mortgage lending industry, which includes banks, building societies and specialist lenders. Our 111 members currently hold around 94% of the assets of the UK mortgage market.
2. Given that the proposals are not home finance specific, the CML is responding primarily to the key themes of the proposed award limit and the removal of the two-stage complaints process, rather than the detailed questions posed in the consultation paper. The CML has been in discussion with other trade bodies representing the wider interests of our members, which have re-emphasised the need to address longstanding concerns with claims management companies.
Ombudsman award limit
3. We recognise that the £100,000 limit has been in place for a number of years and has been overtaken by inflation. As such, a review is overdue.
4. We believe that both the proposed limit of £150,000 and an implementation date of 1 January 2012 appear reasonable. The decision to move immediately to a limit of £150,000 in January 2012 may cause transitional problems, but we accept that these should be minimal given the number of cases that would be affected.
5. We agree with the FSA and FOS that re-consulting on the award limit every year, and thus introducing a staged implementation of the proposed award limit of £150,000, would be an over-engineered solution. That said, it would helpful if the FSA/FOS could outline the extent of any fluctuations in inflation that would trigger further consultation on the award limit.
Two-stage complaints process
6. Our members continue to treat complaints handling seriously. In 2009/2010, the Ombudsman received 2% fewer mortgage related complaints than the previous year. 37% of mortgage related complaints were upheld in 2009/10, compared to 40% in 2009/10. These uphold ratios are among the lowest for banking and credit products. We have seen further reductions in 2010/11, with 37% upheld in Q1 and 33% upheld in Q2.
7. We do not believe that the FSA and FOS have presented a strong enough case for abolishing firms’ two-stage complaints process as proposed. The ‘Dear CEO’ letter of July 2007 focussed on overdraft charges and the importance of the FSA’s specific concerns, and indeed the underlying point, may not have been read-across all business units. Similarly, the FSA’s review of banks complaints handling is not necessarily representative of how the industry operates the two-stage process in line with DISP.
8. If the current two-stage process is prone to misuse as CP10/21 asserts, the FSA already has a range of regulatory provisions at its disposal to address such misuse and educate regulated firms. For example, we would prefer the FSA to outline what it would regard as ‘good practice’ examples of how the two-stage process can operate.
9. We believe that a regulated firm should be given the freedom to operate the complaints handling process that best suits itself and its customers, subject to the existing DISP rules. There is a danger that, in removing the two-stage process outright, the regulator and ombudsman will give an unfair impression to consumers that lenders cannot be trusted to handle complaints and that the streamlined one-stage process will in effect be a fast-track to the ombudsman.
Claims management companies
10. Although not covered directly in CP10/21, we believe that the FSA/FOS review of the complaints process and DISP rules should give due consideration to the detriment caused to firms and consumers by claims management companies.
11. Firms continue to receive subject access requests from CMCs, with the information provided only serving to help construct a ‘complaint’ against that firm. In many cases these complaints are entirely without merit or foundation. We would therefore welcome the FOS reviewing its restrictive definition of what constitutes a “frivolous and vexatious” complaint.
12. We welcome the relevant regulators’ intentions to address unscrupulous CMC practices (such as the impending FSA/FOS joint statement and the planned Claims Management Regulator’s consultation on inducements), but we will continue to press for more stringent regulation of CMCs until such proposals reap benefits.
Other complaints handling issues
13. We agree that firms should consider previous ombudsman decisions that are relevant to live complaints and welcome that the FSA and FOS have stopped short of treating such decisions as binding precedents. We would welcome more explicit confirmation from the ombudsman of how it expects individual decisions to be read across future complaints handling, rather than leave this to shifting regulatory interpretations.
14. We support the premise that firms should give board level recognition to the importance of complaints handling. We welcome both the proposal not to introduce a new controlled function for this role and the flexibility offered to firms under DISP 1.3.8G.
Source: Council of Mortgage Lenders
