This month we bring you an account of some significant publications from the UK's Financial Conduct Authority, including one about its proposals for the implementation of the Senior Managers and Certification Regime for insurers and firms that only it regulates and one about its activities in preparation for Brexit, even though it has been shut out of many Brexit negotiations with its European counterparts.

The regional differences between consumers’ financial lives

The FCA’s latest data from the 'Financial Lives' survey concentrates on people's financial circumstances throughout the UK and notes that people in different areas of the country experience financial services differently, mentioning some differences between rural and urban areas.

These differences include the following.

• A higher concentration of adults using high-cost credit products in urban areas rather than in the countryside.
• In rural areas, a higher-than-average proportion (13%) of adults aged 55+, or with health conditions, who have difficulty accessing a bank branch, compared with 9% in urban areas.
• 51% of rural retirees relying on the state pension as their main source of income, compared with 37% in urban areas.
• 27% of adults in rural locations saying that they are highly satisfied with their financial circumstances, but only 20% of adults in urban areas saying the same thing. The lowest reported rates of satisfaction are in London, where only 16% of adults report being highly satisfied with their financial circumstances.

In England, the highest proportion of adults with "potentially vulnerable characteristics" are found in the North West (55%), with the South West reporting 46%. The north-south divide is also evident in the population’s saving rates, with a higher proportion of people in the north having no savings.

How the FCA is preparing for Brexit

The regulator has published a statement in which it outlines the ways in which it is helping the UK to prepare for its departure from the European Union. This statement incorporates some previous communications from the FCA, with some fresh notes about the work that the regulator has done already.

In summary:

• Because nobody knows the details of the implementing period and because a withdrawal agreement has yet to be agreed between the UK and its current master, the FCA is preparing for a wide range of eventualities.
• Under the EU (Withdrawal) Act, existing EU law will be converted into British law at the point of exit and the Government will give the FCA the job of amending and maintaining EU technical standards.
• The FCA will have to update its rulebook to suit the situation after Brexit landscape and it will ask interested parties to comment on its suggestions in the autumn, subject to HM Treasury’s timelines for statutory instruments, including rules about the "temporary permissions regime for inbound passporting EEA firms and funds." EEA is the abbreviation for the European Economic Area.

Government negotiations

The implementation (or transitional) period will run between 29th March 2019 and 31st December 2020. During this time, firms will still be allowed to 'passport' between the UK and the EU and will be subject to EU regulation until the end of 2020. However, the details of the implementing period are still to be finalised as part of a so-called 'withdrawal agreement.'
 
Legal changes

The FCA has written: "The Treasury has set out that its approach to onshoring the EU acquis will not rely on any new, specific arrangements being in place between the UK and the EU after exit and that, as a general principle, EU member states will be treated as third (non-EU) countries – although there are instances where the Treasury would deviate from this general approach, including to provide for a smooth transition. We are taking the same approach. This will ensure that the requirements we are responsible for are consistent with the wider legislative framework. In certain cases we may deviate from this general approach where this is necessary to ensure a smooth transition to a new regime, or to otherwise support our strategic and operational objectives."

It is the Treasury’s intention to make the FCA, the Prudential Regulatory Authority and the Bank of England responsible for amending and maintaining existing "onshore EU binding technical standards" so that they continue to function after Brexit.

The FCA’s priorities

The regulator’s main Brexit-related task will be to amend and update its rulebook before Britain leaves the EU. It also plans to concentrate on the priorities it has outlined recently in its business plan, although it will have to put some of them off.

What it means for the industry

The aforementioned temporary permissions regime is still only a proposal. The idea is to allow EEA-based firms to continue to operate in the UK for a short period after Brexit if the UK and the EU do not strike a deal. This ought to give EU firms enough time to apply to the UK for permission to carry on. Firms that only the FCA regulates (some answer to the PRA also) might have to notify the FCA in advance if they wish to take advantage of this regime.

The Treasury also wants to allow the FCA to introduce transitional arrangements for firms that want to apply for fresh permission to do business in the UK under the EU (Withdrawal) Act 2018. 'Flexibility' is the watchword here.

Access to travel insurance for consumers with pre-existing medical conditions

The FCA has published people's replies to its "call for inputs into access to insurance" and is worried about consumers with pre-existing medical conditions who are struggling to gain access to the specialist travel insurance market.

Of the responses the FCA received, some came from complaining consumers. It spotted three main barriers that they faced when trying to obtain travel insurance and expressed them in its own terminology.

• Pricing. The rationale for a good deal of insurance pricing is obscure and the risk factors that affect quotes make it difficult for consumers to judge whether they are being offered anything appropriate for their conditions.
• Signposting. Insurers do not give consumers enough information when they give them a high quote or refuse them cover. This can lead to them feeling that they are uninsurable.
• Consumer understanding. Consumers are not aware of the options, terminology and risk factors that providers use.

The feedback will help shape the regulator’s wider opinions about insurance pricing practices. It first announced its desire to do something about this in its 2018/19 Business Plan.

SM&CR rules come one step closer to finality

The FCA has published its 'near-final rules' (i.e. latest proposals for rules) to govern the extension of its Senior Managers & Certification Regime (SM&CR) to all financial services. Consultants like TCC are advising firms start preparing for 'D-Day,' which happens on 10th December for insurers and 9th December 2019 for firms that only the FCA regulates. It expects to change its proposals yet again and, if the Treasury consents, issue rules as a result. The FCA is not expecting to change the present version significantly.   

One of the ways to make regulation effective is for the regulator to hold people to account for their conduct. The latest proposals seek to make managers more accountable than they are now, aiming also to shield consumers from harm and imbue the markets with some integrity.

The FCA has released two policy statements on these latest proposals - one for insurers and one for firms that only it regulates, alongside 'guides' to the regime.

The regulator has also issued a policy statement about the "duty of responsibility" that it wants to impose on the whole financial sector. This duty was introduced by the Bank of England and Financial Services Act 2016 and came into force in May 2016. It currently applies to senior managers approved by the FCA and PRA at UK banks, building societies, credit unions and the Britishs bank branches of foreign firms. The FCA can take action against a senior manager if it can prove that:

• his firm failed to live up to a relevant requirement;
• at the time of the contravention, the senior manager in question was responsible for the management of any area related to the contravention; and
• he failed to take the steps that he would reasonably be expected to take in order to prevent the contravention or put a stop to it.

The FCA has published plans to create a new directory of financial service workers, including those in customer-facing jobs such as mortgage and investment advisors, plus all people to be certified in line with the SM&CR.

Operational resilience - the discussion paper

The Bank of England, the PRA and the FCA have published a discussion paper that looks at ways to improve the operational resilience of firms and financial market infrastructures. Operational resilience refers to the ability of firms and the financial sector as a whole to prevent, respond to, recover and learn from moments of operational disruption. The paper goes on to state that a resilient financial system is one that can absorb shocks rather than contribute to them.

The paper suggests that senior managers at firms can make them more 'resilient' by setting, monitoring and testing specific impact tolerances for key business services, the better to set the level of disruption that they think that their firms can tolerate.

Technological advances benefit firms, but they can also make it difficult for them to measure and assess their operational resilience. Ever-more sophisticated cyber-attacks can cause serious disruption. With this in mind, the discussion paper concentrates on how firms can ensure that their customers can go on using their products and services while protecting them from various ills. Firms and financial market infrastructures, it argues, ought to develop and improve the ways in which they can respond to disruptive events and reduce the damage they do.

The approach outlined in the paper is in line with the Financial Protection Committee’s recent plans for approaching tolerance during cyber security and maintaining business continuity.

How firms should react to the FCA’s consumer protection proposals in the high-cost credit and overdraft sectors

More than three million consumers in the UK, including the most vulnerable in society, use some form of high-cost credit and the FCA is keen to ensure that financial firms treat the most vulnerable fairly. It has now published two consultative papers that contain proposals to protect consumers from new threats in the rent-to-own, home-collected credit, catalogue credit and store card sectors, along with its thoughts about alternatives to high-cost credit. These proposals are wide-ranging and deal with access to borrowing, complex charging structures and the awareness that customers have about various things.

Before any it enacts any new rules, the FCA is asking practitioners for feedback about its proposals. However, there are still steps that firms can take now to ensure they are meeting some 'expectations' that it has.

• Review products, pricing structures and communications with customers to assess the risk of harm to consumers and the steps that one could take to reduce the risk of increasing debt burdens.
• Know your customer – have a clear understanding of the behaviour of people who use one's products.
• Review the complaints of the past for trends that may suggest that customers have incurred losses.
• Assess the fairness of one's pricing structures – are there differences between the way in which the firm is pricing arranged and unarranged facilities?
• Review pre-application communications to ensure that one is providing consumerswith the information they need to work out whether a facility is right for them.

Speech: ten years on

In a recent speech at the Banking, Litigation and Regulation Forum, Mark Steward, the FCA’s director of enforcement and market oversight, reflected on how the industry has changed in the ten years since the world-girdling financial crisis began. He noted that the biggest effect of the crisis has been on public trust and confidence in the financial industry. He insisted that the FCA was trying to change things for the better.