The FCA has undertaken a flurry of Brexit-related activity, urging firms to make preparations for all eventualities. On other parts of the financial scene, it has published an update to Sector Views, an annual document that divides the financial system into sectors and comments on them.

The Sector Views document (see below) is vital for anyone who wants to understand the regulator’s opinions about the most significant risks in each part of the financial sector that it oversees. It also gives the reader some idea of the ways in which the FCA will allocate its resources in the forthcoming year.

APP fraud

The FCA has published new rules to help each victim of Authorised Push Payment (APP) fraud complain to the payment service provider (PSP) that receives the payment in question and then to complain to the Financial Ombudsman Service (FOS) if he is unsatisfied with the result of his complaint. These rules will come into force on 31st January.

At the moment, victims can only complain to the sending PSP and firms must handle the complaint in accordance with the FCA’s existing complaint-handling rules. An investigation by the FCA and the Payment Systems Regulator (PSR), which acted on a complaint by 'Which?,' the consumer group, found that receiving PSPs could do more to prevent accounts from being compromised and to spot fraudulent payments.

To comply with the requirements of the European Union's second Payments Services Directive (PSD2), the FOS’s compulsory jurisdiction will be extended to cover complaints by the initiator of a misdirected payment about the service provided by the recipient PSP.

The Payment Systems Regulator has set up a steering group to develop a code to which it wants PSPs to adhere voluntarily. This code will, it hopes, spur firms to respond to - and indeed prevent - instances of APP fraud and reimburse victims who meet certain criteria.

The Temporary Permissions Regime

The FCA has continued to prepare for Brexit. Firms based in the European Economic Area (EEA) that want to take advantage of the UK's 'temporary permissions' regime ought to notify the FCA, using its 'Connect' system, by 28th March. The FCA requires fund managers to identify the funds that they wish to continue marketing in the UK as they do so.

The only funds that need not heed the deadline of 28th March will be the new sub-funds of existing EEA UCITS (European Economic Area Undertakings for Collective Investment in Transferable Securities) that come under the UK's so-called temporary marketing permissions regime on exit day.

The Financial Services Contracts Regime

HM Government has published the Draft Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, by which it wants a Financial Services Contracts Regime (FSCR) to allow firms which do not enter the temporary permissions regime to wind down their business in the UK in the event of the UK leaving the EU without a withdrawal agreement.

The legislation, when passed, will give EEA passporting firms a breathing space in which they can continue servicing existing British contracts while winding down their business in an orderly manner. The regime will apply to firms that have not notified the FCA of their wish to enter the temporary permissions regime (TPR), or that have failed to secure authorisation at the end of the regime. Firms that are subject to the regime will have to stay authorised in their home countries and will have to notify the FCA if and when they cease to be authorised or if the terms of their authorisation are changed in any way.

The FSCR will operate for a maximum of 15 years in respect of insurance contracts, with a five-year limit on all other contracts. HM Treasury can extend this period if the FCA and PRA decide that it is necessary.

The regime will include a period of supervised run-off (SRO) that will apply automatically to the following firms if they have outstanding contractual obligations.

• EEA or 'treaty firms' (see below) which qualify for authorisation as EEA branch firms, or with top-up permission, which do not enter the TPR.
• EEA or treaty firms which qualify for authorisation as EEA branch firms, or with top-up permission, which do not achieve full authorisation at the end of the TPR.
• EEA-authorised e-money institutions (EMIs) which provide services through branches or British agents and which do not join the TPR.
• EMIs which, at the end of the TPR, do not recieve full authorisation.
• EEA-authorised payment institutions (PIs) or EEA-registered account information service providers (RAISPs) which do not join the TPR.
• PIs or RAISPs which, at the end of the TPR, do not have the necessary authorisation to continue operating in the UK.

A 'treaty firm' derives its name from paragraph 1 Schedule 4 Financial Services and Markets Act 2000. This type of firm is a so-called 'national' of a state in the European Economic Area (not the United Kingdom) whose head office is situated there.

The authentication of customers

Under the aegis of PSD2 some provisions of the EU’s Regulatory Technical Standards that pertain to "strong customer authentication and common and secure open standards of communication" (SCA-RTS) will come into force on 14th March, with the remainder coming in on 14th September. A 'no deal' Brexit might subject payments to unnecessary risks unless the UK introduces similar regulatory standards of its own.

To offset this problem, the FCA is proposing to use its own regulatory technical standards to require firms to authenticate their customers 'strongly' and to communicate with them in a secure manner. It wants to base these standards on the EU's SCA-RTS.

The British Rock

In line with HM Government’s commitment to giving Gibraltar-based firms access to the UK’s financial markets until 2020, the FCA has promised to stick to its policy towards Gibraltar in its rulebook or 'handbook.'

Firms that are able to exercise passporting rights will be able to do so after exit day without having to enter the temporary permissions regime, or the financial services contract regime. The FSCS will continue to apply to firms based in Gibraltar that 'passport into' the UK. The FCA has published draft rules and guidelines on this subject; it intends to finalise them shortly before the UK leaves the EU.

Overdraft charges

The FCA has published new rules to prevent banks from charging higher prices for unarranged overdrafts and is proposing to make the following changes.

    • Each firm ought to express the overall cost of an overdraft as a single, simple interest rate which includes an annual percentate rate or APR.
    • The prohibition of banks from charging higher fees for unarranged overdrafts.
    • A ban on fixed fees for borrowing through overdrafts.
    • New guidelines to reiterate the FCA's hope that charges for refused payments correspond reasonably to the cost of refusing payments.
    • Exhorting banks to do more to identify and support customers who show signs of being in financial difficulty.

Barriers to entry in the banking sector

The FCA has published its analysis of the effectiveness of the old Financial Services Authority's reforms to the banking authorisations process in 2013, which aimed to reduce barriers to entry, improve competition and benefit consumers by widening product ranges.

On the whole, the regulator found that:

• the process by which it authorises banks to do things is now more efficient, not least because it is three months faster in processing the average application;
• the current rate of market entry is higher than pre-2013 levels, although the reforms are unlikely to be the sole cause of this;
• consumers now have a wider choice of products; and
• there has been no substantial change in the concentration of competition.

The FCA says that it is important for markets to be easy to enter, although this is not enough on its own to increase competition. It believes that it takes time to see the full effects of regulatory change, especially measures to reduce barriers to entry.

New committee members for the FCA and PSR

The FCA and PSR have announced the appointment of new members to three decision-making committees: the FCA’s Competition Decisions Committee (CDC) and the PSR’s CDC and Enforcement Decisions Committee (EDC).

Lesley Ainsworth has been appointed to both the PSR’s EDC and both regulators’ CDCs. She is also a member of a panel at the Competition and Markets Authority (CMA) and has more than 30 years’ experience in the legal sector. Joining her is David Thomas who has 34 years’ experience in various regulated sectors, including aviation, financial services and utilities. Competition law expert Simon Polito has also been appointed to the three committees, having spent four years as the 'inquiry chair' of the CMA, alongside Tim Tutton, an economist and regulatory specialist.

Finally, Alasdair Smith has joined the FCA’s CDC. He is also a member of the Determinations Panel of The Pensions Regulator, a commissioner at the Scottish Fiscal Commission and Emeritus Professor of Economics at the University of Sussex.

FCA fines and penalties

The FCA has banned and fined a former non-executive director (NED) of two mutual societies £20,000 for failing to act with integrity by not declaring conflicts of interest. Compliance Matters has covered the story here.

It has, moreover, fined a retail bank £32.8 million for failures in its probate and bereavement processes and for failing to notify it of these problems when it became aware of them. The story is here.

The FCA has also banned a former director of a debt management firm for a lack of honesty and integrity. The individual was found to have purchased a debt management firm with funds from his existing debt management business. This money should have been used to pay customers’ creditors at a time when the firm had a significant client money shortfall.

Sector Views

The FCA has published an update of its aforementioned publication Sector Views. The "significant cross-sector themes" that it believes are setting the pace of change in the financial sector are:

• technology;
• societal changes;
• Brexit; and
• the macroeconomic environment.

It believes that businesses and their customers might be suffering in the following areas.

• Retail banking and payments. Service outages and security issues are becoming more frequent and, perhaps, are causing inconvenience or financial loss. New and emerging technology benefits many customers but it can create barriers, particularly for vulnerable customers.
• Pensions and retirement income. People may still be struggling to maximise their pension savings, despite the positive effect of auto-enrolment. Firms are not allowing consumers to make good decisions and are not managing their pension savings in line with their long-term needs.
• Retail investments. Confidence in the market could be affected by financial crime, cyber-crime or technological disruption. The issue of high prices and bad service is also a concern for the FCA.
• Investment management. Beyond the sector-wide issues, which the FCA believes will affect this sector significantly, the regulator is concerned about the quality and pricing of services offered to retail investors.
• Wholesale financial markets, in which private banks deal on behalf of their HNW clients. The FCA has identified seven areas of potential harm: financial crime; market abuse; stability and resilience; conflicts of interest; the effectiveness of markets; the power of markets; and 'information asymmetries.'

Charging structures for pension transfers

Parliament’s Work and Pensions Committee has been making enquiries about "pension freedoms and choice" (i.e. the ways in which people invest their pension pots) and has found that charging structures, particularly contingent charging, could give advisors an incentive to advise their customers badly. As a result, the committee recommended a ban on contingent charging.

Having consulted the industry, the FCA decided not to act on this recommendation. It failed to see a link between contingent charging and poor advice, so it decided to investigate further. To help the regulator in its investigation, HM Government has launched a call for evidence about contingent charging. It wants to know:

• whether contingent charging increases the likelihood of customers receiving unsuitable advice;
• what effect a contingent charging ban might have and how to deal with any resulting problems; and
• what other solutions might remove conflicts of interest while avoiding unintended or negative results.

Dear CEO...

The FCA’s latest 'Dear CEO' letter reminds all regulated firms of the rules that pertain to financial promotions, after evidence has emerged that some firms have published financial promotions that suggest that all of their activities are regulated by the FCA/PRA when they are not. The FCA says that:

• all financial promotions must be clear, fair and not misleading;
• consumers must be able to understand the extent of each firm’s regulated activity;
• if a firm says that the FCA and/or PRA regulates this-or-that part of its business, it must also be clear about those parts that they do not regulate;
• no firm must not imply or indicate that any part of its business is regulated if this is not the case;
• an authorised person must approve all financial promotions; and
• the FCA has the power to prevent a financial promotion from being released or ask the firm to withdraw it.