This month we bring you details of further work regarding defined benefit (DB) pension transfers. The UK's financial regulator has also issued details about its efforts to address the super-complaint issued by Citizens Advice on the loyalty penalty in financial services.

In addition, the FCA has taken steps to restrict the sale, distribution and marketing of two highly risky products to retail investors, to ensure detriment doesn’t occur.

Defined-benefit pension transfers

The FCA has published its latest data on defined-benefit pension transfers and says that it is still worried that a high percentage of these transfers are not up to an acceptable standard.

The latest figures show that:

• 2,426 firms advised on 234,951 defined benefit transfers;
• 1,454 firms recommended a transfer go-ahead for 75%, or more, of their client base; and
• the average value of pensions where transfer advice was provided was £352,303.

The FCA took this opportunity to remind the industry that it expects advisors to take the position that a transfer is unlikely to be suitable and work from there. It worries that the volume of transfers taking place indicates that firms are not starting from this premise.

As a result, the FCA is visiting those firms that are most active in the defined benefit transfer market to assess their business models and defined benefit transfer compliance. It will also be writing to those firms whose data returns indicate that consumers might suffer harm from defined benefit transfer activity.

Analysing the changes in the mortgage market

The results from the latest Mortgage Lending and Administration Return (MLAR) have been published and they show that interesting developments are afoot in the mortgage market.

• The total value of residential mortgage lending is up 3.4% on the same period last year.
• The market share of mortgages with a loan to value (LTV) ratio of 90% or more has increased to 4.5% of the market.
• There has been a marginal decrease in buy-to-let mortgages.
• The proportion of loans in arrears represents 0.99% of all outstanding loans, the lowest level since reporting began in Q1 2007.

The FCA looks for adequate financial resources

In the interests of keeping people informed about its processes for assessing the adequacy of financial resources at firms, the FCA has published a paper that outlines its approach and voices its expectations.

Firms should:

• be forward-looking and understand how the risks that they face are evolving;
• strike the right balance between being financially sound and avoiding excessive costs;
• reflect, at least annually, on whether their financial resources are adequate for the risks that they face;
• consider the effect of financial depletion and the risk of being unable to cover their costs; and
• plan for the time when they might need to leave the market, so that they do so in an orderly fashion.

A supercomplaint about the loyalty penalty

Citizens' Advice, formerly the Citizens' Advice Bureau, a network of 316 charities that offer free information and advice to people about money, legal, consumer and other problems, issued a supercomplaint (a term from the Enterprise Act 2002) to the Competition and Markets Authority (CMA) in December last year.

The document said that Citizen's Advice had seen consumers suffering from the so-called loyalty penalty. The complaint outlined a number of recommendations, particularly within the mortgage, cash savings and home insurance markets, and the FCA published an update on its work to improve consumer outcomes in these areas. This includes:

• its mortgage market study, with an additional focus on the barriers to customers abandoning a product or service in favor of a competitor's;
• announcing the next steps that it wants to take regarding price discrimination (it will publish a feedback statement or consultation paper by the end of 2019);
• continuing to study pricing practices in the home and motor insurance industries, with an "interim report" due in the summer.

The regulator is also thinking about solving some of the cross-sector problems raised by the supercomplaint, such as:

• a firm’s duty of care to its customers;
• the need to identify vulnerable customers and treat them appropriately;
• fair pricing strategies;
• the continuing part that open finance plays in the industry.

The FCA’s first report on the regulatory perimeter

The regulator has published its first annual report about the regulatory perimeter, outlining:

• the things that the Financial Services and Markets Act 2000 includes, and not includes, in its remit;
• the ways in which it will deal with any problems that emerge to do with the perimeter;
• the effect on consumers; and
• areas where the perimeter may have to be moved by legislation to ensure that it remains firm.

The report identifies three broad problems.

• Consumers do not know how well (or otherwise) they are protected. The FCA is working in partnership with the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) to develop an online disclosure system to inform consumers of the protection available to them. The regulator also wants to talk to firms more often about whether their activities sit within or outside the regulatory perimeter.
• The effect of unregulated activity, which can lead firms to harm consumers and diminish the public's trust in the industry. The report contains many examples and the FCA believes that the Government should extend the regulatory perimeter in certain cases to allow it to protect consumers. These proposals have been put to HM Treasury.
• Rapid changes within firms’ business models and financial markets. The rapid evolution of technology does blur the regulatory perimeter and the regulator is looking at this. It will publish a "call for inputs" regarding open finance later this year.

In a report that it wants to publish next year, the FCA intends to focus on the following three areas.

• The effectiveness with which it discharges its duties in relation to all financial services performed by (and related activity undertaken by) regulated firms.
• The relationship between the FCA's perimeter and the coverage provided by the FOS and the FSCS.
• Whether consumers and firms know where the perimeter lies.

Fines and penalties

Retail banking group fined for failing to report fraud suspicions

The FCA has fined Bank of Scotland £45 million for failing to report its suspicions of fraud in one of its teams and for failing to deal with regulators in an open and co-operative manner.

Suspicions were first aroused in 2007 when it became clear that the unit’s team leader was authorising limit increases and additional lending well beyond his authority. There was no evidence that anybody looked at the team’s actions, nor did anyone at the bank consider the consequences of not reporting these actions to the regulator or to the police.

The bank eventually shared its suspicions with the Financial Services Authority (the FCA's predecessor) in 2009, which promptly involved the Serious Organised Crime Agency. In 2017 a court sentenced two employees for fraud.

Two found guilty of insider dealing

Ms Fabiana Abdel-Malek, a senior compliance person at the London offices of the investment bank UBS AG and Mr Walid Choucair, a close relative of hers and an experienced financial securities trader, have each been sentenced to three years' imprisonment for five offences of insider dealing.

The compliance officer had access to information about potential mergers and acquisitions which she passed to her relative on a pay-as-you-go mobile phone. The pair made a profit of approximately £1.4 million from subsequent dealings.

Unauthorised firms ordered to pay customers restitution

The High Court has approved an order to make two unauthorised firms and their directors hand over their remaining funds to the FCA in order to compensate consumers for their losses as a result of unauthorised investment schemes.

The firms in question raised more than £15 million from 1,000 investors and the FCA took urgent enforcement action to shut the schemes down. The firms only paid out £9.25 million to investors. The recovery order will provide an additional £3.4 million, leaving a shortfall of £2.7 million.

Reviewers appointed to investigate Interest Rate Hedging Products

The FCA has commissioned a "lessons learned review," conducted by independent reviewers, to look at "the Interest Rate Hedging Products redress scheme" (redress is the FCA's word for compensation) and another one to look at the regulation of firms that are involved in a fund (the Connaught Income Fund, Series 1) that the FCA is investigating.

Both reviews will examine the approach, judgements and processes employed by the FSA and, subsequently, will examine the FCA itself. Their findings will be published in full, barring any legal restrictions.

2019/20 fees and levies

Details of the fees and levies required to fund the FCA, the FOS, the Money and Pensions Service (formerly the Single Financial Guidance Body), devolved authorities and the illegal money lending (IML) expenses of HM Treasury, have been published.

The total annual funding requirement (AFR) remains unchanged from the proposals that the FCA published in April, with the overall budget increased by 2.7% to £558.5 million. The Ongoing Funding Requirement (OFR) has also increased by 2%, to £537.7 million.

The clampdown on CFDs

Having cosulted the industry and read the feedback, the FCA is introducing new rules to restrict the sale, marketing and distribution of contracts for differences and similar products to retail investors.

The European Securities and Market Authority (ESMA) has already temporarily restricted the use of these products. To protect consumers from their own inexperience, the FCA has opted to make these restrictions permanent and to extend them to CFD-like products, which expose people to similar risks.

In a similar vein, the FCA has proposed a ban on the sale of derivatives and exchange-traded notes (ETNs) which refer to certain crypto-assets. Again, the aim is to prevent consumers from coming to harm. The regulator believes that consumers are unable to assess the value or risk that these products pose because their prices are extremely volatile.

Credit information market study launched

The FCA has launched a study to find out how the credit information market operates and its effect on consumers.

The regulator is worried about the coverage and quality of the information that firms are reporting to it, the effectiveness of competition between credit reference agencies and the degree to which consumers are involved in the market.

The study will focus on the following areas.

• The purpose, quality and accessibility of information about credit.
• The structure of the market, business models and competition.
• The degree to which consumers are involved in the market, their understanding of the information that they receive about credit and the effect of all this on their behaviour.

Amending the DEPP manual and EG to introduce new obligations for proxy advisors

The EU has revised its Shareholder Rights Directive (SRD II), introducing new obligations for proxy advisors. In response, the FCA has published a consultation paper on the necessary amendments to the decision procedure and penalties manual (DEPP) and associated enforcement guide (EG).

To implement SRD II, Parliament passed the Proxy Advisors (Shareholders’ Rights) Regulations 2019 recently to give the FCA new powers over proxy advisors and they came into force on 10th June. To accommodate these new powers the FCA has to add to DEPP (its Decisions, Procedures and Penalties 'manual') and EG (its Enforcement Guide). The regulator is asking for comments about the changes that it proposes to make and will publish a policy statement in the autumn.

New chairs of the FCA Practitioner Panel and Markets Practitioner Panel announced

Charles Randell, the FCA's chairman, has appointed the new chairs of the regulator's Practitioner Panel and its Markets Practitioner Panel, with the approval of his board and of HM Treasury.

Tulsi Naidu, the chief executive of Zurich in the UK, will chair the Practitioners Panel from 1st August on, having been a member of that panel since 2017. She will take over from Anne Richards, the chief executive officer of Fidelity International.

Nikhil Rathi, the chief executive of the London Stock Exchange, will begin to chair the FCA Markets Practitioner Panel on 1st July. He has been a member of the panel since 2015 and is also a member of the Practitioner Panel.

Finalising the SM&CR

The FCA is still formulating new rules to do with the Senior Managers & Certification Regime (SM&CR) and has published an update about its progress. HM Treasury has to sign a Commencement Order before the FCA can publish those final rules in a policy statement - the regulator's preferred way of issuing new rules nowadays.

Also due to be announced is the date on which the regime is to apply to benchmark administrators.