CONSUMER CREDIT - preparing for FCA supervision. Bill McCaffrey and Simon Morris CMS Cameron McKenna. 18 June 2013

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1 CONSUMER CREDIT - preparing for FCA supervision Bill McCaffrey and Simon Morris CMS Cameron McKenna 18 June

2 1. Journey to the FCA Bill McCaffrey 2. FCA regulation of Consumer Credit The practical impact and getting ready Simon Morris 2

3 Journey to the FCA Bill McCaffrey CMS Cameron McKenna LLP 18 June 2013

4 Initial consultation Journey to the FCA FSA October 2012 High level proposals for an FCA regime for consumer credit FSA March 2013 A new approach to financial regulation HMT March 2013 The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013 Financial Services Act 2012 (Consumer Credit) Order

5 Transfer to the FCA One single body regulating all retail financial services Ensure markets function well Promote effective competition in interests of consumers Secure appropriate degree of protection for consumers Protect and enhance the integrity of UK financial system 5

6 The FSMA Model Rule making complimented by high level requirements and principles Authorisation robust scrutiny at gateway to market Approved persons scrutiny of key individuals Supervision monitoring and provision of information Enforcement action against firms and individuals 6

7 Authorisation Authorisation to replace current licensing system If carrying on a credit-related regulated activity, must be authorised or exempt Tougher scrutiny meet and continue to meet threshold conditions Ensure appropriate systems, controls and individuals in place Ability to carry or remove permission or place requirements 7

8 Interim permissions Any person holding current OFT licence will be granted an interim permission if: notify FCA of wish to obtain pay fee ( 350 unless sole trader, in which case 150) Expect to apply Autumn/Winter 2013 If application not made cannot carry out regulated activity If want to carry out activity for which not licensed must apply for full authorisation Will remain in effect until 1 April 2016 or other date set by FCA May not act as principal for appointed representative in relation to an activity for which hold an interim permission Supervision to be event driven and issues based 8

9 Tiered approach to authorisation Tier 1 Core credit model high risk: lenders must meet all threshold conditions Tier 2 Limited permissions regime lower risk: credit provision is secondary to core activities less onerous and tailored to business Appointed representatives principal accepts responsibility for regulated activities may obtain authorisation and operate as an appointed representative 9

10 Threshold Conditions Threshold Conditions Explanation Location of offices If the firm is a body corporate constituted under UK law, the firm s mind and management, e.g. directors, compliance function, audit function, should be in the UK. Effective supervision A firm must be capable of being effectively supervised by the FCA, including the complexity of its regulated activities, products, and how the business is organised. Appropriate resources The firm must demonstrate appropriate financial resources, nature and scale of the business and skills and experience of those managing the firm s affairs. Suitability Business model The firm must demonstrate the competence and ability of management, and that the firm s affairs are conducted in an appropriate manner regarding the interests of consumers and the integrity of the UK financial system. The firm s strategy for ongoing business must be suitable for its regulated activities, having regard to the FCA s operational objectives. 10

11 Approved persons Need to have right people in important roles Detailed proposals in September 2013 Controlled functions/significant influence functions Approval needed before individual can perform Consider fitness and propriety, including competence and capability 11

12 Conduct standards General principles for business ( PRIN ) Systems and controls rules ( SYSC ) General provisions ( GEN ) Conduct Standards Rules OFT guidance CCA conduct provisions Industry codes 12

13 Principles for business The Principles for Businesses Integrity Skill, care and diligence Management and control Financial prudence Market conduct Customers interests Communications with clients Conflicts of interest Customers: relationships of trust Clients assets Relations with regulators A firm must conduct its business with integrity. A firm must conduct its business with due skill, care and diligence. A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk-management systems. A firm must maintain adequate financial resources. A firm must observe proper standards of market conduct. A firm must pay due regard to the interests of its customers and treat them fairly. A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading. A firm must manage its conflicts of interest fairly, both between itself and its customers and between a customer and another client. A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely on its judgement. A firm must arrange adequate protection for clients assets when it is responsible for them. A firm must deal with its regulators in an open and co-operative way, and must disclose to the FCA appropriately anything relating to the firm of which the FCA would reasonably expect notice. 13

14 Rules etc. SYSC examples Must have robust governance arrangements Must keep sufficient business records to allow compliance monitoring Must employ personnel with necessary skills, knowledge and expertise Gen examples Rules on statutory disclosure on customer correspondence Ban on insurance against financial penalties Firms may not pay financial penalties imposed on employees/directors Where rules cannot be replicated under FCA they will be retained in CCA. OFT guidance will be turned into FCA rules. 14

15 Financial Promotions Proposal to replace CCA advertisements regime May have significant impact on additional costs increased scrutiny Consulting Autumn

16 Enforcement Powers significantly greater than those available to OFT. Will include: Investigatory: make people answer questions and provide documents obtain warranty to enter and search Civil, criminal and disciplinary withdraw authorisation and approval stop individuals working in financial services publicly censure unlimited fines freeze assets restitution orders 16

17 FCA REGULATION OF CONSUMER CREDIT The practical impact and getting ready Simon Morris June

18 Looking at... 1) The view from the FCA 2) The FCA policy a) Approach, culture & supervision b) What it means for consumer credit firms 3) The rationale for change 4) The FCA agenda for consumer credit 5) 10 key changes 6) 10 steps for a firm to take 7) The longer outlook 18

19 1) The view from the FCA Renamed FSA with reduced scope Must act compatibly with strategic objective ensuring markets function well Consumer protection appropriate degree, proportionate to risk and customer skills bearing in mind customer responsibility Integrity protecting & enhancing integrity of UK financial system Competition promoting effective competition in the interests of consumers Taking a more pro-competition approach to regulation Still thinking but will take bold and wide reaching action Will challenge providers on value for money Market dominance; weak consumer engagement bundled/inertia 19

20 2) The policy... The Journey to the FCA 1. This is our opportunity to reset conduct standards 2. The six retail TCF outcomes remain core 3. Ensuring fair treatment of consumers through CCA regulation The FCA is considering eight success measures 1. Successfully intervening earlier 2. Dealing quickly and effectively with crystallised risks

21 Elements of the policy approach We built ever more rules and guidance about how to build a compliant process. It was robotic. Too captured by the interests of firms. What we did too little was look at outcomes, so not ask was the sale compliant?, but did it achieve a good outcome?... And that is why the FCA is looking not just at systems and processes, but asking serious questions about major moral hazards like buyer beware or caveat emptor. Martin Wheatley April

22 Elements of the policy culture Our approach today is to draw conclusions about culture from what we observe about a firm in other words, joining the dots rather than assessing culture directly. This can be through a range of different measures such as how a firm responds to, and deals with, regulatory issues; what customers are actually experiencing when they buy a product or service from front-line staff; how a firm runs its product approval process and the considerations around these; the manner in which decisions are made or escalated; the behaviour of that firm on certain markets; and even the remuneration structures. Clive Adamson April

23 Elements of the policy supervision Our forward-looking assessment of a firm s conduct risks will be undertaken by the new Firm Systematic Framework (FSF). This is designed to answer the key question of Are the interests of customers and market integrity at the heart of how the firm is run? and will involve: analysing firms business models and strategies so we are able to form a view of the sustainability of the business from a conduct perspective and where future risks might lie; and an assessment of how the fair treatment of customers and ensuring market integrity is embedded in the way in which the firm runs its business, from the tone from the top through how culture is embedded across the firm, to how the firm manages and controls its risks Clive Adamson March

24 So welcome to the mainstream... Where 1) Disclosure is not enough 2) Outcomes matter 3) Culture is important 4) Show me is essential a) How do you manage remuneration & incentives? b) Why is your product or service positively valuable? c) How do you achieve compliant distribution? 5) Your business model is scrutinised a) What makes your money? b) Do we approve? 24

25 3) Why? The rationale for change Fundamental overhaul of regulation is now due. We need a system able to flex to keep pace with a fast-growing, innovative market; with the powers and resources to protect consumers from actual and potential detriment, that puts a proportionate and manageable regulatory burden on business; and which delivers a well-functioning consumer credit market, which ensures that consumers have access to the credit they need and supports the sustainable growth of the UK economy. => Flexible not fixed; fully resourced; alert to potential detriment 25

26 And therefore... The FCA will protect consumers police the gateway more thoroughly to ensure that firms entering the market meet appropriate standards; be proactive and forward-looking in identifying risks to consumers; approve individuals in influential roles in firms; make rules to tackle actual and potential consumer detriment; use its wide enforcement powers to tackle bad practice, illegal lending and drive up standards through credible deterrence; and ensure that consumers have access to redress if things go wrong. => Rules for firms & individuals, judgemental, enforcement & redress 26

27 4) The FCA agenda for consumer credit Nothing in FCA Risk Outlook; little in FCA Business Plan. But Consumers are not sufficiently protected from harm in this market. To be effective, regulation must also keep pace with a rapidly changing and growing credit marketplace. The Government wants to ensure that the consumer credit regulatory regime is equipped to deliver more robust consumer protection in the future. Where detriment does occur, the regulator will take strong and effective action, including enforcement action. A New Approach to Financial Regulation March 2013 stricter, more intrusive & dynamic 27

28 5) Ten key changes 1. Some specific changes financial promotions 2. Some reserve powers product intervention 3. Business reviewed through a competition focus 4. A higher hurdle after interim authorisation 5. Frequent policy initiatives 6. Active supervision 7. Subject to Principles for Business 8. Ability to require past business reviews 9. Reality of enforcement 10.Senior management subject to individual approval 28

29 6) Ten steps for you to take 1. Map risks from nose to tail 2. Ensure they are managed senior management responsibility 3. Get full MI and act on it 4. Review your business from a TCF perspective 5. Follow the FCA policy initiatives, cases and speeches 6. Prepare for active supervision be orderly and transparent 7. Consider the governance of how you operate 8. Think how will this look to an intrusive and judgemental FCA? 9. Think competition 10.Ensure comprehensive competence at all levels 29

30 7) The outlook 1. Continuity of substantive rules for 3 to 5 years 2. Significant change in delivery from 2014 accelerating after 2016 Supervision Manufacture of policy Creation of campaigns Highlighted by enforcement action 3. Imposition of senior management responsibility 4. After conversion of statute to rules 30

31 Any questions? 31