Client Briefing: Compliance, Conduct and Risk Bulletin October 2015

1. Accidental landlords could waive rights 

The Financial Conduct Authority has said that lenders could take legal advice on whether a borrower waiver would allow them to lend to so-called consumer landlords on commercial terms.

Lorna O'Brien, mortgage sector technical specialist at the FCA, was not able to give guidance on where the liability would lie if a consumer buy-to-let borrower subsequently regretted their decision to waive their right to consumer protection under MCD. But she said that the lender would need to be satisfied that the buy-to-let loan was being taken for business purposes.

A statement from the FCA said: "A creditor cannot rely on this declaration if it, or anyone acting on its behalf, knows or has reasonable cause to suspect that the agreement is not entered into by the borrower wholly or predominantly for the purposes of a business. It would be for a firm to determine how it establishes a ‘reasonable cause'."

2. 71% of brokers not ready for MCD regulation 

Research by Clever Lending, the secured loans master broker, has found that seven out of ten intermediaries are not ready for the Mortgage Credit Directive (MCD). The regulatory changes become effective on 21 March 2016 although firms are able to start adopting the rules from this week. However, 55 per cent of brokers surveyed were said they were aware of the new regulations indicating a need for more communication across the industry about the MCD.

When asked if they had started to prepare for the changes, 71 per cent said ‘No’, meaning that with just seven months to go to the new regulation deadline, there is still a lot of work to be done in the broker market for them to be ready and knowledgeable for their clients.

Clever Lending said: “The survey results confirm what we have feared all along, that with the clock ticking it’s even more essential that the secured loans sector needs to provide the education and training required to deliver MCD through the broker network.

“We also have to remember the end user in this scenario, the customer, and provide assistance for brokers to make them fully aware of the new requirements as they apply for loans early in 2016. Handling pipeline cases will be key in this and very clear messages will need to be produced across the industry.”

3. Advisers over-relying on tech

Some advisers have placed an over-reliance on point of sales technology rather than considering customer needs when giving advice, The Financial Conduct Authority has said. Speaking at the Association of Short Term Lenders Conference 2015 yesterday the FCA's mortgage sector technical specialist Lorna O'Brien was talking through the FCA review ‘Embedding the Mortgage Market Review: Advice and Distribution', which found that 3% of sales from advisers resulted in an unsuitable recommendation, 59% were suitable, but in 38% of cases the regulator was unable to determine whether the mortgage advice was suitable or not.

O'Brien said: "Some firms placed a heavy reliance on point of sale technology application systems which actually didn't give them any flexibility to consider customers' specific needs or to apply judgement.

Some firms delivered advice with little or no structure, so advisers didn't have sufficient understanding of the customers' needs and circumstances on which to base their recommendations.

"The best performing firms in our sample, which did include both lenders and intermediaries, demonstrated that it is possible to do both and strike a balance using structured processes so that advisers could obtain relevant information about customers' needs but also to allow them to apply their judgement and expertise to provide suitable recommendations."

O'Brien added: "We have asked some of the firms to make specific improvements and we will be working with the industry to further help ensure firms are delivering suitable recommendations."

4. Financial Conduct Authority (FCA) Publishes New Rules on Whistleblowing

The rules are designed to build on and formalise examples of good practice already found in parts of the financial services industry and aim to encourage a culture in which individuals working in the industry feel comfortable raising concerns and challenge poor practice and behaviour.

The rules on whistleblowing, which take full effect in September 2016, apply to deposit-takers (banks, building societies, credit unions) with over £250m in assets, and to insurers subject to the Solvency II directive; they are non-binding guidance for all other firms we supervise.

• Appoint a Senior Manager as their whistleblowers’ champion
• Put in place internal whistleblowing arrangements able to handle all types of disclosure from all types of person
• Put text in settlement agreements explaining that workers have a legal right to blow the whistle
• Tell UK-based employees about the FCA and PRA whistleblowing services
• Present a report on whistleblowing to the board at least annually
• Inform the FCA if it loses an employment tribunal with a whistleblower
• Require its appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service

The FCA has in recent years taken a number of steps to encourage whistleblowers to come forward to the organisation, including conducting a detailed review of its whistleblowing procedures and increasing the resources dedicated to the area. The FCA has seen an increase in the number of reports it receives; for example, there were 1340 whistleblowing disclosures recorded for financial year 2014/15 against 1040 in 2013/14 (28% increase). In the financial year 2007/08 the then Financial Services Authority received only 138.

5. Are consumers being treated fairly in relation to unauthorised transactions?

Consumers are protected in the event of fraudulent or other unauthorised transactions by provisions in the Payment Services Regulations 2009 (PSRs), the Consumer Credit Act 1974 (CCA).

The Financial Conduct Authority (‘FCA’) has been carrying out investigations to discover whether consumers are being treated fairly in relation to these unauthorised transactions.

This review was deemed necessary as even though consumers are aware that there are protections in place where an unauthorised transaction has taken place, they do not always know how the protections apply to them and tend to make assumptions about what their basic rights are. Before the review was undertaken it was also identified by the FCA that consumers face obstacles when remembering multiple PINs and/or passwords in relation to their account, which may lead to them storing or sharing them.

The work of the FCA focused on current accounts and credit cards, as these are core services used by consumers to undertake day-to-day transactions.

The review was carried out in order to ascertain whether the protections in place are operating as effectively as they should be, including ensuring that the requirement to provide a refund in the event of fraud or other unauthorised transactions is adhered to.

Through this thematic review, the FCA has found that firms are generally meeting their legal requirements. Firms were found to be making an effort to deliver fair outcomes for their customers, tending to err on the side of the customer when reviewing claims.

The FCA found no evidence of firms declining claims on the basis of customer ‘non-compliance’ with prescriptive security requirements in the terms and conditions.

Some issues were highlighted by the FCA regarding some of the content of account terms and conditions, and they found some fairly minor problems around how some firms organise their decision making. For example, there was sometimes a lack of clear policies for complex cases and a heavy reliance in a small number of firms on in-experienced staff.

Overall however, the FCA made a general finding that firms seem to be trying to balance the need to consider claims on a case-by-case basis with consistent decision making.

Find out more: Financial Conduct Authority Thematic Review