Financial Guidance and Claims Bill – tougher regulation for Claims Management Companies

Claims’ Management Companies (“CMCs”) offer legal claims and complaint management services to members of the public. Historically, CMCs work to bring large numbers of complaints against financial services companies and recent areas of focus have been PPI and interest rate hedging mis-selling complaints. Whilst some CMCs are reputable, others try to rally business through unsolicited calls/texts and charge high fees, often backed by a policy of “after the event” insurance, for handling complaints that would otherwise be free for counsumers to progress via the Financial Ombudsman Service (“FOS“) .

An independent review into the regulation of CMCs was undertaken and the Government accepted the recommendations outlined as a result of that review.   Importantly, responsibility for regulating CMCs will be transferred to the Financial Conduct Authority (“FCA”). There has been recent progress in this area, as the Financial Guidance and Claims Bill (“FG&C Bill”) was announced in the Queen’s Speech on 21 June 2017. The FG&C Bill is currently at the Committee Stage in the House of Lords. One of the aims of the FG&C Bill is to transfer regulatory responsibility for CMCs to the FCA.

The relevant clauses in the FG&C Bill will:

  • make amendments (by way of secondary legislation) to the Financial Services and Markets Act 2000 (“FSMA”) to enable the FCA to regulate the activity of CMCs as a “regulated activity” under FSMA;
  • give the FCA the power to impose a cap on the fees that CMCs can charge for their services;
  • Include a power for the Ministry of Justice (as current regulator of CMCs) to put into place a transfer scheme for (i) the assets/liabilities of the Claims Management Regulation Unit and (ii) staff, to the FCA; and
  • In addition, provide for the transfer of responsibility for dealing with consumer complaints about CMCs from the Legal Ombudsman to the FOS.

The changes that are due to be implemented under the FG&C Bill are likely to greatly improve the position of consumers, who should no longer be targeted by unsolicited campaigns (because CMCs will be subject to the FCA’s rules on marketing) or be charged steep fees to pursue a financial services complaint due to the proposed fee cap.   For financial institutions, the wave of speculative claims might also decrease. Broadly speaking, regulation of CMCs by the FCA will see a shift away from CMCs focussing on their own profit, towards fulfilling their intended purpose as firms who help consumers to resolve meritorious complaints in a cost effective manner.

However, it is worth noting that the FCA is seemingly not likely to rush the implementation of the new regime and it will take time for the secondary legislation that will supplement FSMA (as referred to in the first bullet point above) to be finalised. Until such time as both of these steps are concluded, CMCs may continue to operate in their present form. This is unfortunate, in light of the recent FCA announcement that the final deadline for making a new PPI complaint will be 29 August 2019, which we discussed in further detail in a blog post in May.   This may well mean that consumers experience significant numbers of approaches from CMCs regarding possible historic PPI policies and claims, as CMCs rush to bring all possible claims ahead of Augsut 2019 deadline.

Regulator takes action to address risky lending practices

On 4 July 2017, the Prudential Regulation Authority (“PRA”) released a statement on consumer credit (“Statement”), following a review of consumer credit lending (“PRA Review”). The review included the examination of PRA regulated firms’ underwriting practices for credit cards, unsecured personal loans and motor finance.   As readers will be aware, there has been a good deal of press coverage regarding concerns over increased consumer lending and the rising average level of household debt.   The fear is that “risky” lending is on the rise,taht  consumers won’t be able to manage their debts if interest rates increase and commission based products could be leading to an increase in the (mis) selling of unsuitable products.

The PRA website confirms that the PRA Review was carried out following “a continued period of material growth in consumer credit, a lowering of pricing and extensions of interest-free offers” and the Statement records the issues which are seen to arise for the PRA regulated firms which provide the consumer credit referred to in the paragraph immediately above.   As set out in the introduction to the Statement, those firms will shortly be contacted by the PRA, with a request that they respond to the Statement and the information provided by them will assist the PRA in determining firm specific supervisory action and will be shared with the Financial Conduct Authority.

What the PRA Review found

In brief, the PRA Review found:

  •  There was evidence of weakness in some aspects of underwriting;
  • The resilience of consumer credit portfolios is reducing due to the combination of continued growth, lower pricing and some increased lending into higher risk segments;
  • Assessment and pricing for risk has been influenced by historically low arrears rates;
  • Firms are not necessarily considering the impact of consumer indebtedness and consumer’s future ability to repay debt when assessing lending risk;
  • There is a large degree of variation between firms in respect of risk management practices and controls in respect of consumer credit products;
  • In respect of credit cards, many firms are attracting new consumers by offering 0% promotional offers. This includes applying the uncertain Effective Rate Accounting standards to those offers. In addition, if the model assumption used by the firm when calculating the offer turns out to be optimistic (because of unpredicted changes in consumer behaviour), that firm could be facing a loss if the offer made was only likely to be marginally profitable;
  • In respect of unsecured personal loans, the rapid reduction in interest rates for consumer lending means that the firms will be left with less income to absorb potential future losses;
  • In respect of motor finance, the fast expansion of Personal Contract Purchase (“PCP”) deals exposes lenders to the risk of the vehicle’s residual value – in PCP deals, lenders offer a guaranteed future value for the vehicle, which is usually in the range of 85% to 95% of the expected future value of that vehicle. This exposes the lender if there is a significant downturn in the used car market.

Issues for PRA Regulated firms

 The PRA Review made it clear that firms are “the first line of defence against the risk of losses on these exposures”.   In light of this, the PRA will be requesting evidence from all firms with “material exposure” to consumer credit as to how they will ensure the following:

  •  That a firm’s credit scoring process adequately captures medium term risk (including consideration as to whether credit scoring models should build in an approach to “new generation” borrowers, who do not have experience of a high interest rate environment);
  • That “stress-testing” approaches do not under estimate potential downturn risk – current arrears multiplier models may be unsuitable and it might be wise to predict the absolute level of arrears in stress when taking a view as to risk;
  • That loss leader segments are to be explicitly reported and monitored;
  • That, at the cut off point for new business, consideration is given as to whether a “prudent add-on” should be applied, meaning that default rates could be higher than provided for by an assumption, before new business becomes loss making;
  • That a consumer’s total level of all debt is be taken into account during the underwriting process;
  • That firms’ risk appetite, MI and governance frameworks are sufficient to oversee consumer credit portfolios;
  • In respect of credit cards and in particular 0% offers, that they can justify the assumptions used when forecasting new business and in particular, how the potential volatility of customer behaviour referred to above will be managed;
  • They can provide evidence of underwriting assessments and pricing of unsecured personal loans which take into account the total amount of debt a consumer has; and
  • In respect of motor finance, the guaranteed future value of a vehicle (as referred to above) is set in a “prudent” manner.

These issues have been summarised from the Statement, the full copy of which can be found here: http://www.bankofengland.co.uk/pra/Documents/publications/reports/prastatement0717.pdf

 What the future holds

In addition to the PRA seeking the evidence outlined above from PRA Regulated firms, The Bank of England will also be bringing forward its assessment of “stressed losses on consumer credit lending in the Bank’s 2017 Annual Cyclical Scenario stress test for the major firms”. In addition, the PRA will work with firms who have high exposure to consumer credit but were not captured by the Annual Cyclical Scenario stress test to review firm’s resilience to the 2017 stress scenario and to provide appropriate feedback to firms.

The risk here is that, if firms do not address the issues highlighted in the PRA Review and the Statement, they are potentially engaging in risking lending practices.   This could leave them open to claims from consumers in negligence and/or for breach of contract, should consumers encounter difficulties with their borrowing and allege that they should not have been sold the consumer credit products they have entered into. In addition, consumers may be left with risky products which they cannot afford to repay in the future. And there is the possibility of regulatory investigaiton and disciplinary actions

Firms should therefore look to comply with PRA requests for evidence and should ensure that they have considered how to comply with the issues outlined in the Statement, as summarised under the heading “Issues for PRA Regulated firms” above.

 

SFO appears safe for now after proposed merger with the National Crime Agency omitted from Queen’s Speech

The UK Government appears for the time being at least to have scrapped plans to merge the Serious Fraud Office (“SFO”) with the National Crime Agency (“NCA”). The controversial proposal to abolish the SFO did not feature in the Queen’s Speech, suggesting that it has been put on the back burner following the failure of Prime Minister Theresa May to gain an overall majority following the recent General Election.

The proposal to combine the SFO with the NCA was previously met with disapproving comment from many who suggested that it would damage the UK’s reputation in fighting fraud and corruption. The apparent decision to drop the proposal also comes just after the announcement that the SFO has charged Barclays Bank and four of its former executives with conspiracy to commit fraud and the provision of unlawful financial assistance.

The apparent change in the Government’s plan and the latest charges against Barclays may prove a lifeline for the SFO, particularly now that its powers continue to gain some traction. However, this is not the first time the Government has tried to abolish the SFO and, whilst the charges against Barclays go in its favour, it may still have to work hard to keep its place as a prosecuting authority. A senior official has said that the Government continues to “review options”. Nevertheless, the recent hefty settlements with Rolls-Royce and with Tesco highlight the progress the SFO is now making and it could be that the options being reviewed shift from abolition to funding.

Retailers Consortium v MasterCard – an update on ongoing MIF litigation

Background

Our previous blog piece (20 September 2016) described how, in 2007, the EU found that MasterCard’s Multilateral Interchange Fees (“MIFs“) were unfairly high. This decision was applicable to cross-border transactions using MasterCard and Maestro cards in the European Economic Area (“EEA“). The finding was that Mastercard’s MIF breached Article 101 of the Treaty on the Functioning of the European Union (“TFEU“) because they restricted competition between retailers’ banks and inflated the cost of card acceptance by retailers.

On 14 July 2016, Sainsbury’s was awarded £68.5 million plus interest by the Competition Appeal Tribunal in a decision which stated that Mastercard had restricted competition by setting fees on card transactions in the UK.

2017 decision by Mr Justice Popplewell

Interestingly, it was reported back in March that MasterCard had won a High Court legal battle brought by a group of twelve retailers which included Asda, New Look and Morrisons, in respect of MIFs. The retailers were relying on the European Commission decision from 2007 (outlined above) which was upheld in 2014.

The retailers’ case against MasterCard was based upon MIFs in three relevant territories: (i) transactions in the UK (UK cardholders at UK retailers) (ii) transactions in Ireland (Irish cardholders at Irish retailers) and (iii) cross border transactions (in the UK and Ireland by EEA cardholders). The retailers argued that, over the last ten years, they had spent approximately £437 million on MIFs. The Court was being asked to consider whether the MIFs set by MasterCard for debit and credit transactions in the relevant period, in respect of the three relevant territories outlined above, were anti-competitive in breach of UK, Irish and EU competition law.

In line with the European Commission ruling, Mr Justice Popplewell sitting in the High Court did consider that MIFs, in isolation, were anti-competitive. However, Mr Justice Popplewell went on look at the wider position – specifically, to consider the commercial impact on MasterCard if they set their MIF at zero. In this scenario, would MasterCard have survived in the face of competition from the Visa regime? Mr Justice Popplewell thought it likely that if MasterCard had a zero MIF and Visa’s MIFs were set at their actual levels, card issuing banks would have taken their business to Visa (and clearly, a Visa monopoly would be no better for consumers and no less anti-competitive).

In light of the above, Mr Justice Popplewell considered the MasterCard’s MIFS were necessary for the functioning of its payment system, describing them as “objectively necessary as an ancillary restraint“. Paragraph 44 of Mr Justice Popplewell’s judgment discusses the ancillary restraint doctrine, which can essentially operate to take a practice outside of the Article 101 TFEU prohibition in a situation which is predominantly “pro-competitive” but “has as one of its constituent parts what would be a restraint on the autonomy of the parties if considered in isolation“.

In addition, Mr Justice Popplewell did not consider there was any restriction of competition because, had MasterCard had a zero MIF, it would not have survived in the market. It was not appropriate to think that in the scenario of MasterCard operating a zero MIF, Visa would only have been able to operate at lower rates also.

The Future?

The decision of Mr Justice Popplewell is certainly likely to impact upon the ongoing class action brought by Walter Merricks CBE on behalf of some 46 million consumers, as discussed in further detail in our last blog piece. It seems far less likely that the consumer class action will be successful in the UK in light of the latest decision in the MasterCard litigation.

 However, MasterCard’s request to appeal the judgment in the Sainsbury’s case was refused on 22 November 2016, therefore despite Mr Justice Popplewell’s recent ruling; the decision in the matter of MasterCard and Sainsburys (which cost MasterCard some £68.5 million) is unlikely to be reversed.

 

SFO win a reminder of the limits of privilege in internal investigations

In May the Serious Fraud Office persuaded a High Court judge to order Eurasian Natural Resources Corporation to hand over internal investigation documents it had claimed were privileged. The decision brings back into focus the vexed question of which documents produced in corporate internal investigations can be withheld in subsequent regulatory investigations and prosecutions. Continue Reading

Long awaited certainty on cut-off for PPI claims

In a previous blog post, we discussed how the Financial Conduct Authority (“FCA“) was backing a call by the banks for the introduction of a two year cut-off for PPI claims.

Deadline

The FCA has now announced that the final deadline for making a new PPI complaint will be 29 August 2019.   Andrew Bailey (Chief Executive of the FCA) commented that “putting in place a deadline and campaign will mean people who were potentially mis-sold PPI will be prompted to take action rather than put it off. We believe that two years is a reasonable time for consumers to decide whether they wish to make a complaint“. Continue Reading

Subject access requests likely to increase in customer disputes?

Financial institutions often receive a subject access request made under the Data Protection Act 1998 (“SAR”) from individual customers as pre-cursor to a formal complaint or a legal claim.

That is because a SAR enables the customer to access a significant amount of information held by the organisation about him or her. A customer can thereby access potentially sensitive information, effectively by way of advance disclosure at minimal cost which can then enable a customer to build a legal case against the institution.

SARs cannot be ignored and must be responded to promptly and in any event within 40 days of receipt.

In the recent case of Dawson-Damer v Taylor Wessing LLP, the Court of Appeal made three important points about SARs:

  • A SAR will be valid and must be responded to even if a collateral purpose is to obtain information for the purposes of litigation.
  • The exemption in the Data Protection Act 1998 (DPA) that allows data controllers to withhold material that is subject to legal professional privilege does not extend to other protected information, such as information that can be withheld under trust law principles. .
  • It is not necessary to supply personal data in response to a SAR if to do so would involve disproportionate effort (section 8 (2) of the DPA). The Court said that assessing proportionality includes looking at the work needed to find the relevant personal data and then to produce copies.

The final point is likely to be welcomed by financial institutions facing broad and unreasonable SARs. But other aspects of the decision are not so helpful and we may see an up-tick in individuals using SARs in disputes, directing the SAR to both counterparties and their solicitors.

Squire Patton Boggs appointed to FCA/PRA Skilled Person panel

“Skilled Person” reviews under section 166 of FSMA have become a major feature of the financial services regulatory landscape in recent years. FCA figures show that 51 reports were commissioned in 2016 alone, up from 47 in 2015. Under FSMA the regulators have wide powers to require financial services firms to commission skilled person reports into almost any aspect of the firm’s business.

Following a thorough tender process Squire Patton Boggs has been appointed as one of only three law firms on the regulators’ panel of organisations approved to conduct skilled person reviews on financial crime issues (Lot E of the panel). We have demonstrated to the FCA that we have the skills, experience and expertise to conduct reviews on all aspects of financial crime including market abuse, anti-money laundering, anti-bribery and corruption, third party payments, market manipulation, insider trading, and governance of these areas. The revised skilled person panel went live on 1 April 2017, and will run for four years.

Firms can sometimes view the appointment of a skilled person as a negative development and potentially a stepping stone into the FCA enforcement process. But our general experience is that if proactively managed (both by the firm, its advisers, and the skilled person) a s.166 review can be a positive exercise in identifying and resolving areas for improvement in a collaborative way with FCA supervisors. Where it is approached in the right way, enforcement action following on from a skilled person report is actually much rarer than firms might think.

We are looking forward to working with the regulators and firms involved in skilled person reviews during the life of the panel. If you are facing a s.166 skilled person review or would like to discuss the panel and how we can help clients in a regulatory process, please don’t hesitate to get in touch.

Supreme Court confirms London Whale notices did not identify Achilles Macris

In a previous blog I described how the FCA is facing a number of challenges from individuals complaining that they are identifiable from regulatory notices addressed to their employers. By way of recap, under section 393 of the Financial Services and Markets Act 2000 (“FSMA“), individuals are granted third party rights, meaning that if an FCA notice identifies and is prejudicial to someone other than the person to whom it is given, a copy of the notice should be given to them.  Continue Reading

Insurers, professionals and lenders: two Supreme Court decisions in one day

AIG Europe Limited v Woodman and others [2017] UKSC 18

Supreme Court clarifies the correct interpretation of the aggregation clause contained in the Solicitors’ Minimum Terms and Conditions of Insurance (“MTC”) in what will be considered a partial victory for insurers. Continue Reading

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