Tag: FCA

The Fall Of Pay Day?

There have been some interesting developments in the short-term lending market in the UK recently.  The Financial Conduct Authority in the UK recently published data on the so called high-cost short-term credit (HCSTC) market.  HCSTC loans are unsecured loans with an annual percentage interest rate (APR) of 100% or more and where the credit is due to be repaid, or substantially repaid, within 12 months. In January 2015, The FCA introduced rules capping charges for HCSTC loans.

Just over 5.4 million loans originated in the year to 30 June 2018, and that lending volumes have been on an upward trend over the last 2 years. Despite some recovery, current lending volumes remain well down on the previous peak for this market. Lending volumes in 2013, before FCA regulation, were estimated at around 10 million per year.

These data reflect the aggregate number of loans made in a period but not the number of borrowers, as a borrower may take out more than one loan. They estimate that for the year to 30 June 2018 there were around 1.7 million borrowers (taking out 5.4 million loans).

The market is concentrated with 10 firms accounting for around 85% of new loans. Many of the remaining firms carry out a small amount of business – two thirds of the firms reported making fewer than 1,000 loans each in Q2 2018.

For the year to 30 June 2018, the total value of loans originated was just under £1.3 billion and the total amount payable was £2.1 billion. Figure 2 shows that the Q2 2018 loan value and amount payable mirrored the jump in the volume of loans with loan value up by 12% and amount payable 13% on Q1 2018.

The average loan value in the year to 30 June 2018 was £250. The average amount payable was £413 which is 1.65 times the average amount borrowed. This ratio has been fairly stable over the past 2 years. A price cap introduced in 2015 stipulates that the amount repaid by the borrower (including all charges) should not exceed twice the amount borrowed. 

Over the past 2 years the average Annual Percentage Rate (APR) charged for HCSTC has been consistent, hovering around 1,250% (mean value). The median APR value is slightly higher at around 1,300%. Within this there will be variations of APR depending on the features of the loan. For example, the loans repayable by installments over a longer period may typically have lower APRs than single installment payday loans.

In the UK, the North West has the largest number of loans originated per 1,000 adult population (125 loans), followed by the North East (118 loans). In contrast, Northern Ireland has the lowest (74 loans).

Borrowers between 25 to 34 years old holding HCSTC loans (33.4%) were particularly over-represented compared to the UK adults within that age range (17.5%). Similarly, borrowers over 55 years old were significantly less likely to have HCSTC loans (12.2%) compared to the UK population within that age group (34.8%). The survey also found that 60% of payday loan borrowers and 45% for short-term installment loans were female, compared with 51% of the UK population being female.   

61% of consumers with a payday loan and 41% of borrowers with a short-term installment loan have low confidence in managing their money, compared with 24% of all UK adults. In addition, 56% of consumers with a payday loan and 48% of borrowers with a short-term installment loan rated themselves as having low levels of knowledge about financial matters. These compare with 46% of all UK adults reporting similar levels of knowledge about financial matters.

But now the top PayDay lenders are out of business. In August 2018, Wonga, once the biggest payday lender in the UK collapsed and now administrators for the lender have revealed that 389,621 eligible claims have been made since Wonga’s demise. Despite being vilified for its high-cost, short-term loans, seen as targeting the vulnerable, it became a household name and was enormously successful until stricter regulation curtailed its, and other payday loan companies’, lending.

It collapsed in the UK following a surge in compensation claims from claims management companies acting on behalf of people who felt they should never have been given these loans. So far, the compensation bill is £460m, with the average claim £1,181.

Another lender, The Money shop closed earlier this year.

Now QuickQuid, UK’s largest payday lending firm is to close with thousands of complaints about its lending still unresolved. QuickQuid’s owner, US-based Enova, says it will leave the UK market “due to regulatory uncertainty”.

QuickQuid is one of the brand names of CashEuroNet UK, which also runs On Stride – a provider of longer-term, larger loans and previously known as Pounds to Pocket. The UK’s Financial Ombudsman Service said that it had received 3,165 cases against CashEuroNet in the first half of the year. It was the second most-complained about company in the banking and credit sector during that six months.

Back in 2015, CashEuroNet UK LLC, trading as QuickQuid and Pounds to Pocket, agreed to redress almost 4,000 customers to the tune of £1.7m after the regulator raised concerns about the firm’s lending criteria.

More than 2,500 customers had their existing loan balance written off and more almost 460 also received a cash refund. (The regulator had said at the time that the firm had also made changes to its lending criteria.)

“Over the past several months, we worked with our UK regulator to agree upon a sustainable solution to the elevated complaints to the UK Financial Ombudsman, which would enable us to continue providing access to credit,” said Enova boss David Fisher.

“While we are disappointed that we could not ultimately find a path forward, the decision to exit the UK market is the right one for Enova and our shareholders.”

So this could be the twilight of the PayDay industry in the UK, as better education, and other lending options, plus tighter regulation bite.

Meantime in Australia its worth reflecting that proposed changes to SACC loans here (Small Amount Credit Contracts) have not progressed despite an earlier investigation, and we will be talking about the impact of this inaction in a later post.

Given the pressures on households here, we are concerned that more will reach for short term loans to tide them over, despite the high costs and risks from repeat borrowing, all made easier still via the proliferation of online portals. The debt burden on households is high and rising.

Price Discrimination In the Savings Market

We discuss the UK’s FCA report into the savings market

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Link to the FCA report.

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Banking Strategy
Banking Strategy
Price Discrimination In the Savings Market



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The Savings Market Is Not Working

One of the critical issues which is hardly discussed in the media is that fact that many savers have funds in accounts which are paying very low rates of interest, when in fact there are better deals available. This little guilty secret allows banks to pump up their margins, offer highly attractive rates to capture new customers then milk them down stream.

Paying lower interest rates to longstanding customers is a long-running pricing strategy used by firms around the world, and gets almost NO coverage.  Its a blatant example of “price discrimination” which occurs when providers offer different prices to different customers that have the same costs to serve but different willingness to pay.

But now the UK’s Financial Conduct Authority has released a discussion paper on the problem, which we also see here in Australia. They believe this is unlikely to change without further intervention. They propose a solution which we think might be worth looking at here too.  So today I am going to look through their report, and discuss the issue in depth.

Many savers (yes there are still some with money in the bank despite the debt bomb), have their hard earned funds sitting in low interest paying accounts.  Their research shows that 33% of the £354bn easy access savings account balances in savings accounts in the UK have been in accounts for more than 5 years, and that on average longstanding customers received on average 0.82% less than accounts opened more recently. A similar trend is also reported in the £108bn investment savings account, where again longstanding customers received on average 0.87% lower.

They call out the high level of consumer inertia in the cash savings market, with only 9% of consumers switching in the last 3 years. Their research also highlights that providers have multiple easy access products, leading to confusion for consumers, and large personal account providers have a competitive advantage over smaller providers.

So they has initiated a discussion about what should be done in the UK to improve outcomes for customers.

They say that consumers are put off switching by the expected hassle; large, well-established personal current account providers are able to attract most savings balances despite offering lower rates; and there is a lack of product transparency.

In fact this is the latest in a series of interventions which the FCA has been look at since 2015. They initially trialed

  • A switching box: provided to customers periodically, setting out the potential financial gains from switching. This would prompt customers to consider their choice of account and provider.
  • RSF: a simple ‘tear-off’ form and pre-paid envelope which would enable a customer to switch to a better paying account offered by their existing provider more easily (internal switching).

Neither worked that well, though the second, a simple tear-off form was a little more effective.

They also tried what they called a sunlight remedy for 18 months in 2015-16. In this trial, they asked firms to provide data on the lowest possible rate that customers could earn across all their easy access savings accounts and easy access cash ISAs. This was split into on-sale and off-sale accounts and branch and non-branch accounts. They released the data over 12 months, via publications. However, they found that the trial did not have a clear, measurable impact on providers’ rate setting strategies. There may be several reasons for this, including that the rates published did not always accurately reflect the rate being paid to most customers.

In the current paper they describe some of the other options they considered, including a complete price discrimination ban on easy access cash savings products. This would involve firms being required to offer single interest rates for all easy access cash savings accounts and easy access cash ISAs, irrespective of the length of time the account has been open.

Banning price discrimination would address the harm against longstanding customers. Under this approach, providers would be unable to offer different interest rates based on age of account. Longstanding customers would have the most to gain from this approach as they are likely to see an increase to their interest rates. Furthermore, customers would not have to take any action to be put on to the same rate as new customers.

It would also increase transparency as providers would be unable to obfuscate prices by making interest rates for all customers clear. This would make it easier for customers to understand and compare their interest rate. It would therefore be beneficial for competition as it would make it easier for customers to shop around for a potentially better value product with an alternative provider.

It may be beneficial for smaller providers with smaller back-books as it would not affect them as much as providers with larger back-books. Smaller providers would therefore be able to continue to offer higher rates than large providers, attracting customers.

This would make it easier for small firms to attract new balances and thus expand. The increased transparency adds to this effect as customers would be able to compare rates more easily and understand how different providers treat their customers.

However, the FCA says that although they have not performed any detailed modelling of this potential remedy, they believe that the unintended consequences of this approach could be significant and may outweigh the intended benefits. First, retail deposits make up a vital part of providers’ funding strategies, with 87% of funding generated by customer deposits (either current accounts or savings accounts).

This approach is, therefore, likely to have an adverse impact on funding models. It would significantly decrease flexibility and reduce providers’ ability to alter their pricing strategies to manage their funding  requirements, ie by either shedding or attracting deposits. They
consider that this could lead to significant unintended consequences. They, therefore, believe that a less restrictive option would be more proportionate relative to the harm. Secondly, the impacts may be offset by significantly reducing front-book interest rates across the board, particularly for larger providers. This is because providers may find it too costly to increase interest rates on all back-book accounts. This may reduce the benefits of shopping around for more active customers who wish to remain with a larger provider.If the customer knows they are getting the best internal rate, there may be less of an incentive to shop around at all. If fewer customers shopped around, this may have the effect of further entrenching the power of the incumbents.

So, instead, they suggesting the introduction of a basic-savings-rate (BSR).
The BSR would involve providers applying single interest rates (BSRs), respectively, to all easy access cash savings accounts and to all easy access cash ISAs which have been open for a set period of time (for example, 12 months). Individual providers could decide the level of their BSR, and would be able to vary it. Providers would remain able to offer different interest rates to customers in the period before the BSR applies (the front-book).

The BSR option that they have modelled is based on providers having broadly 3 groups of customers:

  • front-book customers who opened their accounts less than 1 year earlier
  • mid-book customers who opened their accounts between 1 and 2.5 years earlier
  • back-book customers who opened their accounts over 2.5 years earlier

They suggest that consumers could gain £300m per year –  (actually a range of £150m – £480m)

This is a net transfer from firms to customers, taking into account the ‘waterbed effect’ between the different customer groups. They envisage that a BSR could apply to an account after it has been open for a specified length of time. Providers would retain the freedom to offer a full range of easy access products to front-book customers (ie on accounts before the BSR applies) and would also be free to offer the BSR to front-book customers.

They envisage that a BSR could apply to all banks and building societies that offer easy access cash savings accounts and easy access cash ISAs. Credit unions were excluded from the scope of the CSMS as most products they offer could not be substituted for others. Most credit unions offer a dividend rather than an advertised interest rate on their savings. This dividend can depend on how much profit the credit union has made in the year.

They say it would be important for the BSR to be communicated effectively to consumers. This would ensure that consumers are aware of the changes to their interest rate on their savings account and prompt them to consider their choice of savings account and firm; in doing so, they may increase competitive pressure. In addition to providers’ current obligations on the communication of interest rate changes, to provide clarity to consumers before they open their account, providers could:

  • display their BSR prominently on their webpage, clearly stating that this is their ‘Basic Savings Rate’ and that it is comparable
  • include the BSR in summary boxes for easy access accounts; they could make the interest rate that would apply after 12 months clear and include a projection of the balance of the account when the BSR applies based on a £1,000 account balance.If a BSR were to be proposed, the FCA’s current view is that providers should communicate the change to existing customers when they first implement the BSR. Sunlight remedy linked to a BSRAs a development of the sunlight remedy trialled in 2015-16, they could introduce a sunlight remedy linked to the BSR. They could ask providers to report their BSRs to the FCA to be published on the FCA website biannually. The aim of this would be to bring to light firms’ strategies towards their longstanding customers. They would expect this to:
  • be reported by the media as an indicator of how firms treat longstanding customers, exerting reputational pressure on firms to change their behaviour
  • increase back-book rate transparency, removing a switching barrier by making it easier for customers to understand if they are getting a good dealThey believe that publishing BSRs on the FCA webpage would be more successful than the sunlight trial, given that the BSRs would be directly comparable across firms. they, therefore, believe this would be more likely to have an effect on providers’ rate-setting strategy.

I think its time we had a debate in Australia about the same issue, because data from my surveys highlights that many savers are not getting the best returns they could.  So far as I can see ASIC has not even looked at the problem, more shame on them. Another case where regulators here are asleep, and customers are being ripped off as a result – does that sound familiar?

FCA publishes Feedback Statement on Distributed Ledger Technology

The Financial Conduct Authority (FCA) is the conduct regulator for 56,000 financial services firms and financial markets in the UK and the prudential regulator for over 18,000 of those firms. The FCA recently published feedback on its Discussion Paper on Distributed Ledger Technology (DLT).

In April 2017 The FCA announced that it was seeking stakeholder views on the potential for future development of DLT in the markets the FCA regulates.

The FCA received 47 responses from a wide range of market participants including regulated firms, national and international trade associations, technology providers, law firms and consultancies.

DLT has come to greater public prominence as it underpins digital currencies such as Bitcoin. This paper is not about Bitcoin or other so-called cryptocurrencies. Rather its remit is to consider the range of ways that DLT can impact on financial services and the regulatory implications.

Respondents expressed particular support for the FCA maintaining a ‘technology-neutral’ approach to regulation and welcomed the FCA’s open and proactive approach to new technology, including our Sandbox and RegTech initiatives.

The feedback also suggested that current FCA rules are flexible enough to accommodate the use of DLT by regulated firms and no changes to specific rules were proposed. Many respondents suggested that DLT solutions could deliver regulatory requirements more efficiently than current systems, substantially reducing costs for firms and regulators alike.

However, some respondents doubted the compatibility of permissionless networks (permissionless networks allow general public visibility of transactions online and are open for broad participation whilst permissioned networks typically feature a ‘gatekeeper’ who controls access) with our regulatory regime. Based on the feedback and its own work, overall the FCA is open to all forms of deployment of DLT (including both permissioned and permissionless DLT networks) provided the operational risks are properly identified and mitigated.

The FCA will continue to monitor DLT-related market developments, and keep its rules and guidance under review in the light of those developments. It will work collaboratively with industry, HM Treasury, the Bank of England, the Information Commissioner’s Office and other UK bodies to ensure a co-ordinated approach towards DLT in the UK. At an international level, the FCA will work closely with national and international regulatory bodies to shape regulatory developments and standards.

On the Initial Coin Offering (ICO) market, the FCA will gather further evidence and conduct a deeper examination of the fast-paced developments. Its findings will help to determine whether or not there is need for further regulatory action in this area beyond the consumer warning issued in September. In the meantime, the FCA highlights how an ICO-related business proposition needs to be designed to satisfy the ‘consumer benefit’ condition for access to the FCA’s Innovate facilities.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:

“The original paper opened a discussion about DLT and the volume and breadth of responses we received from the industry demonstrates the significance of this issue. DLT has the potential to transform practices across a number of markets, sharpening competition and improving risk management. At the same time we have to be alive to the risks of certain applications of it. We will continue to work with a range of agencies and firms to ensure a co-ordinated approach to the use of DLT in financial services.”

UK’s Financial Conduct Authority’s review of banking culture is scrapped

The City regulator, the Financial Conduct Authority (FCA), has shelved plans for an inquiry into the culture, pay and behaviour of staff in banking.

The FCA had planned to look at whether pay, promotion or other incentives had contributed to scandals involving banks in the UK and abroad.

The FCA said it had decided instead to “engage individually with firms to encourage their delivery of cultural change” according to UK reports.

The move means the watchdog’s so-called “banker bashing” review has effectively ended after only a few months.

The decision comes after the FCA’s chief executive, Martin Wheatley, announced in July his decision to quit the post when the Chancellor George Osborne refused to renew his contract, which was due to end in March next year.

In a statement the FCA said: “A focus on the culture in financial services firms remains a priority for the FCA.

“There is currently extensive on-going work in this area within firms and externally.

“We have decided that the best way to support these efforts is to engage individually with firms to encourage their delivery of cultural change as well as supporting the other initiatives outside the FCA.”

Earlier this year, the FCA told banks to sharpen up their efforts to learn lessons from scandals such as foreign exchange and Libor rate-rigging, which have already cost them billions of pounds in fines.

The body said companies’ progress in making improvements as part of the review – designed to examine and compare behaviour within the banking sector, including staff pay and complaints procedures – was initially disappointing and improvements “had been uneven” across the industry.

They also often lacked the urgency required given the severity of recent failings, the watchdog said.

But it also said “some progress had been made on improving oversight and controls and benchmarks” following the scandals involving the benchmark rates in Libor – the interbank lending rate – as well as in foreign exchange and gold markets.

A number of banks have already signalled that changes are being made to their operations.

Conservative Mark Garnier, who sits on the Treasury select committee, suggested Chancellor George Osborne may have been behind the move.

“I am disappointed about it. It remains to be seen whether this is a cancellation or a delay but I fear it probably is a cancellation,” he told BBC Radio 4’s Today programme.

Mr Garnier said there was a “difficult balance” between a strong regulatory regime and “over doing it”.

He added: “There has always been this great argument that perhaps the Treasury is having more influence over the regulator than perhaps it ought to and certainly if I was looking for a Machiavellian plot behind what’s happened here and the tone of the regulator then I suppose I would start looking at the Treasury.

“But I equally think that the regulator has a very, very difficult job to do, which is striking the balance between looking after the people who are its members, the financial institutions, and the consumer.

“And it has certainly been widely talked about that the Treasury thought the regulator was over doing it in favour of the consumer and, certainly from my point of view on the Treasury select committee, I thought otherwise.”

UK Banks To Improve Complaints Procedures

The UK FCA has completed an assessment of the complaints processes at 15 major retail financial firms – seven banks, two building societies, three general insurers and three life insurers – using hypothetical customer complaints. According to the results of the research, the firms chosen accounted for 79% of banking complaints, 60% of home finance complaints, 26% of general insurance complaints (excluding PPI), 42% of life insurance complaints and 42% of investment complaints reported to the FCA’s predecessor the Financial Services Authority between July and December 2012.

The review was conducted by a working group made up of the 15 participant firms and five trade bodies. The FCA also sought the views of the Financial Ombudsman Service and consumer groups.

“We asked firms to carry out self-assessments to better understand how complaints are dealt with in practice, as well as providing their documented policies, processes and management information (MI) for our review. We also established, and chaired, a working group of the participant firms and trade bodies to identify and discuss common complaint-handling issues. Our approach provided valuable insight into how firms manage their complaint functions. This allowed us to observe any barriers to effective complaint handling.”

But while the FCA found some improvements have already been made, such as senior management becoming more engaged with complaint handling and firms empowering staff to make the right judgements and to demonstrate empathy, the review also identified areas requiring further improvement. For example:

  • Firms do not always consider the impact on consumers when designing and implementing processes and procedures.
  • There are inconsistencies in the amount of redress offered, particularly for distress and inconvenience.
  • Firms take a narrow approach to determining and fixing the underlying reason for a complaint, which may affect their awareness of wider issues.

The FCA is asking all financial firms, not just those that took part in the review, to consider the findings and to ensure their complaints procedures “have the interests of consumers at their heart”.

The working group also recommended changes to FCA rules on complaint handling, such as ensuring all complaints are reported to the regulator rather than just those that take longer than one working day to resolve. The FCA is now considering these recommendations and will consult on possible policy changes.

FCA fines five banks £1.1 billion for FX failings

The Financial Conduct Authority (FCA) has imposed fines totalling $1.7 billion on five banks for failing to control business practices in their G10 spot foreign exchange (FX) trading operations.

Between 1 January 2008 and 15 October 2013, ineffective controls at the Banks allowed G10 spot FX traders to put their Banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The Banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.

These failings allowed traders at those Banks to behave unacceptably. They shared information about clients’ activities which they had been trusted to keep confidential and attempted to manipulate G10 spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.

Today’s fines are the largest ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA), and this is the first time the FCA has pursued a settlement with a group of banks in this way. We have worked closely with other regulators in the UK, Europe and the US: today the Swiss regulator, FINMA, has disgorged CHF 134 million ($138 million) from UBS AG; and, in the US, the Commodity Futures Trading Commission (‘the CFTC’) has imposed a total financial penalty of over $1.4 billion on the Banks and the Office of the Comptroller of the Currency (‘the OCC’) has imposed a total financial penalty of $700 million on Citibank N.A. and JPMorgan Chase Bank N.A.

Since Libor general improvements have been made across the financial services industry, and some remedial action was taken by the Banks fined today. However, despite our well-publicised action in relation to Libor and the systemic importance of the G10 spot FX market, the Banks failed to take adequate action to address the underlying root causes of the failings in that business.