Greg Kilminster
Head of Product - Content
Taking the leap: reflecting on one year of the FCA's Consumer Duty
In a speech at the Financial Conduct Authority's event: Consumer Duty: 1 year on, Sheldon Mills, executive director of consumers and competition at the FCA, revisited an analogy he made 18 months earlier when he encouraged firms to “eat the frog” - tackle the implementation of the Consumer Duty however unpalatable it may seem. This speech celebrated progress made and outlined the next steps in this regulatory journey.
Consumer Duty in action
The Consumer Duty was introduced with the aim of fostering a financial environment that supports healthy competition and innovation while maintaining high standards. This regulatory framework, grounded in the Financial Services Act 2021, is designed to benefit consumers, firms, and the broader economy.
Mills praised the efforts of firms in embracing the Duty, noting significant cultural shifts and improved consumer outcomes. For instance:
- The FCA’s intervention in the cash savings market has led to quicker adjustments in interest rates following base rate increases. This has resulted in an estimated £4 billion in additional interest payments for consumers, money that can stimulate broader economic activity.
- In another sector, changes to the commission structure of GAP insurance products are expected to save consumers around £70 million.
- Similarly, a large financial advice firm has overhauled its charging structure, enhancing transparency and eliminating early withdrawal charges, thereby benefiting clients.
Additionally, platform investment providers have ceased the practice of 'double dipping'—charging for both interest retention and custody of cash—redirecting an estimated £10 million annually back to customers.
Driving cultural and operational change
Mills highlighted that the Consumer Duty has not only led to financial benefits but also driven improvements in firm culture, conduct, and governance. Firms have developed new data and metrics to better understand and support their customers, including those who fall outside their target market. Enhanced recording of customer vulnerabilities and the adoption of a 'tell us once' approach have further improved customer support.
Employee incentive structures have also been adjusted to align with consumer outcomes, ensuring that staff bonuses are tied to customer satisfaction. Firms are proactively communicating with customers about better product options and simplifying their communications to ensure clarity and understanding.
Balancing innovation and protection
Addressing concerns that the Consumer Duty might stifle growth and innovation, Mills argued that consumer protection and economic growth are not mutually exclusive. The Duty aims to ensure that consumers have access to suitable products and services, promoting inclusive and sustainable growth.
Technological advancements, such as the increased use of digital wallets, present opportunities for innovation. However, the FCA is committed to ensuring that innovation does not come at the expense of consumer inclusion. Recent rules to support those reliant on cash demonstrate this balanced approach.
The FCA is also engaging with the Digital Regulation Cooperation Forum (DRCF) to support tech innovators, and plans to launch an AI Sandbox to facilitate the safe and quick market introduction of new products.
A continuous journey
The Consumer Duty, said Mills, is designed to be flexible, adapting to changes in the financial landscape. He stressed that this regulatory framework supports the FCA’s new objective to enhance the international competitiveness of the UK economy.
The FCA’s ongoing work includes thematic studies, sector-specific analyses, and a continued focus on ensuring fair value for consumers. The Call for Input launched in July 2024 aims to simplify regulatory requirements, addressing complexity and duplication that could hinder innovation.
Moving forward
Mills concluded by reiterating that the Consumer Duty represents the beginning of a continuous journey. The FCA remains committed to realising the benefits of the Duty for consumers, firms, and the economy. This regulatory effort is about building trust, delivering value, and fostering growth.
As the Consumer Duty takes full effect, including for closed products and services, the financial sector is encouraged to view this as a new start rather than a completed task. Mills reminded the audience that the FCA will continue to support firms in navigating this regulatory landscape, ensuring that the financial services industry remains dynamic, capable, and innovative.
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PRA publishes 2023/24 annual report
The Prudential Regulation Authority (PRA) has published its annual report for 2023/24, which includes, among other things, a detail of its progress in achieving strategic objectives outlined in the PRA Business Plan 2023/24.
Key highlights
- Maintaining and enhancing the safety and soundness of the banking and insurance sectors, ensuring continued resilience: The report highlights the PRA's efforts in ensuring financial stability for banks and insurers through implementing Basel 3.1 and Solvency UK standards. It also outlines initiatives on operational resilience, including proposals for overseeing critical third parties. Additionally, it provides insight into the orderly resolution of Silicon Valley Bank UK and the response to the failure of Credit Suisse.
- Proactively identifying new and emerging risks and contributing to international policy development: The report discusses the PRA's general approach and specific initiatives related to digitisation, artificial intelligence, and climate change, as well as international efforts. It also outlines the PRA's work on de-risking funded reinsurance arrangements in the UK life insurance sector.
- Supporting competitive and dynamic markets while promoting international competitiveness and growth: With the introduction of the secondary competitiveness and growth objective (SCGO) under FSMA 2023, the PRA's role extends to facilitating international competitiveness and sustainable growth in alignment with relevant international standards. The report covers how the PRA has embedded and advanced its new SCGO, referencing the SCGO Report for additional details.
- Operating as an inclusive, efficient, and modern regulator within the central bank: The report details the PRA's efforts towards transparency, as well as the development of its capabilities through innovative tools. It also covers the new PRA Supervisory approach and how it takes feedback on board.
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Banks face a digital future amid ten years of European oversight
In a speech at the Banking and Payments Federation Ireland, Sharon Donnery, Deputy Governor of the Central Bank of Ireland considered the significant progress made by the Irish banking sector since the financial crisis, while emphasising the urgent need for further transformation in response to ongoing digital and structural changes.
Strengthening resilience post-crisis
Donnery noted that the resilience of the Irish banking system has been a key focus of her career. The sector has made considerable strides since the financial crisis, illustrated by significant reductions in Non-Performing Loans (NPLs) and strengthened capital buffers.
- Non-Performing Loans: Irish banks' NPL ratio dropped from nearly 32% ten years ago to just over 2% today.
- Capital adequacy: The Common Equity Tier 1 (CET1) ratios for Irish banks have risen from 11.9% in 2014 to 15% in 2024, with an additional €23bn of loss-absorbing capacity.
The importance of a stable banking sector
Donnery emphasised the critical role banks play in a well-functioning financial system, contributing to economic growth and stability. She recalled the negative consequences when the system fails, noting the importance of maintaining robust financial health.
Profitability and future challenges
While the current interest rate environment has led to increased profitability, Donnery warned against complacency. Sustainable business models and adequate investment in future capabilities are essential.
- Profits and distributions: Regulators aim for banks to be profitable to cover costs, build financial buffers, and invest in future resilience. Distributions to shareholders should be balanced against these priorities.
- Provisioning: Adequate provisioning for future risks remains crucial, particularly in uncertain environments.
Adapting to a changing financial landscape
Donnery highlighted the profound changes in the financial sector over the past decade, driven by digitalisation and other structural shifts.
- Digitalisation: The value and volume of card payments have surged, with 86% of consumers now using mobile banking. She added that banks need to invest in robust digital infrastructure to meet consumer expectations and ensure operational resilience.
- Structural challenges: The sector must also prepare for challenges related to climate change, demographic shifts, and geopolitical instability.
The Central Bank's evolving role
In response to these changes, the Central Bank of Ireland is transforming its regulatory and supervisory approach. Key initiatives include:
- Individual Accountability Framework (IAF): Which aims to enhance governance and accountability within financial institutions.
- Consumer Protection Code Review: Modernising the code to reflect the digital provision of financial services, with a revised code expected in 2025.
- Integrated Supervision Model: This new approach will maximise the benefits of the Central Bank’s integrated mandate, ensuring comprehensive supervision across consumer protection, financial stability, and market integrity.
In concluding, Donnery acknowledging the progress made in strengthening the Irish banking sector post-crisis. However, she stressed that significant challenges lie ahead. As the financial landscape continues to evolve, banks and regulators alike must adapt to ensure the sector remains robust and capable of meeting future demands.
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EIOPA launches consultation on capital requirement treatment of insurers’ direct exposure to qualified CCPs
The European Insurance and Occupational Pensions Authority (EIOPA) has launched a consultation on the capital requirement treatment of insurers’ direct exposure to qualified central counterparties (CCPs) within the standard formula.
Some context
In the European Economic Area (EEA), (re) insurers have, up until recently, only used central clearing facilities indirectly as clients for their derivatives transactions.
While Solvency II does prescribe specific treatment for these indirect arrangements, direct exposures to CCPs have not been accounted for and, as such, would be treated as bilateral exposure, resulting in higher capital requirements.
Although there are no EEA (re) insurers at present with known traditional direct exposures to CCPs, clearing houses have evolved their access models. Under the so-called ‘sponsored model’, (re) insurers can now become direct members of CCPs with a sponsor handling default fund contributions and default management obligations on their behalf.
EIOPA assessed these developments together with the implications of different access models on insurers’ risk exposures, liquidity needs, and the complexity of their risk assessment calculations.
Key takeaways
The consultation paper proposes three policy options:
- Option 1: No change to the current regime (i.e. no recognition of the risk specificities of new access models and direct exposures.
- Option 2: Extending the treatment of indirect exposures to direct exposures (i.e. more risk sensitivity but without capturing the particularities of default fund contributions).
- Option 3: further aligning the treatment of default fund contributions with the Capital Requirements Regulation. EIOPA prefers this option as it also extends risk sensitivity to default fund payments.
Next steps
The deadline for feedback is 23 October 2024.
Following the consultation, EIOPA will consider the points raised by stakeholders and aim to submit a final advice to the European Commission by 31 January 2025.
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ESMA publishes opinion on risks posed by global crypto firms
The European Securities and Markets Authority (ESMA) has issued an opinion to promote the consistent application of the Markets in Crypto Assets (MiCA) Regulation.
ESMA considers it necessary to provide some clarifications regarding the application of certain MiCA obligations, particularly in relation to Multifunction Crypto-asset Intermediaries (MCIs) that might attempt to structure their business in a way to maintain access to EU clients while minimising the impact of the MiCA regulatory framework on their activities.
The opinion is primarily addressed to national competent authorities (NCAs), and the objective is to share relevant criteria to promote supervisory convergence and support NCAs' assessment of the business model and activities that the applicant MCIs intend to carry out, as well as the ongoing assessment of how such activities are carried out.
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EBA consults on reporting templates under SEPA Regulation
The European Banking Authority (EBA) has launched a consultation on its draft Implementing Technical Standards (ITS) for standardised reporting templates regarding the level of charges for credit transfers and share of rejected transactions under the Single Euro Payments Area (SEPA) Regulation. Alongside the consultation, the EBA has issued a preparatory statement aimed at payment service providers (PSPs) outlining the actions they need to take to comply with future reporting requirements under the revised SEPA Regulation.
Some context
The Instant Payments Regulation (IPR), which came into force on 9 April 2024, amends the SEPA Regulation (Regulation (EU) No 260/2012) and introduces new requirements for PSPs, including a new Article 15(3) of the SEPA Regulation. This new article mandates PSPs to report to their competent authorities every 12 months on the level of charges for credit transfers, instant credit transfers, and payment accounts, as well as the share of rejections for national and cross-border payment transactions due to the application of targeted financial restrictive measures.
PSPs are required to submit the first of these annual reports by 9 April 2025, and the reporting period begins on 26 October 2022. The draft ITS fulfils the EBA's mandate to develop technical standards on templates and instructions for such reporting from PSPs to the National Competent Authorities (NCAs).
Key takeaways
The EBA is soliciting feedback from stakeholders on the proposed approach to standardising the reporting requirements, including the clarity of the draft templates and instructions for completion.
The EBA is also seeking input on whether the draft ITS strike the right balance between the need to obtain the data required for a robust analysis of the impact of the changes to the SEPA Regulation and the need to avoid excessive reporting burden for the industry.
In the statement, The EBA reminds PSPs that, to comply with the future reporting requirements under the IPR, they need to record and store information on the level of charges for credit transfers and payment accounts, as well as the numbers of rejected transactions referred to in Article 15(3) of the SEPA regulation.
The EBA also provides timelines on the periods over which data should be recorded and stored.
Next steps
The consultation will run until 31 October 2024. The EBA will finalise the draft ITS and submit the final version to the EU Commission by the end of 2024.
Financial complaints in Australia rise further 9% to record 105,000 in 2023-24
The Australian Financial Complaints Authority (AFCA) has reported a record number of complaints, with disputes rising by 9% to more than 105,000 in the 2023-24 financial year. Chief Ombudsman David Locke expressed disappointment at the persistent high numbers, despite a lower increase than the unprecedented 34% jump the previous year.
Key findings:
- Total complaints: Increased by 9% to 105,454 in 2023-24.
- Primary drivers: Scam-related complaints surged by 81% to 10,951, averaging 913 per month. Comprehensive motor vehicle insurance complaints rose, leading to a 21% increase.
- Sector-specific increases: Banking and finance complaints rose by 11% to 59,636. General insurance complaints grew by 4% to 29,096.
- Financial difficulty complaints: Increased by 14% to 5,525, with home loans accounting for one-third of these complaints.
Product-specific complaints:
- Personal transaction accounts: 16,365 complaints (+19%).
- Credit cards: 11,841 complaints (+12%).
- Personal loans: 7,660 complaints (+17%).
- Home loans: 6,913 complaints (-3%).
- Online accounts: 2,533 complaints (+33%).
Locke highlighted the importance of firms resolving and preventing complaints and urged for clearer obligations under mandatory codes addressing scams. He also noted the emergence of sophisticated scam activity in the superannuation sector, urging trustees to take preemptive measures.
The full set of data will be available in AFCA’s Annual Review later this year.
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ASIC extends transitional relief for FFSPs until 2026
The Australian Securities and Investments Commission (ASIC) is extending for a further 12 months the transitional relief for foreign financial services providers (FFSPs) from the requirement to hold an Australian financial services (AFS) licence when providing financial services to Australian wholesale clients.
The current transitional arrangements for ASIC’s sufficient equivalence relief and limited connection relief were due to expire on 31 March 2025.
It will now be extended until 31 March 2026.
After this date:
- FFSPs will be required to notify ASIC of their intention to rely on the new licensing exemption regime unless they opt-in by notifying ASIC earlier.
- Entities not currently subject to ASIC relief will be able to notify ASIC of their reliance on the licensing exemption regime after it commences.
- FFSPs that have been, or are granted a foreign AFS licence, will be able to continue to operate their financial services business in Australia under the licence issued by ASIC.
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