CUBE RegNews: 21st October

Posted: 2024-10-21

FCA imposes fine for treating customers fairly failures

Volkswagen Financial Services (UK) Limited (VWFS) has been fined £5.4 million by the Financial Conduct Authority (FCA) for failing to treat customers in financial difficulty fairly and effectively. The penalty, which could have reached £7.7 million, was reduced by 30% due to VWFS’s early settlement agreement. The failings were uncovered following a review by the FCA, which led to VWFS conducting its own third-party review of its practices. 

Some context 

VWFS is one of the UK’s largest motor finance providers. The FCA’s investigation focused on VWFS’s conduct between January 2017 and July 2023, when the company breached several regulatory principles related to customer care, communication, and internal governance. 

The FCA found that VWFS failed to sufficiently probe customers’ financial situations and vulnerabilities, leaving many at risk of suffering significant detriment. The investigation revealed systemic issues, including inadequate communication practices and insufficient forbearance for customers struggling to meet their financial obligations. 

Key takeaways 

• Widespread customer detriment: 110,000 customers were either harmed or at risk of harm due to VWFS’s practices. Vulnerable customers were disproportionately affected, with some experiencing heightened distress and anxiety. In some cases, the firm’s actions led to vehicle repossessions, further aggravating customers' financial difficulties, especially for those relying on their cars for work. 
• Failure to engage with vulnerable customers: The FCA found that VWFS lacked appropriate mechanisms for identifying and supporting vulnerable customers. Instances where customers had their vehicles repossessed without consideration of their vulnerabilities were highlighted as particularly concerning. Additionally, VWFS failed to provide tailored support, leading many customers into unsustainable payment arrangements. 
• Inadequate communication: VWFS’s communication with customers in arrears relied heavily on standardised, templated messages, which the FCA deemed insufficient for customers to make informed decisions. Misleading statements about "late payment interest" in default notices added to the confusion and distress, as VWFS did not charge such interest. 
• Forbearance failings: The firm failed to assess individual circumstances to offer meaningful support, instead often recycling customers through short-term payment arrangements. This lack of tailored support left customers unable to maintain new agreements, trapping them in a cycle of unsustainable debt. Additionally, VWFS did not consistently engage with customers before terminating agreements and repossessing vehicles. 

Redress for customers 

VWFS has paid £17.8 million in redress to affected customers and expects to pay more than £21.5 million in total compensation. The FCA’s investigation serves as a reminder to firms of the importance of understanding customers’ individual circumstances, especially when dealing with financial difficulty or vulnerability. 

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ECB issues SIPS regulation consultation

The European Central Bank (ECB) has launched a public consultation on proposed revisions to the regulation governing oversight requirements for systemically important payment systems (SIPS). The recast of the SIPS Regulation aims to update key areas based on a general review conducted over the past year. 

Some context 

The SIPS Regulation was first introduced in 2014 and has undergone amendments in 2017 and 2021. The ECB’s role in overseeing payment systems is critical, as these infrastructures are pivotal to financial stability within the euro area. The consultation introduces several new elements, including changes to the governance of SIPS operators, cyber risk requirements, and outsourcing risk management. 

Key takeaways 

• Expanded scope of SIPS operators: The consultation proposes expanding the definition of a SIPS operator to include, on an exceptional basis, a euro area branch of a legal entity located outside the euro area. This shift acknowledges the growing complexity of cross-border financial institutions and seeks to bring these branches under the regulatory umbrella for better oversight. 
• Governance enhancements: The proposal introduces a requirement for all SIPS operators to establish a risk committee. This move aims to improve the governance structures of payment systems, particularly in how they manage risk. Additionally, it places stricter demands on the integrity of board members, ensuring that individuals in key positions have no history of legal convictions or penalties in certain areas of law. 
• Cyber risk requirements: A new article on cyber risk is included, reflecting the growing threat posed by cyberattacks on financial infrastructures. SIPS operators will need to implement a comprehensive cyber resilience framework, with specific obligations related to threat detection, response, and recovery. The introduction of mandatory threat-led penetration testing is also a key feature of the new requirements. 
• Outsourcing risk management: The consultation introduces binding rules on outsourcing practices, addressing a key area of operational risk for financial institutions. While the high-level requirements are included, further detailed guidance on the implementation of outsourcing expectations is expected to be published separately. 

Next steps 

The consultation will close on 29 November 2024, after which the ECB will review the feedback from market participants. The final version of the recast regulation is likely to incorporate suggestions from stakeholders, with a view to enhancing the resilience and governance of systemically important payment systems in the euro area. 

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Bank of England consults on 2024/25 supervisory fees for financial market infrastructure

The Bank of England has issued a consultation paper outlining its proposed supervisory fees for financial market infrastructure (FMI) for the 2024/25 period. 

Key proposals for 2024/25 fees 

The Bank of England’s supervisory fees for FMIs cover a wide range of activities, including the costs associated with its supervisory staff, policy work, specialist resources, and corporate services. For the 2024/25 fee year, the Bank has proposed an increase in the overall supervisory fees, driven by several factors, including new responsibilities under the Financial Services and Markets Act 2023 (FSMA 2023). 

The total cost for the 2024/25 fee year is expected to increase to £18.4 million. This rise reflects the additional workload associated with FSMA 2023, as well as higher staff and central costs. 

FMI rulebook development costs 

Under FSMA 2023, the Bank has new rule-making powers for FMIs, which include the responsibility to develop a UK-specific rulebook for central counterparties (CCPs). This work will cost an estimated £4.5 million over two years. 

Changes to supervisory fees 

The fee increases are significant. For CCPs, the supervisory fee will rise by 31.2% compared to 2023/24, primarily due to the costs of the rulebook. Without this instalment, the increase would be 10.7%. The rise reflects the additional responsibilities taken on by the Bank, particularly around policy development and supervisory activities. 

For firms, this means preparing for higher fees over the next few years. The Bank’s decision to spread the cost of the rulebook work over three years allows firms to better manage their financial planning, but the 2024/25 year will see a notable rise in charges. 

Special project fees (SPFs) 

In addition to the standard supervisory fees, the Bank proposes new hourly rates for special project fees (SPFs) in the 2024/25 fee year. SPFs apply to exceptional, resource-intensive projects that go beyond regular supervisory activities. Firms subject to SPFs should be prepared for potential costs associated with these projects, particularly in cases of complex supervisory work or policy development. 

Looking back: 2023/24 fees 

The Bank also reviewed the actual fees for the 2023/24 fee year. As in previous years, there is a rebate and recovery mechanism to adjust the fees in line with the actual supervisory resource expenditure. This ensures that firms are not overcharged or undercharged relative to the Bank’s costs. 

For the 2024/25 year, any significant variation in the final supervisory fees will be addressed through rebates or additional payments once the year concludes. This approach provides firms with a degree of flexibility and ensures fees are more accurately aligned with the Bank’s actual supervisory activities. 

FSMA 2023: New responsibilities for the Bank 

The FSMA 2023 has introduced significant changes to the Bank’s regulatory responsibilities, particularly with respect to rule-making for FMIs. This transfer of responsibility follows the UK’s withdrawal from the EU and the need to replace onshored EU law with UK-specific rules. The Bank’s new rule-making powers allow it to adapt its regulatory framework to support financial stability and, as a secondary objective, foster innovation in FMI services. 

Developing the FMI rulebook 

One of the most significant pieces of work stemming from FSMA 2023 is the development of the UK’s CCP rulebook. This includes reviewing existing firm-facing requirements, assimilating onshored law, and incorporating relevant international standards. The rulebook development will involve publishing consultation papers, seeking industry feedback, and finalising rules through the Bank’s internal governance processes. 

The costs associated with this work are substantial but are considered necessary to ensure the UK’s FMI regulatory framework remains robust and flexible. For firms, this represents a key area of regulatory focus, and the consultation process offers an opportunity to provide input on the Bank’s proposals. 

Implementation and next steps 

The proposed changes to FMI supervisory fees are expected to be implemented in Q4 of the 2024/25 fee year, with invoices issued between December 2024 and February 2025. Firms will be able to respond to the consultation until 18 December 2024, and the Bank encourages feedback on all aspects of the proposals. 

Once the rulebook development costs are fully recovered, the Bank anticipates lower, ongoing costs to maintain the rulebook, which will be consulted on annually as part of the FMI fees process. Firms should remain engaged with the consultation process to ensure their views are considered in the final decisions. 

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PRA consults on changes to large exposures framework to implement remaining Basel standards

The Prudential Regulation Authority (PRA) has issued a consultation paper (CP) proposing changes to the UK's large exposures (LE) framework to implement the remaining Basel large exposure standards (LEX standards). These changes aim to further safeguard firms from significant losses due to the default of a single counterparty or a group of connected counterparties (GCC). 

Key changes proposed  

• Securities financing transactions (SFTs): The PRA proposes to remove the option for firms to use internal model (IM) methods when calculating exposure values for SFTs, such as repos. This change would take effect from 1 January 2026. Firms will need to plan for this by assessing how the removal of internal models will affect their exposure calculations and overall capital requirements. 
• Credit risk mitigation (CRM): The introduction of a mandatory substitution approach is proposed to standardise how firms calculate the impact of CRM techniques. This change is aimed at ensuring consistency in how firms treat exposures where CRM techniques are used. 
• Changes to LE limits for trading book exposures: The consultation proposes amendments to the LE limits for both third-party and intragroup trading book exposures. 
• Third-party exposures: The option to exceed LE limits for third-party trading book exposures is set to be removed, bringing stricter controls on how much exposure a firm can have to non-group counterparties in its trading book. This aims to limit concentration risk to external parties. 
• Intragroup exposures: Firms will still be allowed to exceed LE limits for trading book exposures to intragroup entities. The PRA is also simplifying the calculation of the additional capital required for these exposures and allowing firms to apply for higher LE limits to intragroup entities, subject to conditions. Firms will need to carefully assess how these changes affect their capital planning and intragroup exposures. 
• Removal of exemptions and certain options: Several options and exemptions currently available to firms under the LE framework are proposed to be removed: 
• UK Deposit Guarantee Scheme (DGS): Firms will no longer be exempt from LE limits for exposures to the UK DGS. This could impact how firms calculate their exposure to the scheme and may result in higher capital requirements. 
• Immovable property as CRM: The use of immovable property as a form of CRM will no longer be allowed, reducing the flexibility firms currently have in managing their collateral. Firms will need to reassess how they secure their exposures and whether alternative CRM techniques are needed. 
• Stricter requirements on French counterparties:  The PRA proposes to remove tighter requirements for exposures to certain French counterparties, bringing these in line with other counterparties under the LE framework. 
• Simplification of the LE framework: To improve accessibility, the PRA is proposing to merge the Large Exposures (CRR) and Large Exposures Parts of the PRA Rulebook. This will simplify the framework by consolidating rules into one document. The supervisory statement SS16/13 will also be updated to reflect these changes. 

Timeline and next steps 

The consultation closes on Friday 17 January 2025. 

The proposed changes are expected to take effect shortly after the publication of the final policy statement, except for the SFT proposals, which will come into force on 1 January 2026. 

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UK fraud figures show slight decline

Trade body UK Finance has revealed that fraudsters stole £571.7 million from consumers and businesses in the first half of 2024, marking a slight 1.5% decline from the same period in 2023. Despite this reduction, fraud remains a major threat to the UK financial system, with the banking industry preventing an additional £710.9 million in unauthorised fraud. 

APP fraud and unauthorised fraud trends 

Authorised Push Payment (APP) fraud losses, where victims are tricked into making payments themselves, fell by 11% to £213.7 million. This decline is attributed to enhanced security measures and increased awareness campaigns. Despite the drop, 72% of APP fraud cases continue to originate online, highlighting the significant role that digital platforms play in enabling these scams. 

Unauthorised fraud losses, on the other hand, increased by 5%, totalling £358 million. This category covers fraud committed without the account holder’s consent, such as payment card fraud and remote banking scams. Notably, the number of unauthorised fraud cases surged by 19% compared to last year, with a sharp 26% rise in "card not present" fraud incidents, where criminals exploit online payment systems by manipulating one-time passcodes. However, card ID theft showed improvement, with losses down 12%. 

Financial sector response 

The banking industry has been proactive in preventing fraud, stopping more than £710 million in unauthorised fraud attempts during the first half of the year—a 13% increase from 2023. Ben Donaldson, Managing Director of Economic Crime at UK Finance, stressed that while progress has been made, fraud remains a "dynamic" threat that requires ongoing investment and collaboration across industries, including telecommunications and online platforms. 

Donaldson also emphasised that the newly introduced APP reimbursement rules, which came into effect in October 2024, while beneficial, are only part of the solution. He called for broader action from other sectors to address the root causes of fraud, especially online, to prevent psychological harm and financial losses to victims. 

Impact on consumers and prevention efforts 

Fraud prevention efforts are paying off in some areas, with significant reductions in the number of APP fraud cases, including a 32% fall in impersonation scams where fraudsters pose as banks or the police. Other types of fraud, such as purchase, romance, and investment scams, also showed declines, signalling that consumer education and stronger security protocols are working. 

While the overall reduction in fraud losses is encouraging, the persistence and sophistication of fraudsters present ongoing challenges for the financial sector. The growing role of online platforms and telecommunications in facilitating fraud highlights the need for a multi-sectoral approach to tackling economic crime. 

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New listing applications enhanced in Hong Kong

Hong Kong’s Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong Limited (HKEX) have announced a significant enhancement to the timeframe for processing new listing applications. The changes are part of a broader effort to boost Hong Kong’s competitiveness as a leading international listing destination by offering greater clarity and efficiency in the application process. 

Some context 

In recent years, the SFC and HKEX have focused on improving transparency and efficiency in listing regulations. Since 2023, both regulators have published more detailed vetting statistics, and the Exchange has consolidated guidance into a comprehensive guide for new listing applicants. These steps aim to streamline processes and offer applicants clearer regulatory expectations. 

Under the current framework, the SFC oversees compliance with the Securities and Futures Ordinance (SFO) and the Securities and Futures (Stock Market Listing) Rules (SMLR). At the same time, HKEX handles the day-to-day administration of the Listing Rules and determines the suitability of applicants for listing. Together, they coordinate to ensure that only qualified companies enter the Hong Kong market. 

Key takeaways 

• Enhanced Application Timeframe: For applicants that fully meet all relevant requirements, the SFC and HKEX will individually assess applications within a maximum of two rounds of comments. Both regulators have committed to completing this review within 40 business days. After this, HKEX will work with the applicant to finalise the necessary disclosures, allowing the application to proceed to the Listing Committee hearing. The process is expected to take around 60 business days in total for applicants to address regulators’ comments, and the entire application will be concluded within the six-month validity window. 
• Accelerated process for A-share companies: The new framework also introduces an accelerated timeframe for certain A-share listed companies. To qualify, these companies must have a market capitalisation of at least HK$10 billion and demonstrate full compliance with A-share listing requirements over the previous two years. These eligible companies will be subject to a streamlined process, with the Regulators’ Assessment completed after one round of regulatory comments and within 30 business days. 
• Applications requiring longer processing: Not all applications will benefit from the streamlined process. Where the regulators have significant concerns—such as questions about compliance, material changes to the company’s status, or incomplete responses—more time may be needed. In such cases, the SFC and HKEX will actively engage with applicants to clarify expectations and provide detailed feedback. 

Next steps 

This new enhanced application process applies to all new listings submitted following the joint statement’s release. 

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FCA CEO discusses growth and effectiveness

In a speech at the City Dinner at Mansion House, Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA), highlighted the urgent need for growth in the financial services sector and emphasised the regulator's role in fostering capital formation and competitiveness. 

Rathi began by affirming that growth has always been part of the FCA’s mission, even before its inclusion as a secondary statutory objective. "Trusted, liquid markets. Consumers confidently engaging with products they need. Competition. Reduced financial crime," Rathi stated, stressing the FCA’s existing efforts to support growth. However, he acknowledged that recent feedback from industry surveys shows mixed views on the FCA’s performance in areas like competition and international competitiveness, suggesting "we clearly have more to do." 

To address these concerns, the FCA has initiated a literature review to better understand the links between financial regulation and growth. This review reveals a gap in the research, highlighting "not how much we know but, often, how little." 

Operational effectiveness and enforcement 

Rathi also addressed concerns about the FCA’s operational effectiveness, pointing to improvements made over the past two years. He cited significant strides in the authorisation process, noting that 98% of applications are now processed within statutory deadlines. "Our first application form is now fully digitised. More digitisation is coming," he said, highlighting the FCA’s ongoing efforts to increase efficiency. 

The speech also detailed the regulator’s enhanced enforcement actions. "We’re more assertive against harm," Rathi said, citing that the FCA had tackled 10,000 misleading financial promotions and successfully prosecuted nine fraud cases last year—a record number. He further emphasised the reduction in investigation times, which have dropped to as low as 14 months in some recent cases, compared to the previous 42-month average. 

Rathi also touched on the contentious proposal for naming firms earlier in the investigation process. "We think a degree more openness can reduce harm, build whistleblower confidence and benefit firms that play by the rules," he said, though acknowledging that the proposal had sparked opposition. The FCA plans to provide more detailed data and case studies next month to further illustrate how this public interest test could function. 

Digital infrastructure and technology 

Rathi noted the need for a collective effort to modernise the infrastructure underpinning financial markets, especially in the realm of digital technology. He pointed to progress in areas such as tokenisation in asset management but warned of a "collective execution deficit" in critical areas like open banking, payment systems, and identity authentication. 

He called on the financial services sector to adopt a more optimistic approach towards technology. "Let’s overcome national tech scepticism, and adopt an optimism which could tackle financial exclusion," he said, drawing on examples of biometric identity systems successfully reducing exclusion in countries like India and Sweden. 

Rathi also addressed the FCA’s internal technological advancements, noting the regulator’s increasing reliance on data. "We now ingest 1 billion records a day, double a few years ago," he said, suggesting that both the FCA and the industry must continue to invest in technology to streamline data sharing and ease regulatory burdens. 

Risk appetite and regulatory reform 

Rathi challenged the industry to reflect on its collective appetite for risk, particularly in light of the FCA’s recent reforms. He cited the FCA’s far-reaching listing reforms and upcoming changes to the prospectus regime as examples of the regulator’s willingness to "back the right technology" and encourage innovation. 

He also touched on the ongoing review of the advice guidance boundary, which aims to make financial advice more accessible to consumers. However, he warned that if more people are encouraged to invest rather than save, they will be more exposed to market volatility. "Outcomes-based regulation brings risk as well as opportunity," Rathi said, signalling that firms may face greater accountability as the FCA reduces prescriptive rules in favour of a focus on outcomes. 

Looking ahead, Rathi floated the idea of introducing "provisional authorisations" for newly authorised firms, akin to an "L-plate," allowing them to take on more risk as they grow. He acknowledged that such an approach could lead to more firm failures and higher costs for the Financial Services Compensation Scheme (FSCS) but suggested that it could also drive innovation and growth. 

Conclusion 

Rathi closed his speech with a call for greater collaboration between regulators, industry, and policymakers to deliver growth. "We are now in 2024, not 2008. A shift in approach is underway," he said, emphasising the need to accept both the opportunities and the risks that come with innovation. He urged the industry to move beyond merely admiring problems and focus on executing solutions, stating: "Isn’t it time to stop admiring the problems and execute solutions? To collaborate to deliver growth rather than compete for who’s done best." 

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OCC outlines fiscal year 2025 bank supervision priorities

The US Office of the Comptroller of the Currency (OCC) has released its fiscal year 2025 Bank Supervision Operating Plan, outlining supervisory priorities for national banks, federal savings associations, and branches of foreign banking organisations. The plan, effective from 1 October 2024 to 30 September 2025, is intended to align with the OCC’s overarching strategic plan and reflects its risk-based supervision approach. 

The OCC’s Committee on Bank Supervision (CBS) will guide the execution of this plan across its Large Bank Supervision, Midsize and Community Bank Supervision, and other operating units. Supervisory strategies will be tailored to individual institutions, taking into account their size, complexity, and risk profile. A key focus remains the monitoring of third-party service providers, especially fintech firms offering banking products and services. 

Key supervision themes 

The OCC has outlined several priority areas that will shape its supervisory approach in FY 2025, particularly as banks continue to navigate volatile economic conditions, rising interest rates, and potential geopolitical disruptions. 

Financial risks 

• Credit risk: Examiners will assess how well banks are managing credit risk amid economic uncertainty. Special attention will be paid to stressed sectors, such as commercial real estate and multifamily housing, where borrowers are grappling with higher operational costs and inflation. Additionally, the OCC will review banks’ loan renewal processes, ensuring that risk management functions adequately challenge risk ratings, stress testing, and concentration limits. 
• Allowance for credit losses: Examiners will evaluate whether banks have made appropriate provisions for credit losses, considering both current economic conditions and future forecasts. This will include a review of banks’ methodologies, assumptions, and governance processes. 
• Asset and liability management: With the current interest rate volatility, banks’ ability to manage interest rate and liquidity risks will come under scrutiny. The OCC will assess contingency planning and stress testing, ensuring that banks can withstand market fluctuations and have sufficient access to emergency funding. 
• Capital management: Banks engaging in capital optimisation activities, particularly credit risk transfer transactions, will be closely monitored to ensure they comply with regulatory capital relief requirements. Examiners will also verify that risk management systems are robust enough to control risks related to these activities. 
• Climate-related financial risks: For larger banks with more than $100 billion in assets, examiners will evaluate their ability to manage climate-related financial risks, integrating these assessments into broader supervisory reviews. 

Operational focus 

• Cybersecurity: The OCC will continue to prioritise cybersecurity, particularly in light of evolving cyberattacks. Examiners will focus on banks’ incident response capabilities, operational resilience, and preventive measures, including network and data management, multi-factor authentication, and third-party access controls. 
• Third-party risk: As banks increasingly rely on fintech companies for critical services, the OCC will examine banks’ risk management processes for third-party relationships. This will include a review of how banks manage operational, compliance, and reputational risks, with a focus on fintech collaborations that provide banking products to consumers and businesses. 
• Payments: As instant and real-time payment services gain traction, examiners will assess the associated risks, including fraud management and third-party risk, to ensure that banks are adequately controlling these risks. 
• Enterprise change management: Banks undergoing significant changes—whether in leadership, strategy, or operations—will be evaluated for the adequacy of governance and risk management processes. This includes transitions such as mergers, system migrations, and the adoption of new technologies like cloud computing and artificial intelligence. 

Compliance and consumer protection 

• AML/CFT compliance: The OCC will continue to scrutinise banks’ anti-money laundering and counter-terrorism financing programmes, focusing on their ability to detect and report illicit financial activities. Examiners will also assess banks’ fraud detection and suspicious activity reporting processes. 
• Consumer compliance: The OCC will focus on banks’ compliance with consumer protection laws, particularly in relation to new products and services, including those offered through fintech partnerships. Examiners will review whether banks provide clear and accurate information to consumers, ensuring that risks related to new payment systems are effectively managed. 
• Fair lending: Examiners will assess banks’ compliance with fair lending laws, particularly in relation to mortgage lending, where appraisal bias and discriminatory property valuations may occur. The OCC will take enforcement action as necessary, ensuring equal access to financial products and services. 

Emerging risks and evolving priorities 

As economic conditions evolve, the OCC will adjust its supervisory strategies to address emerging risks. For instance, the agency will continue to monitor the impact of rising interest rates on deposit stability, as well as potential stress in commercial real estate markets. 

The OCC will also conduct horizontal risk assessments, which allow for a broader, sector-wide review of key risks across multiple institutions. Regular updates on supervisory priorities and emerging risks will be provided through the OCC’s Semiannual Risk Perspective report. 

Next steps

The OCC has called on banks to remain vigilant in their risk management practices, particularly in relation to emerging financial, operational, and compliance risks. Institutions are encouraged to review the operating plan in full and ensure their internal processes align with the OCC’s supervisory expectations for FY 2025. 

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