Eva Dauberton
News Editor
Consumer Duty: Insurance firms encouraged to strengthen outcomes monitoring
The Financial Conduct Authority (FCA) has released findings from a review of larger insurance companies’ methods for monitoring outcomes in compliance with the Consumer Duty (the Duty).
The report presents examples of both good and poor practices related to monitoring approaches, data usage, interpretation and scrutiny of data, and monitoring of different customer groups, including those with vulnerability characteristics. Additionally, the report sets out expectations in these areas and evaluates firm monitoring approaches against the four Duty outcomes.
The FCA has also updated the annual reports section on the Duty information page. The section now provides more details about the expectations regarding governance and outcome monitoring under the Duty, which can be found in Chapters 10 and 11 of the Finalised Guidance FG22/5.
Some context
In December 2023, the FCA requested the most recent board and/or committee reporting from 20 larger insurance firms, covering general insurers, life insurers, insurance intermediaries, and regulated third-party outsourcers servicing insurers. These firms were required to demonstrate their methods for monitoring, assessing, and testing the outcomes that customers are receiving, as well as outline actions taken to address poor outcomes.
The FCA evaluated the submissions based on the monitoring requirements outlined in PRIN 2A.9 and the guidance provided in Chapter 11 of FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty.
The review focused solely on outcomes monitoring and did not assess underlying processes or other Duty requirements.
Key takeaways
Key findings from the review indicate that:
- Monitoring MI across most firms should be enhanced to ensure it is outcomes rather than process-driven.
- Some firms’ reporting was not comprehensive enough to provide the relevant board or committee with a clear view of compliance with Duty requirements.
- Only a few firms were able to demonstrate how outcomes monitoring led to proactive action to improve outcomes, particularly for distinct customer groups.
In its conclusions, the FCA emphasised that while inadequate monitoring itself would not necessarily result in poor customer outcomes, it is nonetheless essential for firms to identify and remediate such outcomes.
Next steps
The FCA encourages all insurance companies, intermediaries, and outsourced service providers in the insurance sector to review these findings. These observations may also benefit retail financial service firms in other sectors.
Firms are advised to consider these findings when considering approaches to monitoring outcomes for closed products, as required by 31 July 2024. Additionally, these findings can support firms in developing their first Consumer Duty annual report, which is also due by 31 July 2024.
Starting from July, the FCA will review a wide range of reports and share insights to promote best practices. Firms are not required to send the board reports to the FCA, but they should be made available upon request.
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CFPB annual fair lending report highlights agency efforts to combat discrimination
The Consumer Financial Protection Bureau (CFPB) has released its annual fair lending report for 2023. This report fulfils the CFPB’s obligation to report to Congress on enforcement actions taken to enforce the Equal Credit Opportunity Act (ECOA) and the progress made in achieving compliance with the ECOA. The report includes information on enforcement actions, supervisory approaches, rulemaking initiatives, stakeholder and interagency engagement, and the agency’s future focus.
Key takeaways
Fair lending enforcement and supervision
The CFPB took action against Citibank and filed a lawsuit against Colony Ridge, a Texas-based developer, for discriminating against Latinos by offering them inferior mortgage products. The CFPB also addressed issues related to institutions failing to report required demographic information under the Home Mortgage Disclosure Act (HMDA). The CFPB filed two public enforcement actions against repeat offenders, Freedom Mortgage and Bank of America, for inaccurately reporting HMDA data.
Rulemaking and guidance
The CFPB collaborated with other agencies to combat appraisal bias through the Federal Financial Institutions Examination Council’s Appraisal Subcommittee. The CFPB filed court briefs, proposed guidance on reconsiderations of value for residential real estate valuations, conducted a rulemaking on automated valuation models, and urged the Appraisal Foundation to revise its draft Ethics Rule. The CFPB also finalised the Small Business Lending rule, which aims to promote economic development, combat unlawful discrimination, and enhance transparency in small business lending. In addition, the CFPB issued a circular to law enforcers regarding adverse action notice requirements and the proper use of the CFPB’s sample forms provided in the regulation implementing the ECOA. The agency also published various fair lending-related reports and data.
Looking forward
Moving forward, the CFPB will continue to monitor markets and institutions for fair lending compliance and review the fair lending testing regimes of financial institutions. The CFPB exam teams will explore the use of open-source automated debiasing methodologies to potentially develop alternative models to institutions’ credit scoring models. Furthermore, the CFPB aims to combat digital discrimination and take a leadership role in building the federal government’s capabilities to address transformative technologies in the coming years, starting in 2024.
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ASIC approves revised Australian Banking Code of Practice
The Australian Securities and Investments Commission (ASIC) has approved a revised version of the Australian Banking Association’s (ABA) Banking Code of Practice (the Code).
ASIC Chair Joe Longo said, "The Code and reports like these call for banks to continuously look at how they should be putting the customer front and centre. ASIC expects the ABA to continue working with its members to consider opportunities to improve consumer outcomes through data insights, including the identification of consumers experiencing vulnerability and customers identifying as First Nations consumers."
Some context
The Code is a self-regulatory document developed by the banking industry, represented by the Australian Banking Association Limited (ABA). It is overseen by an independent body called the Banking Code Compliance Committee (BCCC). The Code outlines the standards of practice and service that banks in Australia must adhere to when dealing with individual and small business customers, as well as their guarantors. While ASIC does not directly administer the Code, it does give its approval.
Key takeaways
After conducting several reviews of the existing Code and engaging in extensive consultation led by ASIC, the ABA agreed to address key stakeholder concerns. As a result, the standards have been strengthened, and important consumer and small business protections have been retained.
Some of the improvements introduced in the February 2025 Code include:
- Widening the definition of a small business from $3 million to $5 million in aggregate borrowings, thereby making an additional 10,000 businesses eligible.
- Enhancing inclusivity and accessibility for customers, including interpreter services.
- Introducing provisions for deceased estates.
- Broadening the definition of financial difficulty.
- Providing enhanced protections for loan guarantors.
Next steps
The new Code will come into effect on 28 February 2025.
In the coming weeks, ASIC will also release reports on various topics, including Better Banking for Indigenous Australians, credit card offerings, and detecting, preventing, and responding to scams.
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ESMA publishes overview of upcoming consultations
The European Securities and Markets Authority (ESMA) has provided a detailed overview of its published and upcoming consultation papers for 2024. The future consultations are aligned with ESMA’s 2024 plan, as outlined in September 2023.
The remaining mandates for 2024 involve:
- Expanding the single rulebook for sustainable finance.
- Issuing technical standards and guidelines for the implementation of the Markets in Crypto-Assets Regulation (MiCA) and Digital Operational Resilience Act (DORA), as well as for the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR).
- Delivering mandates under the reviews of the Alternative Investment Fund Managers (AIFMD) and Undertakings for Collective Investment in Transferable Securities (UCITS) Directives, the Central Securities Depositories Regulation (CSDR), and under the new Retail Investment Strategy
- Fulfilling mandates related to the ongoing reviews of the European Market Infrastructure Regulation (EMIR) and the new Listing Act
ESMA will regularly update the provided table with the latest information.
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EBA welcomes new EU AML/CFT framework
The European Banking Authority (EBA) has released a statement welcoming the entry into force of the new EU framework for anti-money laundering and countering the financing of terrorism (AML/CFT).
Some context
The new EU AML/CFT framework introduces a unified AML/CFT rulebook and establishes a new Anti-Money Laundering Authority (AMLA).
Under this framework, AMLA will directly supervise cross-border financial institutions that face the highest risks of money laundering and terrorist financing (ML/TF). AMLA will also develop AML/CFT standards and guidelines, oversee national AML/CFT supervisors, and coordinate Financial Intelligence Units (FIUs).
Key takeaways
By the end of 2025, the EBA will transfer its AML/CFT mandates, powers, and resources to AMLA.
During the transition period in 2024 and 2025, the EBA will focus on:
- Developing a methodology for selecting financial institutions for direct EU-level supervision.
- Creating a common risk assessment methodology.
- Determining the necessary information for customer due diligence.
- Establishing criteria to assess the severity of AML/CFT violations.
The EBA will provide its recommendations to the Commission in October 2025.
Throughout the transition phase, the EBA will assist national competent authorities in preparing for AMLA and collaborate with the European Commission’s AMLA taskforce, which will oversee AMLA's establishment and initial operations.
Post transfer, the EBA will continue to be responsible for addressing ML/TF risk in its prudential remit and will work closely with AMLA through joint guidelines, mutual consultations, and governance arrangements.
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SRB issues EU banks bail-in toolkit
The Single Resolution Board (SRB) has released a document aimed at banks, investors, and other stakeholders regarding the execution of its bail-in decisions in line with EBA guidelines.
It outlines the important aspects of bail-in execution within the Banking Union (BU) and complements existing or future publications from national resolution authorities (NRAs).
The document is organised around the various stages of a resolution process, describing the roles of the SRB, NRAs, banks, and other stakeholders in relation to bail-in. It may benefit banks when developing bail-in playbooks to align with the bail-in implementation approach in their respective jurisdictions.
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Banque de France and HKMA to collaborate on cross-border CBDC innovation
The Banque de France (BDF) and the Hong Kong Monetary Authority (HKMA) have announced a new collaboration to enhance cross-border financial transactions through wholesale central bank digital currency (CBDC). This partnership marks a significant milestone, with the HKMA participating in the European Central Bank's (ECB) Eurosystem exploratory work.
Under a Memorandum of Understanding, the two institutions will focus on real-time cross-border and cross-currency payments, exploring interoperability between BDF's DL3S platform and HKMA's Project Ensemble Sandbox. This initiative aims to optimise settlement efficiency and foster financial innovation in cross-border transactions.
Denis Beau, First Deputy Governor of the BDF, highlighted the objective to improve cross-border payments and leverage the Eurosystem's exploratory work to enhance financial inclusion. Howard Lee, Deputy Chief Executive of the HKMA, emphasised the potential for collaboration in the fintech sector, aiming to promote global financial market connectivity and develop the tokenisation market through this partnership.
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FCA speech: Teamwork to tackle financial crime
In a speech at the City & Financial Global Financial Services Investigations and Enforcement Summit, Steve Smart, Joint Executive Director of Enforcement and Market Oversight at the Financial Conduct Authority (FCA), discussed the pivotal role of collaboration in combating financial crime. Reflecting on his year at the FCA, Smart detailed the agency's dual role as both a regulator and law enforcement body, emphasising the need for integrated operations across enforcement, supervision, and authorisations to enhance efficiency and effectiveness.
Drawing on his experience with the National Crime Agency, Smart highlighted the similarities in approach between the FCA and other law enforcement agencies. He pointed out that the FCA's strategy involves preemptively identifying and addressing potential harm while also taking decisive enforcement actions against offenders. This proactive stance is critical, he noted, in an era where financial crimes evolve rapidly, often leveraging new technologies such as AI and deepfakes.
Accelerating investigations and enhancing internal synergies
A key focus of Smart's speech was the FCA's commitment to speeding up investigations and fostering seamless cooperation among its various divisions. By ensuring that enforcement, authorisations, and supervision work in concert, the FCA aims to deploy the most appropriate regulatory tools swiftly and effectively. This integrated approach is essential for preempting financial crimes and ensuring that the FCA remains ahead of criminal tactics.
Smart emphasised the importance of staying ahead of criminals who exploit technological advancements. He stressed the necessity for firms to maintain robust systems and controls to counter such threats. The FCA, acting as a quasi-law enforcement agency, collaborates extensively with industry players and other regulatory bodies to fortify defences against financial crimes. This collaboration is crucial, as firms themselves bear significant risks and losses from fraud.
Impactful campaigns and preventative measures
The FCA's efforts in raising public awareness through campaigns like ScamSmart and InvestSmart were highlighted as vital preventative measures. These initiatives help consumers identify and avoid potential scams by providing clear warnings and encouraging the use of resources like the FCA's online Warning List. Additionally, the FCA's partnerships with major tech platforms to tackle illegal financial promotions have been instrumental in curbing fraudulent activities online.
Tackling financial fraud and ensuring compliance
In 2023, Smart reported there were 3.1 million reported incidents of fraud, a 16% decrease from the previous year. While this marks progress, fraud still constitutes nearly 40% of national crime. The FCA's targeted efforts to reduce APP fraud, investment fraud, and money laundering are yielding results, but the evolving nature of fraud requires continuous vigilance and adaptation.
Smart reiterated the importance of stringent authorisation processes for firms wishing to enter the UK financial market. By maintaining high standards at the entry point, the FCA aims to prevent systemic harm and ensure only firms with robust systems and controls can operate. This is particularly pertinent in emerging sectors like cryptocurrency, where a significant proportion of initial registrations failed to meet the necessary standards.
Enforcement actions and legal pursuits
Smart provided a comprehensive overview of the FCA's enforcement actions over the past year, highlighting the complexity of financial crime investigations. Despite these challenges, the FCA has successfully prosecuted numerous cases, ranging from unauthorised investment schemes to insider trading.
Emphasising the importance of data and intelligence
The FCA's utilisation of data and intelligence plays a crucial role in its regulatory and enforcement activities. With an immense volume of transaction reports and order book records processed daily, the FCA leverages advanced data analytics to detect regulatory breaches and insider trading. The use of such technology enhances the FCA's ability to maintain market integrity and protect consumers.
Whistleblowers are integral to the FCA's intelligence-gathering efforts. Smart highlighted ongoing improvements in the FCA's whistleblowing processes to ensure effective use of the information provided. Encouraging whistleblowers to come forward is a key element of the FCA's strategy to uncover and address misconduct.
Transparency and consultation
Addressing the recent contentious consultation on publicising investigations, Smart stressed the FCA's commitment to transparency and the deterrent effect of timely enforcement actions. The proposed changes aim to enhance the FCA's enforcement capabilities while maintaining a balanced approach that considers public interest on a case-by-case basis.
Smart concluded by emphasising the importance of non-financial misconduct (as it featured on the conference agenda), noting its significant impact on workplace culture and industry standards. He called for continued collaboration and investment in capabilities and relationships to safeguard the UK's financial services sector. The FCA's integrated approach, combining prevention, enforcement, and intelligence, is crucial in maintaining the industry's integrity and reputation.
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