Posted: 20th December 2013

As we approach the end of 2013, we look back on this unprecedented year for the financial services market: what has happened in 2013, notable thematic reviews and regulatory developments. . 

Financial Conduct Authority

In April 2013 we witnessed the arrival of twin peaks regulation. It was out with the old – goodbye to the Financial Services Authority (FSA) – and in with the new – hello Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA).  As a conduct regulator, the FCA has set its stall out to be more judgment-based, forward-looking and outcome-focussed. In practice this means, looking at what consumers are really experiencing, looking closely at firms’ culture, business practices, product strategies and importantly how they make their money.

We have also seen the introduction of three pillars:

  • The FCA’s more forward-looking assessment of a firm’s conduct risks, the new Firm Systematic Framework (FSF) which replaces ARROW. This is designed to answer the key question: Are the interests of customers and market integrity at the heart of how the firm is run? This involves analysing firms’ business models and strategies to form a view of the sustainability of the business from a conduct perspective. It also assesses how the fair treatment of customers is embedded in the way the firm runs its business, from the ‘tone from the top’, to how culture is embedded and how the firm manages and controls its risks
  • Event driven work
  • Issues and product reviews: the FCA’s appetite for thematic reviews has not diminished.  They are an integral part of the FCA’s overall supervisory approach to assess current or emerging risks relating to an issue or product across a number of firms within a sector or market

Notable 2013 thematic reviews


This consists of two phases and is currently still underway. Phase 1 considered how firms identify, record and report complaints, to be completed by the end of December 2013. Phase 2 commences in early 2014, and considers firms’ approach to redress and root cause analysis. To assist firms, we produced a report on complaints and root cause analysis.

General insurance

In June 2013, the findings from the thematic reviews into Motor Legal Expenses Insurance (MLEI) and Mobile phone insurance (MPI) were published.  In summary the review uncovered issues demonstrating that firms need to re-evaluate their approach to the sale of general insurance add on products. Firms should equip themselves to ensure an operating and control environment aligned to a great customer experience whilst achieving appropriate customer outcomes.

2013 FCA policy initiatives

Retail banking

New rules relating to eligibility and suitability for the sale of insurance as part of a packaged account came into effect on 31 March 2013. This required firms to assess a customer’s eligibility for each benefit available under each insurance policy and inform the customer if they are not eligible to claim under any area. Importantly, demonstration of needs should reflect each of the benefits included within the policy. Furthermore, firms are required to provide an annual eligibility statement to customers, setting out eligibility criteria for each benefit and inform customers if they are no longer eligible to claim under any area.

Consumer Credit

The FCA is at pains to stress that it does not want to restrict consumers’ access to credit. Yet, on 1st April 2014 the FCA’s ‘show me’ attitude will require consumer credit firms to evidence good customer outcomes and adherence to the eleven principles for business in ways that consumer credit firms have not had to before. Our experience of working with firms who are attempting to adapt to the more “intrusive” stance adopted by the FCA highlights the need for firms to balance understanding of regulator’s new approach, with the requirement to change mindsets and behaviours.

Mortgage Market Review (MMR)

Throughout 2013 the FCA has engaged with firms covered by the MMR in a number of ways through roadshows, online surveys and workshops, including tracking firms’ readiness for implement of the new Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) rules. It comes into force on 26 April 2014, though this date may shift by a month, subject to industry trade bodies’ discussions with the regulator. This reform removes the non-advised sales process. Once the new rules are in force, they allow firms to conduct advised sales and, in limited circumstances, execution-only sales.

Financial Incentives

In January 2013, the FSA published final guidance about the risks to customers from financial incentives. The review found that most firms have incentive schemes that can drive mis-selling, but do not have effective systems and controls to adequately manage the risks. While the FCA in not mandating the removal of financial incentives, firms are beginning to recognise that culturally they can drive the wrong behaviours and continue to look for other ways to reward their people.

Enforcement developments

There have been a number of high profile enforcement cases this year, underlining the FCA’s commitment to credible deterrence. These include the £138m JP Morgan fine and £14 million fine of ICAP. This is against a back drop of other conduct related enforcement cases including Card Protection Plan (CPP) for the mis-selling of card protection and identity policies and £4.3m for Lloyds Banking Group for failings in their systems and controls that resulted in some customers receiving delayed PPI redress payments. Other notable enforcement cases include Clydesdale Bank fined £8.9 million for failing to inform its customers clearly of their rights after the bank miscalculated the repayments on over 42,500 mortgages, leading to shortfalls in approximately 22,000 accounts.

We also note the £1.8m AXA fine for failing to ensure it gave suitable investment advice to its customers and failing to have effective controls over its incentive schemes. The recent fine for Lloyds Banking Group, at £28m the largest imposed by the FCA. The fine was given for serious failings in controls over sales incentive schemes and highlights the increasing trend of higher fines.

More cases, tougher penalties and pursuing individuals: all part of the FCA’s credible deterrence and central to their enforcement approach.

Looking to 2014

2014 looks set to be a busy year and in particular a busy first quarter.  Just ask Linda Woodall, Director of Mortgages and Consumer Lending at the FCA.  MMR implementation and the transition of 50,000 consumer credit firms from OFT will no doubt keep her busy.  For the rest of the FCA and the wider market, what do we expect?  More of the same.

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