FCA Financial Lives Survey: Avoid Having Children for a Healthier Financial Future

By The Enforcd TeamThe Enforcd Team
FCA Financial Lives Survey

The FCA Financial Lives Survey was published on 18 October 2017. Titled “Understanding the financial lives of UK adults”, the FCA will use the Survey to identify potential consumer detriment. Results have already informed its Financial Advice Market Review Baseline report, the Ageing Population and Financial Services Occasional Paper, and will inform the forthcoming Approach to Consumers paper.

Moreover, the FCA will compare this year’ survey with future survey results, to try and measure the impact of policy change (which will naturally be wider than that implemented by the FCA alone).

In line with accepted independent financial advice practice, the FCA has organised its analysis by life cycle stage (i.e. 10 year age bands). Anyone familiar with asset accumulation and decumulation, and life cycle stages, can afford to skip much of the centre of this near 200 page document.

Despite the somewhat hysterical coverage in papers such as the Financial Times, and the Daily Mail, the overall picture is positive.

62% of UK adults have no unsecured debt (credit and store card debt not paid off in full every month, non-mortgage loans, motor finance and overdrafts). The average 35-44 year old owes £5,130. Those aged 75 and over owe £540. 18-24 year olds owe on average £1,460 excluding Student Loan Company loans but £8,750 including them. That places all average UK adults within the scope of a Debt Relief Order (DRO), an inexpensive alternative to bankruptcy (£90 fee), which discharges debts of up to £20,000 within a year, so long as individuals have less than a thousand pounds in assets, and no more than £50/month in spare income.

Half (50%) of 35‑44 year olds with a mortgage owe between £100,000 and £250,000, and one in ten (10%) owes more than £250,000. However, this is offset by the two fifths of 35-44 year olds (41%) with a household income of £50,000 or more, and the one fifth (20%) with a personal income of £50,000. That means the squeezed middle has a mortgage to income ratio between 2:1 and 5:1, which is by no means fatal.

Notwithstanding, those interested in financial comfort should avoid having children:

“one third (33%) of 35‑44 year olds with three or more financially dependent children are over‑indebted, compared with less than one fifth (18%) of those with no children.”

The FCA Financial Lives Survey is a must read for readers concerned with aspects of vulnerability. They will include Compliance professionals, first line of defence Monitoring and Testing teams, and auditors overseeing Compliance. The FCA sets out the following vulnerability characteristics:

· low financial capability,

· a physical or mental health condition,

· low financial resilience,

· recent life event(s),

and then provides the incidence rate for these occurring individually, or at the same time. For those used to identifying vulnerability by reference to capability, ill-health and life event alone, the inclusion of financial resilience poses a challenge. Credit Risk/ Conduct Risk policy owners would do well to revisit the intersection between affordability and vulnerability assessments. This requirement becomes especially acute where customers are placed in collection and recovery processes.

The rest of the survey gives metrics on trust in financial providers, self-confidence in financial literacy and money management, and financial products held (together with the channels used to access them).

Helpfully, characteristics of low financial resilience are given (Table A.2). These should form the basis of screening criteria for lenders (bearing in mind that they already consider total indebtedness):

· Missed payments in the last 3 or 6 months (across household bills and all credit commitments)

· No investable assets

· A rent/mortgage increase of £100 per calendar month would be a stressor

· Having less than a month’s worth of total outgoings in cash savings.

Life events leading to vulnerability include:

1. losing job/redundancy/ reduction in working hours (against wishes),

2. serious accident or illness (or of a close family member),

3. death of a parent, partner or child,

4. becoming the main carer for a close family member

5. relationship breakdown/separation, divorce,

6. bankruptcy,

Taking these in turn, permanent health insurance with optional involuntary unemployment cover is available (and mitigates loss of income arising from the first two). The financial impact of the death of a partner/ parent may be diminished using life insurance policies.

It’s hard to find cover for loss of income arising from becoming a carer. In the standard scenario of an adult caring for elderly parents, permanent health insurance doesn’t encompass the retired, and critical illness is for a defined list of conditions which excludes dementia (but does include Alzheimer’s). Pre-funded care home fee policies are no longer available. However assets can still be placed in a long term care or immediate needs annuity (life insurance policies covering the capital in event of an early death are an expensive extra).

Divorce is a tough one. Recent Office of National Statistics data shows that divorce rates among opposite-sex couples in 2016 were highest among men aged 45 to 49 and among women in their thirties (ages 30 to 39). 106,959 divorces were granted in 2016. By comparison, there were 181,000 motor related accidents in 2016 (most of which would have been covered by mandatory insurance). Therefore the sheer number of potential claims is not beyond the capability of the insurance industry. However, claims handlers would find it extremely difficult to identify whether a couple had pretended to split up in order to collect a pay-out.

It remains to be seen whether the FCA will use this survey data to lobby Government to mandate that couples with children (whether married or unmarried), take out relationship breakdown insurance.

Improving Wholesale Conduct MI

By Jane WalsheJane Walshe
Conduct MI

The Financial Conduct Authority (FCA) has been focused on effective conduct risk management information since 2004 when, as the Financial Service Authority (FSA) it launched the Treating Customers Fairly (TCF) initiative.  The principles applicable to the gathering of effective conduct MI in the retail sphere are equally relevant to wholesale firms. This article explores some of the issues.

The TCF initiative was designed to protect retail customers from tied and multi-tied agents masquerading as independent financial advisors, and encompassed the whole product lifecycle:

1. product design and governance;

2. target markets;

3. product promotion and marketing;

4. sales and advice;

5. after-sales; and

6. complaint handling.

TCF was ignored by investment banks/ investment bank divisions of universal banks, because it was aimed at retail customers. Identifying conduct metrics for wholesale business has been a significant headache for them. This article aims to simplify matters, first by surveying retail metrics, then seeing whether the thinking behind them can be applied to wholesale activities.

In two 2007 papers, the FSA called out as good practice the following heads of TCF MI:

* conduct specific employee opinion survey questions;

* sales by product (especially volumes and commissions);

* product cancellation volumes;

* in general insurance, volumes of refused claims;

* complaints data and Financial Ombudsman Service decisions;

* number of products which were developed, but ultimately not sold; and

* annual product reviews, focused on continuing target market suitability, in light of any unexpected product behaviours (such as higher than marketed investment product volatility).

Positive cultural drivers, such as commission claw-back, salary only compensation, and bonuses tied to sales quality were all articulated that year, as were risks arising from existing compensation arrangements: senior manager targets tied exclusively to profit, income or growth, and employees promoted solely for the amount of business and the level of income generated for the firm (regardless of sales quality indicators such as complaints).

Given the nature of the above, is it reasonable that the wholesale businesses provide their Executive Committees and Boards with operational compliance effectiveness metrics? Common suspects, mistakenly identified as indicators of wholesale conduct risk include; statistics on wall crossing, mandatory training completion, open audit issues, staff attrition, hospitality given and received, whistleblowing investigations, and litigation.

The more willing add simple trade surveillance indicators: frequent booking and cancellation of a trade, irregular logins, and failure to take two weeks mandatory leave.

None of these metrics directly relate to product, or sales quality. Nor do they answer Clive Adamson’s (former FSA Director of Supervision), three questions for non-executive directors (NEDs) to be able to answer:

“How do we actually make money today, what is it we will do in the future to grow the firm and why is this fair?”

Towards a solution

As we learned in the aftermath of the 2008 financial crisis, sophistication is a scale. Local government, northern European pension funds, German Landesbanken , and most recently the Libyan Investment Authority, have all either alleged or successfully proven themselves as being at its lower end.

Investment banking firms/ divisions might consider which of their clients generate the most fees, and/or enter into the highest number of transactions, across structured products and exotic derivatives (on a net flow basis). They might then ask where, on the sophistication scale, these clients fall, and make a judgement on the fairness of offering them complex or illiquid products.

Profit and loss, cut by product and market, can answer Adamson’s money question when cross-referenced with rebates paid. Firms could also generate insight as to the sustainability of reported profits by aggregating exceeded desk trading and position limits, especially when combined with requests for profit and loss suspensions (monitoring this should be a standard control following rogue trading at UBS and Societe Generale).

Firms wanting to impress FCA supervisors would also do well to focus on financial forecasting and target setting. This annual process is a key driver of customer outcomes. If the current process is last year’s numbers plus a percentage, without any evidence of thought given to competitor activity, customer demand, and regulatory and political headwinds, then it may create targets which are impossible to meet safely. There are two simple solutions. Manipulate the numbers, or manipulate the customers. All firms should recall the fates of Tyco, Wordcom, Enron, Bear Stearns and Lehmann Brothers.

To date, retail customers have bought, and then complained en masse about: structured capital at risk products (split caps and precipice bonds), pensions advice, mortgage endowments and payment protection insurance.

Wholesale customers have bought, then sued over: interest rate swaps, collateralised debt obligations and derivatives contracts linked to manipulated global inter-bank offer rates, precious metals fixes and FX rates.

In many cases, regulated firms have paid out more than they took in, taking into account operational litigation, and compensation costs.

Ultimately, the test of effective conduct risk MI is whether it helps boards know that the money their firm makes is money it will keep.

Pension Transfer Update

By The Enforcd TeamThe Enforcd Team

The 2015 accounts for Glasgow based Intelligent Pensions Limited were jubilant:

“Turnover has grown this year by 15.4% and the company generated a profit on ordinary activities before taxation of £285,990, a substantial increase from £159,784 reported for 2014.

The recent changes to pension legislation have proved to be very beneficial for the Company with a significant uplift in activity. This has been most noticeable in our pension transfer service which has had an extremely busy year and activity and enquiries continue to be strong. The core pension business has also had a very satisfactory year with new business throughout the UK showing a significant uplift.”

Contrast that with the FCA’s shorter, blunter:

“…with effect from 30th May 2017 the firm shall cease to provide advice in relation to the transfer, or conversion, of safeguarded benefits under a pension scheme to flexible benefits.”

The same fate met an Appointed Representative of Financial Solutions Midhurst Limited:

“… Heather Dunne (FRN 524600) should immediately cease to provide advice in relation to the transfer, or conversion, of safeguarded benefits under a pension scheme to flexible benefits.”

No such article is complete without a reference to the subsidiary of international IFA deVere Group, deVere and Partners (UK) Limited, which was required by the FCA to:

Immediately cease to provide third party companies with TVAS/DBAR reports or other similar report of information designed to assist third parties companies in transferring customers DB pensions to an alternative arrangement.

All three performed transfer value analysis on behalf of other advisers.

The Telegraph credited Intelligent Pensions with performing over 10,000 transfers (which doesn’t seem plausible based on its reported income), whilst Citywire identified that it provided a Direct Benefit to defined contribution pension transfer service to clients of other advice firms unable to offer that service themselves, as well as to its own clients.

All this activity aligned with the FCA’s consultation paper on pension transfer advice. The window for responses closed on the 21st of September 2017, with final rules expected in Q1 2018.  The FCA explained:

“firms without the relevant permission to advise on the transfer or conversion of safeguarded benefits might have clients who are seeking this advice. They can pass the transfer element of advice to an adviser with the appropriate permission but retain a role in advising on the destination of the funds following the transfer, e.g. the specific personal pension scheme and the investments within it. In practice, the assessment of suitability on the transfer cannot be done without consideration of the destination for the transferred funds and vice versa. Therefore in this scenario, although the firms are responsible for different elements of advice given to the client, they will need to liaise to ensure the overall recommendations are suitable and to avoid any disconnect. Both firms must be able to demonstrate the advice they give is suitable for the client.”

Providers of professional indemnity insurance to the IFA sector could do well to carve out this sort of advice from future policies. And firms should know that since they provide the regulator with detailed reports on their income, they should expect scrutiny if that starts looking toppy.

Complaints Handling

By The Enforcd TeamThe Enforcd Team
complaints handling

Complaints handling is (sort of) back in the headlines.

This time the FCA has written to firms with consumer credit permissions, to say that following its review, it had identified:

  • a failure to provide to customers the required information about the Financial Ombudsman Service – this included failing to provide details of the complainant’s right to refer to the ombudsman if they remain dissatisfied;
  • a failure to provide a clear explanation, to the complainant, of the outcome of the complaint and why this outcome had been reached; and
  • a lack of management controls in place to analyse and remedy any root causes of complaints or systemic problems.

The regulator hinted that lenders (who include payday loan providers), were manipulating their FCA reportable complaints handling performance statistics by neither upholding nor rejecting complaints, instead making ex gratia payments that were very similar in amount to their upheld complaints.

The FCA’s previous intervention in the complaint handling space covered packaged bank account complaints. It identified similar concerns:

  • setting out clearly and accurately what the firm has understood the customer’s concerns to be;
  • accurately reflecting the investigation that was actually undertaken (according to the record on the complaint file); and
  • fully addressing every complaint point (or each key theme, where there are multiple complaint points that can be grouped together).

Of course, the gold standard for FCA involvement in complaints handling has to be payment protection insurance, now the subject of a very formal deadline (fronted by a rubber mask based on Arnold Schwarzenegger). For all the FCA’s focus on DISP 1.3.3R (a rule requiring firms to identify the root causes of complaints, see if they impact processes or products not directly complained of, and correct these) PPI was never subject to an industry scheme, whereby all customers were offered redress automatically. This gave a massive boost to the claims management company sector (and the advertising sales departments of most UK tabloids and radio stations).

Meanwhile, the most recent set of quarterly FOS complaints by product category saw 59% of payday loan complaints upheld in the customer’s favour by the FOS between April 2016 and March 2017. These were customer complaints reviewed and rejected by firms. Given this, why aren’t we hearing more about an industry-wide scheme, offering to settle payday loan complaints proactively, by reference to DISP 1.3.3R? The claims management companies are already operating in this space (and taking a much higher share of the smaller amount of redress paid). It may be, that having considered the figures, the FCA decided against it, on the basis that most payday lenders would be rendered insolvent. Still, it’s a bit off. The Ombudsman experience is every bit as bad as payment protection (currently running at a 52% uphold rate), and the FCA has already identified that many customers were not advised of their right to refer a rejected complaint to the FOS.

What are the take-aways?

The FCA is aware that complaints handling statistics are not as reliable as they might be. So the Ombudsman service experience serves to enrich their view (they have a memorandum of understanding and an information gateway in place for this sort of thing). Overall, it’s much harder to hide a problem product. Firms should probably stop bothering.

A Great or Terrible Year to be a Banking IT Manager?

By The Enforcd TeamThe Enforcd Team

Depending on your point of view, this is either a great, or a terrible year to be a banking IT manager. Three major regulatory burdens are in train: the second payment services directive (PSD2), the general data protection regulation (GDPR), and the second markets in financial instruments directive (MIFID2). It renders the European operations of universal banks completely overstretched, and fighting for the same small pool of contractors and management consultancy support.

GDPR seeks to give EU citizens greater control over data held about them by companies and social networks. This includes the right to request deletion, amendment, and disclosure of all information held on them. On the point of disclosure, the regulations require firms to tell customers how their data will be processed. Data requests will be free, unless excessively complex. Data breaches will need to be reported far more promptly.

This is a far cry from Subject Access Requests under the Consumer Credit Act. For a start, financial services firms will have to figure out how to search for, and present securely, the data that they hold on a customer. They’ll each need to come up with new processes and technologies to enable deletion and amendment. They may have to hire more loan underwriters, because the GDPR enables customers to opt out of automated decision making.

PSD2 promotes data portability (and creates a new vulnerability under GDPR’s data security obligations): payment service providers must give payment initiation service providers (think Apple Pay and Android Pay but integrated with your bank statements and direct payees) access to their customers’ accounts so as to facilitate transactions ordered at the customers’ request. In return, payment initiation service providers must observe a number of data security obligations and take on some liabilities in relation to unauthorised transactions they are responsible for. Facilitating access upon request is the sticky problem, with nascent European financial technology firms worried that bank APIs (back-end data access), will lag behind their customer-facing apps and websites. Currently, many of the services which aggregate multiple accounts across multiple providers rely on holding your access credentials, and scraping the data so accessed.

Finally MIFID2 has mopped up what programming and operational change talent is left by requiring firms to submit data on over the counter derivative transactions (having moved these on to regulated trading venues), and extending the number and type of trading venues in the UK (see for instance organised trading facilities). This will hugely increase the complexity of settlement and regulatory transaction reporting.

One exceptionally geeky concern is that trading venues and their members will need to synchronise their clocks (it helps regulators quickly reconcile trades across venues and between organisations). To understand the magnitude of this requirement, readers should note that some systems within a single bank may observe British Summer Time, whilst others may not. Legacy systems might not be capable of recording a microsecond level of precision. Another concern is when to time-stamp: at the time a trade is sent, or confirmed?

MIFID2 and PSD2 come into force in January 2018 (the FCA is already help firms submit waivers to European regulators). GDPR follows in May 2018. The Information Commissioner’s Office has been at pains to explain that it will not be applying fines at their new maximum come June.