FSA Consultation CP 13/7: High-level proposals for an FCA regime for consumer credit

Transcription

1 FSA Consultation CP 13/7: High-level proposals for an FCA regime for consumer credit The ABI s Response to the FSA consultation on transferring consumer credit regulation to the Financial Conduct Authority Introduction 1. The ABI is the voice of insurance, representing the general insurance, investment and long-term savings industry. It was formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums in the UK. The ABI s role is to: Be the voice of the UK insurance industry, leading debate and speaking up for insurers. Represent the UK insurance industry to government, regulators and policy makers in the UK, EU and internationally, driving effective public policy and regulation. Advocate high standards of customer service within the industry and provide useful information to the public about insurance. Promote the benefits of insurance to the government, regulators, policy makers and the public. Summary 1. The ABI welcomes the opportunity to respond to the FCA s consultation. We are supportive of the stated intention to avoid excessive and unnecessary burdens on firms, and to bring consumer credit legislation into line with other financial services regulations. 2. We have significant concerns, however, around the regulatory disclosure requirements for firms already regulated by the FCA and the PRA, in particular with regards to the interim permissions regime requirements. Firms currently authorised and regulated by the FCA and/or PRA are not required to stipulate other permissions for which they are authorised e.g. permission to hold client money. Information regarding an interim permission is more likely to confuse than to reassure consumers. 3. We also believe that annual insurance premiums paid in monthly instalments where no interest is charged should be considered low risk activities.

2 Specific questions 1. Do you agree that our proposals strike the right balance between proportionality and strengthening consumer protection? 1. In general, yes, as the FCA does not intend to add anything to current requirements. We also support the FCA s intention to conduct a full review of the future regulatory regime for consumer credit. We believe the regulatory regime for consumer credit is very light in comparison to that for insurance savings products. 2. However, as outlined in the response to Question 28, we believe the regulatory disclosure requirements for firms that are already regulated by the FCA and/or PRA are disproportionate to any potential consumer detriment. 2. Do you agree that we have included the right activities in the higher and lower risk regimes? 3. In principle, yes, although we consider that although insurance firms are regulated by the PRA, the consumer credit activity of allowing customers to pay their annual insurance premium in monthly instalments, particularly where no interest or administrative charges are added, is (at most) a low risk activity. It is not dissimilar to other activities currently in the lower risk category, such as consumer credit lending where there is no interest or additional charges. We are in fact making representations to the Government that this type of activity should sit outside the Consumer Credit regime altogether. Further information supporting this can be found in Appendix A. 4. We believe insurance customers are already sufficiently protected by FCA requirements. Customers paying for annual insurance contracts in instalments are currently covered by existing FCA regulations: ICOBS when a firm communicates information, including a financial promotion, to a customer or other policyholder, it must take reasonable steps to communicate it in a way that is clear, fair and not misleading. ICOBS that all information to be provided to a customer must be communicated in a clear and accurate manner, comprehensible to the customer. ICOBS a firm must take reasonable steps to ensure a customer understands he is responsible for deciding whether a policy meets his demands and needs and that a policy's main characteristics include its significant benefits, its significant exclusions and limitations, its duration and price information. ICOBS a firm must take reasonable steps to ensure a customer is given appropriate information about a policy in good time and in a comprehensible form so that the customer can make an informed decision about the arrangements proposed. 2

3 TCF Outcome 3 - Customers are provided with clear information and are kept appropriately informed before, during and after the point of sale. 5. Annual contracts paid for in four or fewer instalments without interest or any other charge (such as utility bills) are already exempt from the CCA. We do not believe that customers paying for annual contracts in more than four instalments are exposed to greater risk than those paying in four or fewer instalments. In addition to protections outlined above, customers are free to cancel an annual insurance contract at any time and will not be expected to settle the outstanding balance, subject to notification of cancellation periods. Consumer credit requirements place a disproportionate burden on insurance firms, for very little, if any, added protection for the consumer. 6. The FCA s recently published Risk Outlook 1 clearly highlighted the importance of access to financial services, particularly for certain groups. We believe that offering annual insurance premiums to be paid in instalments, particularly where no additional interest is charged, increases access to financial services for some consumer groups, such as young or elderly consumers, or the financially excluded. 4. Do you have any comments regarding our proposals for the interim permission regime? 7. We do not believe it is necessary to have an interim permission regime for firms that are already authorised and supervised by the FCA and/or PRA. An interim permissions regime is a sensible approach to managing the changeover for firms that have not until now been authorised or regulated by the FCA, as the FCA will need to take time to become familiar with their business models and practices. However, firms that have been regulated by the FSA for a number of years, and now FCA and/or PRA, are known to the regulator. When the changeover was conducted from FSA to FCA and/or PRA, the Government decided simply to grandfather over all existing permissions, and to allow firms to determine whether they continued to comply with all new and existing requirements. We think this is the most sensible approach for firms already regulated by the FCA, from the perspective both of regulatory burden and consumer protection. We are making representations to the Government on this point. 8. In the meantime, we do not believe that firms which are already regulated by the PRA and/or FCA should be required to amend their status disclosure to refer to their interim permission. FCA/PRA authorised firms have already been assessed by the regulator(s) as meeting the threshold conditions, and will already have in place the necessary infrastructures and systems and controls to facilitate effective supervision. A requirement to disclose an interim permission should only be relevant where the regulators have not had the opportunity to assess a firms ability to be authorised (i.e. those firms which are not currently regulated by the PRA and/or FCA). We therefore believe the requirement to disclose an interim permission should be limited to such firms. 1 3

4 9. Interim status disclosure changes are unlikely to be noticed by consumers, and in the rare cases they are noticed, they are more likely to confuse than clarify. In fact, requiring the disclosure of an interim permission may also cause unnecessary concern to consumers who may question whether a firm is appropriately authorised or regulated for the other activities it conducts. Firms currently authorised and regulated by the FCA and/or PRA are not required to stipulate other permissions for which they are authorised e.g. permission to hold client money. It therefore does not seem logical for permissions regarding the offering of consumer credit to have more prominence than other financial service permissions. 10. We believe the proposed changes to regulatory status disclosure requirements are unnecessary, and set against the prohibitive cost of making three changes to regulatory status disclosures in the space of three years, it seems unreasonable to insist on such a requirement. More information can be found in Appendix B. 14. Do you agree with our proposals that the new high-level conduct requirements should apply from 1 April 2014? 11. Agree. 15. Do you agree with our proposed approach to financial promotions? 12. In general, our members have a number of concerns about the FCA s financial promotions regime. However, in the context of consumer credit, it seems appropriate to apply it across the board to all FCA-regulated firms. 28. Do you agree with the costs and benefits identified? 13. The total one-off compliance costs identified in the Cost Benefit Analysis for administration for the interim permission regime for all firms conducting consumer credit is million. We are unsure whether this analysis includes changes to regulatory disclosure on documentation, but taking it into account, this figure is likely to be an underestimation. The ABI s analysis on the costs of changes to regulatory disclosure following the transfer to dual regulation by the FCA and PRA found that projected costs for such changes could amount to over 1m for individual large firms. More information can be found in Appendix B. 30. Do you agree with our initial assessment of the impacts of our proposals on the protected groups? Are there any others we should consider? 14. Annual insurance premiums paid in monthly instalments are regulated as consumer credit. Offering this option increases access to insurance policies for the young and/or financially excluded, and is especially important for compulsory insurance such as motor insurance. In seeking to reduce unnecessary burdens, therefore, the FCA should consider classifying annual insurance premiums paid in monthly instalments where no interest or administrative charges are included as a low risk activity. 4

5 Appendix A Difference between insurance through instalments and traditional credit agreements Definitions: Premium finance: premium financing involves the lending of funds to a person or company to cover the cost of an insurance premium. Under this arrangement, the premium financing company pays the insurance premium and bills the policyholder, usually in monthly instalments, for the cost of the loan. If the customer fails to make the payments in a timely manner, the loan company will seek to recover the whole of the unpaid loan. We are aware of only four companies in the UK who provide this type of loan. We fully accept that the CCD and CCA should cover these types of premium finance arrangements. Payment of insurance by instalments: The majority of insurance companies in the UK offer two ways for customers to pay general insurance products (e.g. home and motor insurance): 1. Payment in full at policy inception - in this scenario, a customer is quoted 120 for motor insurance cover for 12 months; the customer pays the full 120 at policy inception (by credit card, debit card or cheque). If they cancel the cover at any time over the 12 month period, their premium will be refunded pro rata (e.g. if they cancel after six months, they will receive a refund of 60). 2. Payment by instalments in this scenario, a customer is quoted 120 for motor insurance cover for 12 months. They spread the payments over the 12 month period, paying 10 each month. If they cancel the cover at any time over the 12 month period, they will not be charged the outstanding premium (e.g. if they cancel after six months, their cover will stop and they will not be required to make any further instalments). The proportion of customers paying by instalments can range from around 40% to 80% of the total customer base of individual ABI member firms. We estimate that approximately 50% of customers in the UK opt to pay annual insurance contracts in instalments. If a customer opts to pay their insurance premium in instalments, a small fee may be charged for the additional administration costs incurred by the insurer. Some insurers may also consider payment by instalments to be an indicator of risk and adjust the total premium accordingly. If the customer fails to pay their premiums in a timely manner, the insurer will contact them to remind them of payments due. If this fails, as a last resort the customer will 5

6 receive written confirmation that their insurance will be cancelled from a specific date, usually around two weeks from the final letter being dispatched. The insurer may attempt to recover any missed payments (between the most recent payment and when the insurance was formally cancelled) but they will not seek to cover the whole annual premium. If the customer makes a legitimate claim in the period between making their final payment and their insurance being cancelled, the insurer will honour the claim but the sum owing for the missed payments will be taken from the claim. For example, a customer who has agreed to pay a 120 premium for annual motor insurance cover in monthly instalments stops paying after six months, having paid 60. The insurer reminds the customer about the need to continue payments but in month seven, before another payment is made, the customer makes a legitimate claim. This claim would be honoured by the insurer, but 10 (the missing instalment) would be deducted from the total claim amount. Payment by instalments is therefore very different from premium financing and we do not believe they are covered by the CCD (refer to Recital 12 and Article 3c). 6

7 Appendix B In 2012 and early 2013 the ABI explored potential costs for members of updating the regulatory disclosure on consumer-facing documentation from referring to FSA to referring to FCA and/or PRA. We received a range of estimates from members representing 45% of the overall insurance market. The average estimates put the costs of the changes at around 700k. For some of our larger insurers however, the impact was deemed to be greater, with projected costs exceeding 1m. For example, one firm estimates the implementation costs will be 1.37m as changes will be required on 3800 customer communications across 118 systems. Another firm estimates costs in the order of 1m reflecting changes to dozens of systems and over 1000 documents. The range of costs reflects the size, group structure and number of product lines. The changes are not a simple cut and paste exercise. The process will involve a mapping phase (identifying all the documents and systems, including legacy ones affected), development phase (making the changes to the programmes, coding etc) and a testing phase. The costs reflect the staff and resources involved in this exercise. They also reflect the costs of reprinting stationery stocks. As firms are still in the process of assessing the scope of the changes, some of the reported costs are likely to be underestimates. The costs are further complicated by the business model of the firms. Within groups there may be certain legal entities that are solely regulated by the FCA whilst others will have dual regulation. Having to use different sets of status disclosure wording for dual or FCA-only regulated firms will prove challenging on letters or in areas where more than one of the regulated firms in the group is mentioned. This is likely to increase costs. When weighed against the lack of consumer detriment it is questionable to what extent consumers are actually aware of the FSA or the OFT and their respective roles. Status disclosure wording is complex, will not be meaningful to consumers and increases costs to firms The costs are further exacerbated by the length of the status disclosure wording. The disclosure wording required for dual-regulated firms is already lengthy and complex. We question how meaningful the proposed wording will be for consumers, particularly where firms already state that they are regulated by the FCA for other regulated activities. The length of the statement for dual-regulated firms also impacts on the cost of the changes as it requires more significant changes to be made to document templates. Interim status disclosure changes are unlikely to be noticed by consumers, and in the rare cases they are noticed, they are more likely to confuse than clarify. In fact, requiring the disclosure of an interim permission may also cause unnecessary concern to consumers who may question whether a firm is appropriately authorised or regulated for the other activities it conducts. 7

8 These proposals will impact on other business / regulatory projects without providing discernible benefits to consumers A further consequence of the current proposals is that it will tie up staff and IT resources and will result in delays in implementing other important business and / or regulatory developments. The FCA should focus on real risks to consumers and appreciate that firms are investing significant resources (financial and non-financial) in other major projects such as RDR implementation, Retirement Choices, Solvency II and regulatory reform generally. Additionally, this will make it less likely that firms can prioritise business changes requested by the customer. 8