Regulatory News – 8 May 2008 Source: FSA This bulletin is believed to be accurate but is not intended to provide a basis of knowledge upon which advice can be given. JHFC and JHM Ltd does accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the material included in this bulletin. Any opinions expressed are those of the author or authors and not necessarily those of JHFC and JHM Ltd. Detailed information on the news can be accessed via the FSA website www.fsa.gov.uk . Reading this regulatory bulletin can be included as part of your CPD requirement should you consider it relevant to your professional development needs. Mortgage review findings will help shape future of FSA regime The Financial Services Authority (FSA) last week published the findings of the second stage of its mortgage effectiveness review, which focused on consumer experiences in the sub-prime and lifetime mortgage sectors of the market. The review was designed to measure whether the FSA’s mortgage conduct of business rules are delivering the intended benefits for consumers. The first stage of the review, published in 2006, looked at disclosure, advice and selling practices in the mainstream mortgage market and found that things were generally working well for consumers. This second stage focused on the more specialised sectors of sub-prime and lifetime mortgages. While these sectors are modest in size, together accounting for less than 10% of the regulated mortgage market, they were examined in detail because the risk of consumer detriment may be greater. While the two markets are different in nature, there were many similarities in the findings. The research found the following: Both sub-prime and lifetime consumers see the key facts illustration as an important and useful document for helping them to check points of detail and clarify uncertainties, but not for product comparison and shopping around. In neither market do consumers make a distinction between receiving advice and receiving information only, and the initial disclosure document is not prompting them to think about the level of service they might get. Sub-prime consumers rely to a considerable extent on their broker and accept their broker’s recommendation. Most lifetime consumers also rely on their broker. Both sets of consumers focus heavily on price, with sub-prime consumers concentrating particularly on initial payments. Research was also carried out into consumer experiences of arrears handling and this indicated areas of non-compliance by firms with the arrears rules. The FSA is undertaking focused thematic work on the arrears management practices of firms to establish whether such problems are indeed occurring. The results are expected in June and the findings will also be published then. FSA confirms principles-based approach to platforms The FSA last week published feedback to its discussion paper on platforms, published in June 2007. In the discussion paper, the FSA set out its view that principles-based regulation is the right approach for platforms, as in a new and rapidly developing market detailed rules risk stifling innovation and are likely to become out of date quickly. Respondents agreed. However, the FSA remains concerned about a number of potential risks it highlighted in the discussion paper: that platform adoption may lead to increased complexity and costs for consumers (without new – or valued – services being received in return) and create conflicts of interest for advisers, as well as the risk that advisers may not always have the appropriate competence to provide the level of investment advice they are offering through a platform. As a result, the FSA will be looking at platform providers and intermediaries that use platforms to ensure that customers are being treated fairly through the existing regulatory approach. In the second quarter of 2008, the FSA will begin thematic work on intermediaries' use of platforms to assess current market practice and the extent to which firms are treating customers fairly. The FSA will also shortly be contacting platform providers to examine in more detail, and seek to clarify and improve, standards for the disclosure of costs and services across the industry. FSA speech – Insurance in a wider financial context In a recent speech by Callum McCarthy, chairman of the FSA, at the Insurance Sector Conference, Mr McCarthy took the opportunity to discuss two aspects of the wider financial context of the insurance market, one immediate, the other long term. The immediate issues he discussed were those that have arisen from the present turbulence in the financial markets (particularly the debt and funding markets) and how these have affected the insurance sector, and whether the insurance sector contributed to the present problems, either positively or negatively. The longer term issues that he considered were those posed by increasing life expectancy. Mr McCarthy said: “The fragility of financial markets is a very real and present condition. Since August 2007 we have seen a marked and sustained reduction in a number of funding markets and instruments, both in the UK and globally. Retail MBS issuance in the UK – which amounted to about 15 per cent of global retail MBS issuance in 2007 – has been almost totally absent in the UK this year; the covered bond market is similarly dormant. A problem which had its origins in the US mortgage market has spread to cause widespread anxiety and lack of confidence in many parts of financial services, and may yet have wider effects on the real economy.” The speaker went on to elaborate on what he considered to be the two most important aspects of the present position that have wider application and significance. The first was the role of the credit rating agencies and the second was international co-operation and action. In respect of life expectancy, the issue for life insurers is that improvements in life expectancy bring with them longevity risk. Firms need to make longevity projections to correctly price the risks to their business and assess how this affects policyholders both today and in the future. FSA – Major retail thematic work plan for 2008/09 Last week the FSA set out its Major retail thematic work plan for 2008/2009. The FSA’s retail strategy is to help consumers achieve a fair deal. It approaches this from several angles, focusing on how firms are managed and how they interact with consumers. The FSA’s supervisory activity looks to whether firms are adequately resourced and soundly managed so that consumers can have confidence that firms will be able to honour the promises that they make. The FSA’s current programme of work directed at helping customers achieve a fair deal includes the retail distribution review, the financial capability programme and the treating customers fairly initiative. Treating customers fairly is the cornerstone of the FSA's efforts to help consumers achieve a fair deal and underpins much of its thematic work, and so it is the main focus of this plan. Several other thematic projects are covered in the plan, in particular those relating to financial crime. The status of the following projects is covered in the plan, in addition to the proposed information or communication that will result from those projects: challenging firms to meet treating customers fairly outcomes by December 2008 and to have management information that evidences this; assessing firms' progress with the development and use of management information to demonstrate that they are treating customers fairly; responsible lending in mortgages; mortgage arrears; follow-up on the quality of advice; quality of advice – outcomes; pensions transfer advice (including self-invested personal pensions); payment protection insurance – phase III; with-profits; poor key features documents – follow-up work; high pressure selling of shares; unauthorised overdraft charges; conflicts of interest; mortgage fraud; review of financial crime risks arising from offshoring.