Regulation Round Up – Financial Services

14/02/2024

Barrister Lucy Walker discusses five regulatory updates in the financial services sector.

1. Authorised push payment fraud

The key feature of authorised push payment fraud, (APP fraud) is that at the time the customer issues the relevant payment instruction to their bank, they fully intend to make payment to the payee in the amounts instructed. It is only after payment has been made that the customer discovers they have been the victim of fraud and that the goods, services or causes for which they have paid money do not exist, or that the money has been diverted to another payee.

The key question is what protection does the law offer the customer in cases of APP fraud?  

Following the judgment of the Supreme Court in Philipp v. Barclays Bank UK PLC, [2023] UKSC 25, in which a team from Guildhall Chambers comprised of Hugh Sims K.C., Professor Christopher Hare, Lucy Walker and Jay Jagasia represented Dr and Mrs Philipp, the immediate answer, in terms of common law protection, would appear to be ‘not much’.

The Supreme Court overturned the judgment of the Court of Appeal which had held that the Quincecare duty imposed on a bank not to execute a customer’s instructions where the bank had reasonable grounds to suspect fraud or misappropriation of funds extended to situations such as that of Dr and Mrs Philipp where the relevant payment instruction was given to the bank by the customer as opposed to an agent of the customer.

The Supreme Court held that the Quincecare duty did not amount to ‘some special or idiosyncratic rule of law’ and that ‘[p]roperly understood, it is simply an application of the general duty of care owed by a bank to interpret, ascertain and act in accordance with its customer’s instructions’, per Leggatt JSC, at [97].

Indeed, the central message from the judgment in Philipp is that a bank’s primary duty is to execute a customer’s instructions and any refusal or failure to do so will, prima facie, be a breach of duty. Where the validity of the customer’s payment instruction is not in doubt, provided that the instruction is clear and was given by the customer personally or by an agent acting with apparent authority, the bank will be under no duty to make inquiries to clarify or verify what to do, per Leggatt JSC, at [100].

The Supreme Court also took the view that it was not the role of the Courts to intervene and provide consumer protection in cases of APP fraud when the regulator could perform this task.

This brings us neatly to the publication, in December 2023, by the Payment Systems Regulator of its final policy statement to fight APP fraud, (PS23/4). The policy statement sets out details of a new mandatory reimbursement scheme (enacted through the Financial Services & Markets Act 2023) to protect victims of APP fraud. The new reimbursement scheme will come into force on 7^th October 2024.

The cornerstones of the scheme are as follows:

• the paying bank or payment service provider must reimburse a customer who has fallen victim to APP fraud up to a maximum of £415,000 for a single APP scam although the bank or payment service provider may elect to make reimbursement in excess of that sum;
• the paying bank or payment service provider will be entitled to charge an excess of up to £100 per claim save where the claim is submitted by a vulnerable customer;
• the duty to reimburse customers will not apply where the customer has been grossly negligent (the ‘consumer standard of caution’ exemption). However, reimbursement may not be denied to a consumer who is vulnerable. The regulator has published a ‘consumer standard of caution’ exception notice and guidance on how this exemption should operate; and
• banks and payment service providers will not be required to reimburse customers where the claim is made more than thirteen months after the final payment is made under the APP fraud.

Whilst the reimbursement scheme is undoubtedly good news for customers, notable gaps remain in the protections available to victims of APP fraud.

First, the new regulatory scheme only applies where the payments induced by APP fraud are made over the ‘faster payments’ system. This effectively limits reimbursement to situations where the payments are sent and received within the UK. Hence, the scheme would not assist Dr and Mrs Philipp who were persuaded to make payments to an account in the United Arab Emirates. Given the proliferation of APP fraud orchestrated from abroad this is a significant lacuna in protection.

Second, given the sophistication and money involved in some APP frauds, notwithstanding the optional ability to make greater reimbursement, the limit on reimbursement of £415,000 for any one APP scam will not assist all victims of APP fraud. By way of example, Dr and Mrs Philipp lost £700,000.

Third, the new reimbursement requirement applies to individual consumers, charities and micro-enterprises. It follows that not all victims of APP fraud will be entitled to the protections of the new scheme.

In conclusion, whilst the introduction of the scheme is generally good news, notable gaps in protection remain. Further, a victim of APP fraud wishing to make a claim under the new scheme will need to pay attention to the conditions attached to the consumer standard of caution exemption to make sure that their claim is not excluded.

2. Changes to the financial promotion regime

A number of changes recently have been announced to the regulatory regime governing the content, approval and publication of financial promotions. A ‘financial promotion’ is an invitation or inducement to engage in investment activity. The investments and activities caught by the financial promotion regulatory regime are specified in the Financial Services & Markets Act 2000 (Financial Promotion) Order 2005, (the “Financial Promotion Order”).

Approving financial promotions

New rules govern who can approve a financial promotion for publication. Previously, a financial promotion could be disseminated by a person who was an authorised person under the Financial Services & Markets Act 2000, (the “FSMA”) or by an unauthorised person where the content of the promotion had first been approved by an authorised person.

With effect from 7^th February 2024, an authorised person who wishes to approve the content of a financial promotion for an unauthorised person must hold specific permission under FSMA (‘approver permission’) permitting them to approve the content of financial promotions, unless an exemption applies. Some limited exemptions from this requirement are set out in the Financial Services and Markets Act 2000 (Exemptions from Financial Promotion General Requirement) Regulations 2023.

Amendments to exemption categories

Subject to Parliamentary approval of the relevant legislation, with effect from 31^st January 2024, amendments to the financial promotion regime concerning the exemptions available for promotions aimed at high net worth individuals and self-certified sophisticated investors came into force.

The financial thresholds applicable to income and net assets have been increased in line with inflation. Hence, in order to qualify as a high net worth individual a person will need income of at least £170,000 in the previous financial year and/or net assets of at least £430,000 in the previous financial year.

In relation to the exemption for promotions directed towards self- certified sophisticated investors, an individual who has been a director of a company with an annual turnover of at least £1.6 million in the last two years (up from £1 million) will qualify for this exemption. Additionally, HM Treasury is removing the exemption for individuals who have made an investment in an unlisted company in the previous two years. The other two criteria under which an individual can qualify as a self-certified sophisticated investor have been left unchanged.

Cryptoasset promotions

With effect from 8th October 2023, the financial promotions regime was amended and expanded to cover promotions concerning cryptoassets.

In order lawfully to direct a cryptoasset financial promotion to persons resident in the United Kingdom, the promotion must be approved and communicated by:

• a person who is an authorised person for the purposes of FSMA;
• an unauthorised person, but only if the promotion has been approved first by an authorised person under FSMA (who, with effect from February 2024, must hold ‘approver permission’);
• a cryptoasset business registered under the Money Laundering Regulations.

As an alternative to the above, cryptoasset promotions may be directed towards an exempt person as defined under the Financial Promotion Order, but it is important to note that in relation to cryptoasset promotions, the exemptions relating to high net worth individuals and self-certified sophisticated investors are not available.

A breach of the financial promotion regulatory regime is a criminal offence punishable by up to two years’ imprisonment, the imposition of a fine, or both.

3. The consumer duty

The consumer duty came into force in July 2023 and the Financial Conduct Authority (the “FCA”) will continue keenly to monitor and enforce firms’ implementation of the consumer duty.

In a recent speech, Nisha Arora, a director of the FCA, stated that the consumer duty is not a ‘once and done’ exercise. ‘Firms need to make sure they are learning and improving continuously and must be able to evidence this in their annual board report…..

The consumer duty remains a top priority for the FCA. We will continue our work across all sectors to test firms’ implementation and embedding and will share good practice to support the industry.’.

Accordingly, it is incumbent on all FCA – regulated firms to continue to embed the consumer duty into the culture and procedures of the firm to ensure good outcomes for consumers. The FCA’s expectations of firms in different sectors in relation to implementation of the consumer duty were set out in a series of ‘Dear CEO’ letters in February 2023. The FCA will expect to see firms progress in terms of continuing to review their documentation and policies and making sure that interactions with customers are conducted through the prism of the consumer duty. It is also likely that 2024 will see the first round of enforcement action where the FCA considers that a firm has not complied with consumer duty requirements.

4. Motor finance commission review

On 11th January 2024, the FCA published a policy statement (PS24/1) announcing changes to complaints handling rules for motor finance complaints. This step is the latest in a saga that has been rumbling on for a number of years relating to the widespread use of ‘discretionary commission arrangements’ in the motor finance industry.

In the normal course, a customer wishing to purchase a vehicle using finance would be introduced to a lender by the motor dealer from whom the customer planned to purchase the vehicle. The dealer would earn a commission from the lender for the introduction. However, it was standard practice within the motor finance industry to link the amount of the commission payable to the dealer to the interest rate under the resulting vehicle finance agreement. This meant that the dealer, who usually had a ‘wide discretion’ (the FCA’s words) to set or adjust interest rates under customer agreements would earn greater commission for higher interest rate agreements and many customers probably paid a higher rate of interest under their vehicle finance agreement than otherwise necessary.

The FCA conducted a review of the motor finance market between 2017 and 2019 and in 2021 imposed a ban on discretionary commission arrangements.

The FCA policy statement notes that there has been a sharp increase in complaints about discretionary commission arrangements since the ban came into force, with many of these complaints being rejected by lenders. Referrals to the Financial Ombudsman Service (“FOS”) have also increased and the FCA anticipates that this trend will continue.

In order to reduce the risk of disorderly, inconsistent, or inefficient outcomes which could arise due to the volume of complaints, the FCA proposes that it will pause, for a period of thirty seven weeks, the need for a firm to respond to a customer complaint within eight weeks. There is also an extension of the timeframe in which a complaint can be referred to FOS, from six months to fifteen months.

However, the real concern for the motor finance industry is the likely next steps that the FCA may take. The policy statement makes clear that in exercise of its powers under s.166 FSMA, (the power to obtain a report from a skilled person) the FCA will complete diagnostic work to assess practices within individual firms to determine whether there has been a widespread failure to comply with the relevant requirements and, if so, whether redress is owed. Furthermore, the FCA also states that it may be appropriate (depending on the outcome of the diagnostic work) to set up an industry wide redress scheme under s.404 FSMA.

It follows that the motor finance industry will need to keep a keen eye on the road ahead.

5. Reform of the consumer credit regulatory regime

The proposed reform of the consumer credit regulatory regime flowing from FSMA and the Consumer Credit Act 1974, (the “CCA”) continues its glacial progress. The consultation response to reform of the CCA published by HM Treasury in July 2023 set out the policy and regulatory objectives for reform; essentially to modernise the regulatory regime, facilitate market innovation and development and to reflect the ways in which modern consumers engage and interact with credit products, in particular through the use of digital channels and social media.

There is still much debate to be had about whether the revised regime should focus on consumer ‘outcomes’ or be more prescriptive and orientated around detailed rules in its approach. Nevertheless, the Government plans to develop proposals that will recast as much of the CCA as possible as FCA rules.

However, one of the current barriers to reform is the fact that many important provisions and sanctions contained in the CCA have legislative force and are enforceable by Court Order. Simply transposing these statutory protections to FCA rules would not have the same protective force for consumers and in any event, the FCA would not be empowered to exercise equivalent protections, section 75 CCA being an example.

Interestingly, the Consumer Credit (Agreements) Regulations 2010 and the Consumer Credit (Disclosure of Information) Regulations 2010 are amongst the secondary legislation listed for repeal pursuant to the Financial Services & Markets Act 2023 as part of the post Brexit bonfire of EU derived legislation. No commencement date for repeal has yet been announced, but clearly reform of the rules relating to the form and content of pre-contractual information and the form and content of regulated credit agreements is on the horizon. Any simplification of the legislation would be welcome news.

Detailed proposals and a specific timeline for CCA reform generally are yet to be published. Clearly, the process has a long way to go.

Lucy Walker

Guildhall Chambers

[email protected]

0117 930 9000