Financial Services Act: key changes before Royal Assent

Both core elements of the United Kingdom’s post-Brexit framework as well as some more political areas of concern are addressed in this wide-ranging piece of legislation. Emma Radmore and Lucy Hadrill discuss debates, changes and additions from the Bill as originally published.

It’s now over a year since the Financial Services Bill (the Bill) was introduced into Parliament. In an article looking at the key drivers behind the Bill, we focussed on the three areas of prudential standards for banks, a reform of the investment fund marketing regime, and the future financial services relationship between the United Kingdom and Gibraltar.

On 29 April, the Bill finally achieved Royal Assent, and is now the Financial Services Act 2021.

What's the current status?

As this article comes to its publication date, the Financial Services Act 2021 has just been published. Prior to that, the last consolidated published version of the Bill was in January, when it was introduced into the Lords. Elements not discussed in our previous article, or introduced since the original Bill publication, include:

• Provisions relating to the assessment of and powers with respect to benchmarks, amending the version of the European Union Benchmarks Regulation that has been retained in UK law so as to provide the Financial Conduct Authority, among other things, with additional powers on the winding down of a critical benchmark
• An increase to the maximum penalties for insider dealing under the Criminal Justice Act, and financial services offences under the Financial Services Act 2012 from seven to ten years’ imprisonment
• Changes to the money laundering provisions of the Proceeds of Crime Act 2002 to put e-money and payment institutions on the same footing as deposit-takers when using exceptions to specific offences, and amending relevant provisions about the forfeiture of money to apply also to money held in accounts with e-money or payment institutions
• Application of money laundering regulations to overseas trustees
• Setting out a streamlined procedure for the FCA to use to cancel a firm’s permissions where they are no longer carrying on regulated activities
• Changes to the debt respite scheme rules so as to allow the involvement of creditors in devising the plan and protecting the relevant individual from having to repay a debt otherwise than in accordance with the plan, as well as providing for how amounts should be paid towards the operation of a plan
• Rules on successor accounts for Help-to-Save accounts
• Provisions allowing the FCA to determine whether a product is a Packaged Retail and Insurance Based Investment Product (PRIIP).

However, once the Lords started to debate the Bill, many further amendments were tabled for debate and discussion, but a relatively small list of marshalled amendments were ultimately returned to the Commons for final discussion.

Extension of failure to prevent offence

Disappointingly for many, although unsurprisingly, there were concerted attempts to introduce a new corporate criminal offence of failure to prevent any economic crime, similar to the offences currently in place in relation to bribery and the facilitation of tax evasion. There were, at one stage, around half a dozen variants of the offence tabled for discussion, but all have been dropped. So, it seems that we will need to wait for the Law Commission paper – but this is not even due to report on the options until the end of the year.

Debates in the Lords

The Report Stage included debating and voting on several key amendments, including changes relating to Buy Now, Pay Later (BNPL) products, mortgage prisoners, payments and climate change. Many of the proposals have a strong focus on consumer protection.

Debates that did not result in a Lords' proposal for change

Fossil fuel risks

A vote on an amendment requiring the Prudential Regulation Authority to review the climate change risks applied to fossil fuel exposures in capital requirements was tied, so the change was not made.

Payments

The theme of consumer protection continues in the payments space, with a potential for gambling blockers to be introduced in an attempt to protect customers struggling with gambling addiction better. The proposed amendment to the Payment Services Regulations 2017 (PSRs) would require debit and credit card providers to offer an opt-in option for consumers to block, or access pre-agreed spending limits for, gambling transactions. Certain providers have already introduced similar measures, for instance Monzo was the first bank to launch a gambling block in June 2018. NatWest Group has recently introduced a 48-hour gambling block on its debit card and most Santander UK customers have been moved to Mastercard, which also has a gambling block. If passed, this requirement will be a welcome further step in helping customers who are potentially facing financial hardship due to their struggles with gambling addiction.

When this amendment was debated in the Lords, it was suggested that the FCA, in its guidance, should require banks to include gambling blockers as standard on debit and credit cards. One of the Lords was also of the view that the Gambling Commission should insist that anyone who is licensed provides such facilities. Although debated at great length, this amendment was not moved, and did not proceed to the Lords' vote or the final legislation.

On digital payments, a proposal was tabled, but not passed, that within one month of the FS Bill passing into law, the Government must conduct a review into access to digital payments. The review must include consideration of the accessibility and usability of digital payments for:

• people with protected characteristics, as defined in the Equality Act 2010 – age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation
• people from different socioeconomic groups
• people from each nation and region of the UK.

The proposal was that the review investigate the link between digital exclusion and financial exclusion.

Climate change

• Establishment of a regular reporting framework for systemic climate-related financial risks – this amendment aims to ensure that appropriate consideration is given to climate considerations in future consultations and policy development. It is also suggested that the FCA and PRA should lay an annual report before Parliament setting out how they have evaluated the UK financial system’s and regulated businesses’ exposure to climate-related financial risks as well as the impacts of such risks
• An amendment to Schedule 1ZA FSMA to provide for the appointment of a senior manager within the FCA with responsibility for climate change.

These amendments were not moved, ie not debated, and not voted through.

Increased oversight

• A requirement for the FCA and PRA to give undertakings about liaising with Parliament regarding their activities and rule-making
• The creation of a supervisory body for each of the FCA and PRA. Its function would be to monitor internally the executive boards of the FCA and PRA as well as provide a diversity of views on the conduct and practices of the regulators.

These amendments were not passed.

Sharia-compliant student finance

An amendment to facilitate the availability of sharia-compliant student finance within six months of the FS Bill passing into law was not agreed as the FCA does not regulate student finance,

Financial exclusion monitoring body

An amendment to make the Financial Policy Committee of the BoE responsible for monitoring financial exclusion and reporting on progress on offering basic bank accounts to financially excluded individuals. The Government said the FPC was not the appropriate body for this task and so did not accept this amendment.

Debates that resulted in a Lords' proposal for change that was rejected by the Commons

Duty of care

An amendment seeking to strengthen the FCA’s consumer protection objectives by requiring it to create rules on the duty of care for financial services providers was approved and voted through. The Commons, however, did not agree the Lord's proposal, which would have seen FCA required to make rules on the duty of care owed by authorised firms by 6 April 2022. The Commons instead suggested a milder provision – that FCA should consult as to whether it should make such rules and, if the responses supported it doing so, should make the rules by August 2022. The Lords approved this as the final text.

Mortgage prisoners

Amendments looked to introduce measures that will have a significant impact on the estimated 250,000 mortgage prisoners in the UK. The majority of so-called ‘mortgage prisoners’ became trapped in high interest loans after lenders like Northern Rock collapsed during the 2008 financial crisis and the loans were sold on to investment firms that do not offer new mortgages. Some have now found themselves paying rates of up to nine per cent whereas the rates currently being offered on new mortgages are at an all-time low, with many borrowers securing loans on rates of 1.5 per cent or under. For many such mortgage prisoners, this has led to financial hardship and has had a huge impact on mental health. The amendment, was intended to provide a much-needed lifeline to mortgage prisoners as it would mean their monthly payments are reduced dramatically. The proposals sought to amend the Financial Services and Markets Act to define ‘mortgage prisoner’ as:

“a consumer who cannot switch to a different lender because of their characteristics and has a regulated mortgage contract with one of the following types of firms:

(a) inactive lenders, or firms authorised for mortgage lending that are no longer lending

(b) unregulated entities, or firms not authorised for mortgage lending and which contract with a regulated firm to undertake the regulated activity of mortgage administration.”

Standard variable rates

Under the proposals, the FCA would be required to introduce a cap on the standard variable rates charged to mortgage prisoners. A standard variable rate is the variable reversion rate charged to a customer after the end of any initial introductory deal on their mortgage. The rate would be capped at no more than two per cent above the Bank of England base rate, clearly significantly lower than the rates currently paid by mortgage prisoners.

Fixed interest rates

The proposals also aimed to ensure that mortgage prisoners who meet the following conditions will be offered a fixed rate mortgage by no later than 1 December 2021 on terms no less favourable than mortgages offered to other consumers who have broadly similar creditworthiness characteristics:

• they are up to date with payments or have aggregate arrears of no more than one monthly payment in the last 12 months
• have a remaining mortgage term of two years or more
• have an outstanding loan amount of at least £10,000
• have not received consent to let the mortgaged property.

The new deals were to be offered at an interest rate equal to or lower than an interest rate specified by the FCA. When setting such interest rates, the FCA should specify rates for a range of loan-to-valuation (LTV) ratios, taking into account the average two-year and five-year fixed rates available to existing customers of active lenders through product transfers.

The Lords voted (narrowly) in favour of this amendment by 273 votes to 235, and wanted FCA to introduce the new rules by 31 July 2021.Although the Lords was keen to push forward this proposal, the Commons rejected it, saying it was a disproportionate way to deal with the problem. The Lords did not debate this point further, so the provisions did not make it into the final Act.

Debates that resulted in a change now in the final legislation

Buy now, pay later

Innovative BNPL products, such as Klarna or Clearpay, are growing in popularity, and have particularly done so during the Covid-19 pandemic. BNPL agreements often take the form of either deferred payment or short instalment loans. They are currently unregulated, with providers of BNPL credit agreements relying on the exemption in article 60F(2) of the Regulated Activities Order. There is growing concern that NPL products can cause harm to consumers, particularly as there is a lack of understanding among consumers that such products are a form of credit, owing to the way they are marketed. As such, they have the potential to generate high levels of indebtedness. The recently published report following the Woolard Review highlighted an urgent need for all BNPL products to be regulated and called for the FCA to work with the Government to seek amendments to current legislation as soon as possible to ensure such products are regulated by the FCA. The Government agreed with these recommendations. One of the amendments tabled and debated in the Lords aims to ensure that BNPL products can be brought into the scope of regulation in a way that is proportionate to the risks they pose to consumers. The amendment, which will allow the Government to apply only the provisions of the Consumer Credit Act 1974 that have been determined to be proportionate to the risks posed by BNPL products, was agreed by the Lords and not opposed by the Commons.

Payments

A second amendment to the PSRs has been put forward which provides that, in certain circumstances, the provision of cash will not constitute a ‘payment service’. The provision of cash otherwise than through an ATM will not constitute a payment service where there is a transfer of a corresponding amount from a payment account held by the recipient of the cash to a relevant person and the payment account is not provided by a relevant person. ‘Relevant person’ means:

“(a) where the cash is provided by a person (P1) through one or more persons acting on P1’s behalf, P1 and each person acting (directly or indirectly) on P1’s behalf;

(b) where the cash is provided by a person (P2) otherwise than on behalf of another person or through one or more persons acting on P2's behalf, P2.”

This amendment was passed and appears in the final Act, but noting that the actual execution of the transfer and other services that enable it, are not excluded from the meaning of payment services as a result of the amendment..

Market abuse

It was agreed that the prohibition under the Market Abuse Regulation on retaining personal data for more than five years should be removed;

What next?

After significant debate in some areas, we finally have an Act on the statute books. Many of the key provisions have, at least in part, already been the subject of separate announcements and consultations, not least the critical BNPL changes. It will now be interesting to see how quickly the Government moves to further legislation to give effect to some of the new powers.

Emma Radmore (legal director) and Lucy Hadrill (solicitor) are members of Womble Bond Dickinson’s financial services team in London. Contact them on emma.radmore@wbd-uk.com and lucy.hadrill@wbd-uk.com. This article was written for, and originally published by, Compliance Monitor.