The FSA - In Action - 5/5

This is the last of 5 posts, which relate to the FSA taking action against firms which they regulate.

I will offer little by way of comment, but will instead provide links in each case 1) to the FSA Press Notice involved and 2) to the "Final Notice" given by the FSA  to the firms or individual involved.

In each of these 5 posts I will include highlighted extracts.

1: To illustrate why I hold the view that the OFT approach of setting a "threshold level" was too narrow.

2: To further illustrate that aspect by highlighting both the breadth and depth that the approach used by the FSA stands in comparison to the OFT - you will be able to judge the truth of that or otherwise for yourself

However - I do not want anybody to be misled in any way when I use extracts so I do urge you to use the links provided and read each item in full.

As you do so, you will find reference to some of the items I have commented on before - such as the high level "Principles" that the FSA apply to all those that they regulate, reference also to the powers granted under statute to the FSA, and lastly reference to the - activity related - "Conduct of Business" rules.

In each of these 5 posts we are looking at those "Principles" as they apply to all firms regulated by the FSA -and those "Conduct of Business Rules" as they apply to mortgages (MCOB)

However as you see how they are enforced by the FSA, just bear in mind (perhaps heavily) that those high level "Principles" do apply in the very same way to Banks, and everyone else authorised by the FSA - they are universal in their application.

And also bear in mind (again perhaps heavily) that banks do not escape similar, although not identical "Conduct of Business Rules" this time called "BCOBS".

You can find full details in the links for the full FSA Handbook I listed in an earlier post

*********************

Please read in full the Press Notice in this fifth and last example.

Here are some edited extracts:

FSA fines DB Mortgages for irresponsible lending and poor treatment of customers in arrears

Firms need to understand that we will not tolerate lax lending practices and unfair treatment of customers in arrears.

The Financial Services Authority (FSA) has today announced that it has fined DB Mortgages, part of the Deutsche Bank Group, £840,000 for irresponsible lending practices and unfair treatment of customers in arrears, and secured redress of approximately £1.5 million for DB Mortgages’ customers.

On treatment of customers in arrears, DB Mortgages did not consider customers’ individual circumstances or tell them about the range of options that were available to them, and applied charges that were unfair because they were charged repeatedly or did not accurately reflect the cost of administering an account in arrears.

''Firms which fail in their obligations to customers should expect not only a substantial fine but also that they will have to pay back customers who have been disadvantaged by their failings''.

**************************

Next let's look at the "Final Notice" for this example - please read in full.

However, here are some edited extracts:

TAKE NOTICE: The Financial Services Authority of 25 The North Colonnade, Canary Wharf, London E14 5HS (“the FSA”) gives you final notice about a requirement to pay a financial penalty.

1. THE PENALTY

1.1. The FSA gave DB UK Bank Limited (trading as DB Mortgages) (“DBM” or “the Firm”) a Decision Notice on 15 December 2010 which notified the Firm that, pursuant to section 206 of the Financial Services and Markets Act 2000 (“the Act”), the FSA had decided to impose a financial penalty of £840,000 in respect of breaches of Principle 3 (Management and control) and Principle 6 (Customers’ interests) of the FSA’s Principles for Businesses (“the Principles”) and Rules 11.3.1 R, 12.4.1 R, 13.3.1 R and 13.4.1 R of the Mortgages and Home Finance: Conduct of Business Sourcebook (“MCOB”) in the period between 13 January 2006 and 1 December 2008 (“the Relevant Period”).

1.2. DBM will carry out a customer redress programme to redress the failings set out in this notice (as set out in more detail at paragraphs 2.9 to 2.11 below). The total estimated cost of redress for the period is approximately £1.5 million including interest in relation to refunds of fees and charges and the payment for customers to receive independent financial advice. In addition, there will be a customer contact exercise which may lead to further redress but the amount can not be quantified at this time.

2. REASONS FOR THE ACTION

2.1. The breaches of the Principles and MCOB Rules, which are described in more detail in section 4 below, relate to a number of serious failings by DBM in its lending policy and practices, and in its treatment of customers who were in arrears.

Principle 6

2.5. The Firm breached Principle 6 and MCOB 13.3.1R during the Relevant Period in that it failed to ensure that the relevant mortgage servicing staff had an adequate understanding of, and implemented, the requirement to treat customers fairly in their mortgage arrears and repossession activities.

(2) failed to ensure that customer complaints were appropriately recognised and adequately dealt with by the relevant mortgage servicing staff;

(3) applied certain charges to customers’ accounts that were unfair in that the charges were repeatedly charged or did not accurately reflect the cost of administering an account in arrears. As a result of some of these charges, the Firm was also in breach MCOB 12.4.1 R;

(4) failed to develop an appropriate cost-based approach to the calculation of its arrears charges and therefore could not be sure that they were a reasonable estimate of the cost of administering an account in arrears. As a result of this, the Firm was also in breach of MCOB 12.4.1 R

Seriousness of conduct

2.7. The FSA considers DBM’s failings to be serious given the importance of ensuring that mortgage lending activities are conducted responsibly and take into account customers’ interests. The FSA also considers DBM’s failings to be serious because these failings created a significant risk that a large number of customers who were in mortgage arrears or who had incurred a mortgage shortfall debt (including customers with impaired or non-standard credit profiles) were not treated fairly. In some instances, such customers were also put at a risk of financial loss.

2.11. For failings in relation to DBM’s treatment of customers in arrears:

(1) DBM will write to all borrowers with regulated mortgage contracts which went into arrears and pay redress as appropriate;

(4) DBM will refund to borrowers any returned direct debit fee or returned cheque fee if that fee had already been charged in the same month;

3. RELEVANT STATUTORY PROVISIONS

3.1. The FSA’s statutory objectives are set out in section 2(2) of the Act. The relevant objectives for the purpose of this case are maintaining market confidence and the protection of consumers.

3.2. Section 206 of the Act provides:

“(1) If the Authority considers that an authorised person has contravened a requirement imposed on him by or under this Act, it may impose on him a penalty, in respect of the contravention, of such amount as it considers appropriate.”

3.3. The procedures to be followed in relation to the imposition of a financial penalty are set out in sections 207 and 208 of the Act.

3.4. DBM is an authorised person for the purposes of section 206 of the Act. The requirements imposed on authorised persons include those set out in the FSA’s Principles and Rules made under section 138 of the Act. Section 138 of the Act provides that the FSA may make such rules applying to authorised persons as appear to be necessary or expedient for the purposes of protecting the interests of consumers.

3.6. Principle 6 states:

“A firm must pay due regard to the interests of its customers and treat them fairly.”

3.7. MCOB 11.3.1 R provides that:

(1) “A firm must be able to show that before deciding to enter into, or making a further advance on, a regulated mortgage contract, or home purchase plan, account was taken of the customer's ability to repay.”

3.8. MCOB 12.4.1 R provides that:

(1) “A must ensure that any that it firmregulated mortgage contractenters into does not impose, and cannot be used to impose, a charge for on a except where that charge is a reasonable estimate of the cost of the additional administration required as a result of the customer being in .” arrears"

3.9. MCOB 13.3.1 R provides that:

(1) “A firm must deal fairly with any customer who:

(a) is in arrears on a regulated mortgage contract or home purchase plan

Unfair charges

4.28. During the Relevant Period, DBM failed to take sufficient steps to ensure that arrears fees and charges were based on a reasonable estimate of the cost of the additional administration caused by the customer being in arrears, for example no sufficient activity-based costing exercise was undertaken during the Relevant Period.

4.29. In addition, DBM levied a number of unfair charges on customers in arrears, including:

(1) a fee for a returned direct debit which was repeatedly charged by DBM;

4.30. The above charges were unfair because they were repeatedly charged or they did not accurately reflect the additional administrative costs incurred by DBM.

****************************

So, we have five examples of the FSA taking regulatory action against firms - dating as far back as October 2009 to the near present day in February 2011.

What do they tell us about the manner in which the FSA enforce both their "Rules" and higher level "Principles"?

What part do they play over the question of the fairness or otherwise of bank charges?

The answers to those questions will be addressed in the posts that follow.

They lead to this:

Let's ask Lord Turner and the FSA this very simple question:

Do you believe that the charges levied by Banks on their customers were and are fair or unfair?


I will also begin to cover the crucial distinction arising from the recent Court ruling in the Judicial Review in the BBA challenge to the FSA and the FOS regarding PPI - the crucial distinction over how the application of these FSA "Rules" and "Principles" are to be applied, and have now been recognised in law following that Court judgement.


The "evidence" I will lead will allow you to judge for yourself:

1 - why that question addressed to Lord Turner and the FSA - when answered - plays a unique part over the question of the fairness or otherwise of bank charges.

2 - why that recent Court ruling in that it reveals a crucial distinction between the FSA and the FOS - plays an equally unique part over the question of the fairness or otherwise of bank charges.

3 - why the OFT have proven to be the wrong route to follow to find an answer to the question of the fairness or otherwise of bank charges

4 - why despite all of the costs involved to date, despite the many column inches in the media, despite the financial and emotional difficulties faced by many who have faced these charges - we have not yet gained an answer to whether bank charges are fair or not.

I hope the posts and "evidence" to follow will play their part in finally answering that question.


I also hope to see you here as those posts appear and that "evidence" is provided.