Thursday, 27 March 2014

Continuing 'Music' Lessons from FCA Enforcement – Even When There Isn’t


I continue my review of FCA enforcement cases to draw practical lessons about risk management.  See my previous posts here and here.  One example of a music note is a ‘rest’, which tells you not play your instrument.  I have come across a similar one in terms of FCA enforcement.  This is about an FCA announcement that explains a breach of FCA rules where no enforcement action in terms of a fine is mentioned.  
The case relates to charges of mortgages arrears by the Yorkshire Building Society.   The FSA handbook only allows charging cost-reflective arrears fees (MCOB 12.4R).  However, arrears is defined in the FSA glossary as missing more than two payments.    
The FCA press release (here) does not provide a lot of details about the case.  It suggests that the issue was discovered after the FCA raised concerns.  It is usually not an ideal starting point when a regulatory breach is discovered in the course of a supervisory visit.  The Yorkshire Building Society found that “some of its customers in arrears may have been charged fees incorrectly”.  So in this case, we cannot learn what the actual breach was.  Was it that the building society charged arrears too early? Were the charges “excessive”, i.e. with respect to costs?  I don’t know but we can still learn from this silence.  
The FCA press release says that the building society “will voluntary refund all administration fees for mortgage arrears since January 2009”, which means that “borrowers who were charged correctly will also receive a refund”.  The amounts involved are not trivial: £8.4m to be refunded to nearly 34 thousand customers.  Just to put this in context for the business, this represents about 5% of the societies' profits in 2013.  This would probably underestimate the total cost which will include running an operation to reach out former customers and make the refunds as agreed with the FCA.  
The FCA handbook includes a section on enforcement, which sets out the considerations that the FCA will take into account to decide whether to take action for a financial penalty or public censure.  There are two considerations for the FCA: the seriousness of the breach and the response of the regulated firm.  You read about the specific considerations in the enforcement notices as part of the decision process to set the fine.  They usually include a reference to the co-operation of the firm in the investigation of the breach.  The considerations also include “any remedial steps the person has taken in respect of the breach” and “the likelihood that the same type of breach will recur if no action is taken”.  
The lesson is rather simple.  We focus on risk management as the tools of reducing the likelihood or impact of events.  However, the unpredictable can happen and then proactive risk management is about working with the regulators to address the issue in a way that minimises legal costs and reputational costs.  Compensating customer is the ultimate form of redress.  It suggests that delivering extensive compensation (here to all customers on mortgage arrears since 2009) and, I guess, quickly can have an effect.  

The FCA has shown that it is willing to read the Handbook in the round and not take enforcement action when, in its judgement, it’s in consumers' interest.  

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