The Law Spot highlights some legal points of interest / cases / legislation which have arisen during the month in the UK. It is not intended to be comprehensive in any way, merely a summary of a selection of the legal and regulatory issues which have affected the financial services industry during the period.
This month has a regulatory focus, considering topics such as the recent rise in bank rate, the first for almost a decade; and the need to better protect consumers from fraud, bad debt, and lack of financial awareness / confidence.
Regulation – bank rate rise
Bank rate finally increased to 0.5% on the 2 November 2017, some years after rumours of an increased were first mooted, and was the first increase in interest rates for almost a decade. The modest rise in rates of 0.25% is seen as a sign of confidence in the UK economy.
The Bank of England intends to increase interest rates gradually, with two further increases predicted over the next year or so.
Replacing LIBOR and EURIBOR
Remaining on the interest rate theme are the announcements of the replacements to two of the key interbank rates, London Inter Bank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR). Looking first at LIBOR...
The Bank of England will start setting the interest rate benchmark to replace Libor in April 2018, with a new index known as the SONIA – which stands for the Sterling Overnight Index Average – commencing on April 23.
The Bank of England (2017) stated that ‘overall, the reform process will result in:
- the Bank being the administrator of the scheme, which will include the calculation and publication of SONIA;
- the coverage of SONIA being broadened to include overnight unsecured transactions negotiated bilaterally as well as those arranged via brokers, using the Bank’s Sterling Money Market Data Collection (Form SMMD) as data source;
- the averaging methodology for calculating the benchmark changing to a volume-weighted trimmed mean; and
- the publication of SONIA moving to 09:00 on the business day following that to which the rate pertains.’
The SONIA index will track the rates of actual overnight funding deals on the wholesale money markets, and is intended to minimise opportunities for misconduct.
The European Central Bank (ECB) made a similar announcement on 21 September 2017, and intends to launch a central bank led alternative to EURIBOR, and which will also serve as a "backstop to private sector benchmark rates". This new benchmark rate is currently referred to as the "Euro unsecured overnight interest rate" (EUOIR), although this working title has yet to be finalised.
Bank of England (2017) SONIA reform [online]. Available at: https://www.bankofengland.co.uk/-/media/boe/files/news/2017/october/sonia-reform-to-be-implemented-on-23-april-2018.pdf. [Accessed: 21 January 2019]
The second phase of the Competition and Markets Authority’s plans regarding Open Banking comes into effect in January 2018, with the intention of giving customers more control over their finances by allowing them to view all of their bank accounts, payment accounts and bills in one place, such as on an Application Programming Interface (API) through a third-party provider. The plans are designed to allow smaller providers to complete with older and larger banks to open up competition in the industry.
The launch of the next phase in January is designed to coincide with the forthcoming European Regulation (Payment Services Directive 2), ‘where authorised third parties can be given consent by the account holder to access their bank accounts to extract statement information and to initiate payments, without having to use the banks’ online services. It is envisaged that this capability will then lead to far reaching innovative services being created by new entrants and technology companies’ (Open Banking, 2017).
TLT Solicitors (2017) report that ‘it will also mean additional operational pressures around fraud and cyber-attack prevention as banks lose some control over the data they have available to analyse for fraud detection purposes, a reduction in privacy and a more complex market place. Systems will need to be developed to deal with these challenges in a proportionate way to balance customer convenience and customer protection’.
Open Banking (2017) The initiative [online]. Available at: https://www.rpc.co.uk/perspectives/financial-services-regulatory-and-risk/psr-issues-public-censure-on-payment-system-operator#page=1. [Accessed: 8 November 2017]
TLT Solicitors (2017) 5 regulatory changes that will impact how the industry tackles payment fraud [online]. Available at: http://www.tltsolicitors.com/insights-and-events/insight/5-things-that-will-impact-push-payment-fraud/. [Accessed: 20 November 2017]
Bank fraud hotline
Brian Dilley of Lloyds Banking Group proposed a central reporting telephone number e.g. 555 that victims of fraud/scams could contact to help prevent the rising instances of bank fraud scams and illegal money transfers. Dilley (2017) outlined that "at its simplest the number could be a triaging facility directing victims to the appropriate agency and at its most ambitious it could sit in front of enhanced data sharing/analytics which would take in all reporting and provide standardised reporting and a collective intelligence picture across fraud and money laundering."
Current advice states that victims should contact Action Fraud rather than 999 as police rarely investigate individual instances of bank fraud. Many people unwittingly facilitate scams when they attempt to contact their banks direct by telephone; a single fraud reporting telephone number would reduce some of the risks as well as make it easier to report financial fraud.
The Telegraph (2017) reports that more than 900,000 cases of fraud were recorded in the first half of 2017 alone, equating to more than 5,000 a day.
Telegraph (2017) Ring 555 if you are victim of bank fraud: New hotline suggested to tackle scams [online]. Available at: http://www.telegraph.co.uk/news/2017/10/19/ring-555-victim-bank-fraud-new-hotline-suggested-tackle-scams/. [Accessed: 23 November 2017]
Financial competence and financial vulnerability
Some concerning statistics have been published in a recent FCA study. Key issues include:
- 50% of the UK adult population show at least one sign of potential financial vulnerability, meaning they are at increased risk of harm which may have a disproportionate impact when things go wrong.
- 3% of UK adults are unbanked, and 77% of them show characteristics of potential vulnerability. 1.0 million UK adults are both unbanked and potentially vulnerable.
- 24% of UK adults have little or no confidence in managing their money, and 46% of all UK adults report low knowledge about financial matters.
- 75% of UK adults have had one or more consumer credit product or loan in the last 12 months.
- 3.1 million UK adults have one or more high‑cost loans now or have had one in the last 12 months, including, for example, payday loans and home collected loans.
- 4.1 million people are in financial difficulty.
These numbers highlight the value of financial education, and the continuing work which is needed by the industry as a whole, including the regulators, the banks, debt advice charities and professional / educational bodies.
FCA (2017) Understanding the financial lives of UK adults: Findings from the FCA’s Financial Lives Survey 2017 [online]. Available at: https://www.fca.org.uk/publication/research/financial-lives-survey-2017.pdf. [Accessed: 23 November 2017]