Topic 8 - Consumer Protection

The Credit Crunch

• Many consumer protection measures were set p as a direct result of the global financial crisis started in 2007.

• Many causes for this credit crunch such as:

  • Banks lent money to people who were unlikely to repay. Lehman’s Brother’s for example lent money to the sub prime market (high risk customers) and then they sold this debt to other providers.

  • Banks used money from their retail business (individuals’ accounts) to pay the losses of their investment operations. This led to a situation where they couldn’t repay depositors when the customers wanted to withdraw their money.

• UK was dominated by very large organisations

Responses to the Credit Crunch

• After the financial services market faced many consequences, in June 2010 the government set up an Independent Commission on Banking which was led by Sir John Vickers who recommended how to avoid the situation in the future.

  • This included ways to make the market better able to withstand any future banking crises

• Recommendations such as

  • Improve regulation of providers

  • make sure banks are able to absorb any losses

  • make it easier and cheaper to deal with banks in financial trouble

  • reduce the amount of risks banks take

  • separate retail banking from investment banking

Overview of regulatory system

• The Financial Policy Committee (FPC) is part of the Bank of England, It monitors and responds to risks posed to the whole financial services market. - a macro - prudential market.

• Chancellor of Exchequer in the Treasury can direct the Bank of England and take action if there’s serious threat to the financial stability of the market and public funds.

• Regulators that work together, PRA and FCA. PRA investigates individual providers and FCA ensures all providers are running in a way which benefits consumers and the market.

The Prudential Regulation Authority (PRA)

• It is funded by the fees paid by providers

• There are two objectives:

  • promoting safety and soundness of providers

  • securing an appropriate degree of protection for insurance policyholders

• They set standards and requirements that providers must meet.

The Financial Conduct Authority (FCA)

• An independent body

• Aims to “make financial markets work well so that consumers get a fair deal”

• Two operational objectives:

  • secure an appropriate degree of protection

  • protect and enhance the integrity of UK financial system

  • promote effective competition in the interest of customers

• Has enforcement powers e.g. imposing fines, suspending operation, making providers compensate customers

Financial Ombudsman Service (FOS)

• Set to sort out complaints between financial businesses and their customers

• free to customers but the providers are expected to pay a fee if the complaint is raised against them

• they can order providers to pay their customers compensation

• customers can make a complaint by following these:

  • contact provider directly - should be done ASAP and FCA must respond within 8 weeks.

  • contact FOS - if provider hasn’t responded in 8 weeks, the customer can refer the case to the FOS. This is free of charge but must be done within 6 months of making the initial complaint or receiving final response.

  • take the matter to court - costly process and the court may not always be in favour.

The Financial Services Compensation Scheme (FSCS)

• Will repay customers of their deposits in providers authorised by the FCA

• This is usually due to the provider stopping trading, insufficient funds, or is insolvent.

• No charge to customers

• There are limits to the amount of compensation that the FSCS can provide based on the type of financial product involved.

• Deposits, investments and mortgages are covered up to a maximum of £85,000 per person per provider.

• Deposits in foreign banks which aren’t authorised by the FCA are covered by the compensation scheme operating where their country headquarters are based.

Competition and Market’s authority

• Works to promote competition between providers for the benefits of the customers.

• CMA ensures that customers get a good deal when buying goods and services.

• Responsible for

  • investigating mergers that could restrict competition

  • conducting market studies and investigations in whole markets

  • enforcing consumer protection legislation

  • co-operating with the government

Voluntary codes of conduct

• There are many codes which set out minimum standards of good practice for banks, building societies and credit card providers.

• Providers that subscribe to the standards tell their customers that they follow the principles and provide them with information about the principles they should expect. Includes

  • Clear, fair non-misleading adverts

  • giving info about a product before, at and after sale

  • giving information about any changes to the product