Following implementation of mortgage regulation on 31 October 2004 and insurance regulation in January 2005, there are many who believe the regulatory authorities should provide firms with a period within which to operate without further regulatory change. But as we shall see, the regulatory and legislative outlook remains far from settled in the short to medium-term.
More regulation on the horizon
At a European level, the Consumer Credit Directive (CCD) and the Unfair Commercial Practices Directive (UCPD) are both scheduled for implementation by late 2007. Although financial services have been granted an exemption from the UCPD and secured lending has been removed from the CCD, the lending industry may still feel some effect from the new legislation as regulators look to ‘read across’ principles and provisions into the mortgage and secured lending environment. The European Commission is also due to issue a White Paper on Mortgage Credit in Spring 2007 as a first step to achieving greater harmonisation of the market. At this stage, however, it is far from clear whether this will simply concentrate on access to markets, such as cross-border lending, or look again at substantive regulation at the consumer level.
At the domestic level, the Consumer Credit Act 2006 (CCA) has now passed into law, although many of the substantive changes it introduces will not come into force until 2007 and 2008. And while the Department of Trade and Industry (DTI) – the department responsible for the CCA – has started the consultation process on key areas such as the Unfair Relationship test and High Net Worth and Business Lending exemptions, much is still to be debated concerning the final format of the enabling regulations. As such, the full effects of the revisions won’t be felt until late 2008 or 2009, when the Office of Fair Trading (OFT) and/or the courts have had time to review the actual implementation of the rules.
With regard to mortgage regulation, the Financial Services Authority (FSA) is committed to a major thematic review of the effectiveness of both the Mortgage Conduct of Business (MCOB) and Insurance Conduct of Business (ICOB) rules even though both regimes have been operating for less than two years. These are due to report in September 2006 and in the first quarter of 2007 respectively. And while it is unclear at this time whether recommendations from the review will feed into substantive rule changes and how widespread these might be, any such changes will clearly carry a compliance cost and may lead to uncertainty regarding how the new rules will be interpreted by both the FSA and the Financial Ombudsman Service (FOS).
On the wider front, the FSA has made its desire to become a principles-based regulator very clear, and much has been made of the uncertainty that such an approach may bring. The FSA has also sought to influence the regulatory landscape by undertaking major thematic reviews of certain parts of the industry and publishing its overall findings to the market as a whole. This approach can fall short of actually introducing new rules, but can certainly amount to a ‘best’ and ‘worst’ guide to practice as to the conduct the regulator wishes to see. Examples of such reviews include:
- ‘Treating Customers Fairly’ (TCF);
- Payment protection insurance (PPI);
- Self-certification of income;
- Interest only mortgages;
- Mortgages into retirement; and
- Quality of advice processes.
Legislative changes
In addition to forthcoming regulatory changes, firms of all sizes will be impacted by legislative measures that include age discrimination laws and substantive changes to company law. While these may not be specific to financial services, firms engaged in the sector will be affected in a number of ways.
All employers should be aware that age discrimination became unlawful on 1 October 2006, when the Employment Equality (Age) Regulations 2006 came into force. This instrument finally implements the European Union’s anti-discrimination directive published in 2000. The regulations cover direct discrimination (less favourable treatment on the ground of age), indirect discrimination (applying an apparently age neutral criterion that has disparate impact on a particular age group) and age-related harassment (conduct that has the purpose of violating dignity or creating an intimidating, hostile or offensive environment). The regulations cover the whole of the employment relationship from recruitment through to pay, benefits, training, promotion and termination, redundancy and retirement.
Employers will have a legitimate defence if there is a genuine occupational requirement for an age-related characteristic. They will also have a defence if they can objectively justify age discriminatory treatment or practices, but to establish this defence the employer will have to show that the practice is a ‘proportionate means of achieving a legitimate aim’. The DTI has indicated this will not be an easy test to satisfy as evidence will be difficult to produce which proves age is an essential requirement.
Some examples of the potential issues that might arise from the introduction of the regulations include:
- Specifying a particular age range for a job will have to be objectively justified.
- Using language in advertising with age-specific connotations, such as ‘young’, ‘dynamic’, ‘mature’ or ‘lively’, should be avoided to avoid indirect discrimination against applicants.
- Enhancements to pay and benefits based upon length of service might amount to indirect discrimination to the detriment of younger workers. However, such schemes will be lawful up to a maximum of five years in duration, so for schemes over five years the employer will have to illustrate that they believe there to be an advantage from rewarding loyalty or recognising experience.
- The regulations provide for a national default retirement age of 65 meaning it will not be unlawful to dismiss a person, by way of retirement, at age 65 or over. But if an employer wishes to retire an employee over 65, the employee will have to be notified that they have the right to request to work beyond the intended retirement date. If such a request is made, the employer must seriously consider it and meet with the employee to discuss it, providing a response within 14 days. If an employer wants to retire someone below the age of 65 they will have to justify it objectively and follow the procedure outlined above.
Changes to company law
Company law has long been regarded as too complicated and piecemeal for the majority of businesses to be able to implement effectively and at acceptable cost. The government’s answer has been to introduce the Company Law Reform Bill, which is due to come into force in either April or October 2007. The aim is to replace the majority of existing company law legislation with one primary source – the Company Law Reform Act 2006 – and house most of the applicable law under ‘one roof’. It will therefore affect companies of every size.
The objective is to simplify the administrative burden on smaller private companies while encouraging greater shareholder engagement. It will also update the law in several key areas, including that affecting the duties of directors.
The administrative changes mean private companies will no longer have to lay accounts and appoint an auditor at an Annual General Meeting. Nor will they have to appoint a company secretary. Directors will also be allowed to provide a service address, as opposed to a home address, for the public record.
The overhaul to directors’ duties means they will be set out in statute for the first time. This will make them clearer but may also make directors accountable in a more prescriptive way than now. Directors will also be required to act in good faith, for the benefit of members as a whole and with regard to employees’ interests; and able to demonstrate that decisions made by the board took into account the impact on staff, third parties and the company’s reputation. With approximately two-thirds of the Companies Act 1985 being repealed, directors would be well advised to ensure they are fully prepared for these and all other relevant regulatory and legislative changes.
Karl Spielmann, legal and compliance director, Money Partners
