Money Covered: The Week That Was - 1 November

Welcome to The Week That Was, a round-up of key events in the financial services sector over the last seven days.

The fourth episode of Season 3 of our podcast, Money Covered – The Month That Was, where the team discusses key developments and topical issues in the financial services area, is now available. This episode features Ash Daniells, Matt Watson, Kim Wright and Rachael Healey discussing management liability risks, from a D&O, EPL and PTL perspective.

To listen to this and all previous episodes, please click here.

Please also find our newest publication – our quarterly FOS newsletter – looking at developments at FOS, analysing FOS complaints data and gazing into the crystal ball to consider what to look out for when it comes to FOS trends and developments for the coming quarter.  Please click here.

Headline development 

First Labour budget in 14 years delivered by Chancellor Rachel Reeves

On 30 October 2024, the first Labour budget in 14 years was delivered and said to increase taxes by £40bn. Key proposals include the following:

HMRC Investment and Late Payment Interest

• HMRC is receiving investment in personnel and its systems to tackle tax avoidance schemes, with the expectation to raise £6.5bn by the end of the forecast period by targeting such schemes.  This will be accompanied by an increase in the interest rate payable on the late payment of tax to encourage tax to be paid more swiftly. 
• This will have an impact where claims are made against professionals in relation to tax schemes. If the argument is run that the tax would always have been payable, the heads of loss to which the professional is exposed are commonly: (1) costs (of dealing with HMRC), (2) interest and (3) penalties.  An argument run to mitigate interest is that the claimant has had the benefit of the tax in the interim period – and so interest is cancelled out given the benefit of having cash that should otherwise have been paid in tax.  An increased interest rate makes this argument difficult to offset the entirety of the interest. Whilst it should cancel out some of the interest sought it will be difficult to argue that the benefit of having the cash cancels out the entire interest if the interest rate is at a high level.

Capital Gains Tax

• The expected and significant changes to CGT were confirmed. The lower rate of CGT will increase from 10% to 18% and the higher rate of CGT will increase from 20% to 24%. CGT on residential property gains is maintained at 18% and 24% and the lifetime limit on Business Asset Disposal Relief (BADR) remains at £1m. Gains qualifying for BADR will remain taxed at 10% this year, and rise to 14% in April 2025 and 18% from 2026/27.  We wait to see whether loss of chance claims will be made against tax advisers that suggested a "wait and see the budget" approach for the increase in CGT, or we may even see some "sellers regret" claims for those who though the CGT increase was going to be higher and now regret selling their business.

Inheritance Tax

• Changes were announced to IHT. The Chancellor noted that only 6% of estates paid IHT this year, and is introducing changes said to raise £2bn from IHT. The current IHT thresholds are maintained until 2030 (£325,000, £500,000 if the estate includes a residence to a direct descendent, and £1m when a tax free allowance is passed to a surviving spouse or civil partner).
• Inherited pensions are brought into IHT from April 2027, closing what the Chancellor describes as a loophole. This will be a significant change to inheritance planning which could see more estates paying IHT, or perhaps pensioners looking to draw more from their pensions.
• The first £1m of combined business and agricultural assets will remain free from IHT. For assets over £1m IHT will now apply with a 50% relief, so an effective rate of 20%. 
• There will be a 50% relief for shares in the Alternative Investment Market (AIM) or similar, setting an effective rate of 20%. We will wait to see the impact this has on the AIM. 

Other points to note

• The non-dom tax regime is to be abolished and the domicile concept removed from April 2025 to introduce a "residence" based scheme. We await details of what the residence concept will entail. The change to the non-dom tax regime is likely to introduce uncertainty and complexity with the new "residence" based scheme.  

The rumoured change to reduce the level of tax free cash that can be taken from a pension from age 55 was not introduced – this means that luckily pension redress calculations will not need to be changed going forward.  

Gilt yields have spiked post the budget which is likely to (1) decrease DB transfer redress and (2) decrease pension liabilities (so claims involving final salary schemes will not be as expensive – so if you have a claim involving lawyers or actuaries it may be cheaper now to resolve) as markets get to grips with increases in government borrowing – for those involved with claims where losses are linked to final salary schemes – gilt yields will be something to keep a close eye on.

To read the budget in full, please see here. 

Financial institutions

Court of Appeal ruling puts FCA one step closer to lifting pause on motor finance complaints as the Court of Appeal finds lenders responsible for commissions not disclosed by a motor dealers to customers

On 25 October 2024, the Court of Appeal handed down its judgment in Johnson v Firstrand Bank Ltd (London Branch) t/a Motonovo Finance [2024] EWCA Civ 1282, a group of cases being heard together regarding motor finance commissions paid by a lender to the broker/dealer.  The Court allowed all of the appeals finding the lenders responsible on the basis that (1) if there was a secret commission the lender had a primary responsibility for the broker/dealers breach of their so-called disinterested duty owed by the broker/dealer to the customer and (2) if there is a partial disclosure of a commission (which means the customer being told about the level of commission) then in the absence of informed consent, the lender is likely to be responsible as an accessory to the broker/dealer's breach of fiduciary duty (on the basis a fiduciary duty is established).. 

Since the release of the judgment, the FCA has made a further statement, noting that while the judgment does not directly address discretionary commission arrangements (DCAs), it nevertheless impacts the FCA's views on those complaints.  The FCA further noted that the pause would continue as two of the lenders involved in the cases have confirmed they intend to appeal, and so we must now await the Supreme Court's decision as to whether permission to appeal is granted and, if it is, what the substantive outcome of any appeal is.  

The decision is likely to impact beyond the vehicle finance industry given the prevalence of commissions in the FCA regulated market and with the FCA already looking at DCAs as well as commission in the life insurance industry, this area appears ripe for further regulatory intervention going forward.

To read the FCA's statement, click here.

FCA portfolio letters outline 2025 priorities for Retail Banks and Building Societies 

On 25 October 2024, the FCA released two portfolio letters detailing its strategy and key priorities for retail banks and building societies for 2025. These documents highlight the FCA's views on risks and its expectations, aiming to ensure firms address risks effectively.

The FCA acknowledges the challenges faced, including regulatory changes, compliance, customer service outcomes, adopting to technological advancements, all whilst dealing with increasing competition.

The strategic priorities include:

1. Consumer Duty – firms are required to integrate this duty into their operations to enhance outcomes for retail customers.
2. Support for financially distressed customers – in light of ongoing financial pressures, institutions must assist customers in making informed decisions and achieving their financial goals.
3. Access to services – as banks evolve their service offering, they must ensure that all customers maintain access to essential banking services, without unreasonable barriers.
4. Operational resilience – with many banks updating their technologies, careful management is essential to avoid risks that could disrupt their operations.
5. Combatting financial crime – continuous enhancement of fraud prevention measures is necessary to keep pace with evolving threats, ensuring that suspicions are promptly investigated without unduly restricting customer access to their accounts.
6. Sustainable finance – institutions must ensure that any sustainability claims about their offers are transparent and not misleading, enabling consumers to make well informed choices about climate commitments and transition plans. 

These priorities set a framework for the retail banking sector as it prepares for the challenges of 2025.

FCA publishes portfolio letter for Non-bank Mortgage Lenders & Mortgage Third Party Administrators in 2025

The FCA’s portfolio letter to CEOs of non-bank mortgage lenders (NBMLs) and mortgage third-party administrators (MTPAs) outlines key concerns and priorities for 2025. The FCA highlights the trend of firms diversifying funding sources through forward flow arrangements with retail banks and reminds firms of their responsibility under Principle 11 to be open and honest with the regulator, including notifying the FCA of new agreements.

The FCA will engage NBMLs and MTPAs on six priority areas: financial resilience, treatment of customers in financial difficulty, consumer duty, operational resilience, financial crime and fraud, and sustainable finance. The letter emphasises the importance of a cooperative relationship between firms and the regulator, expecting firms to inform the FCA of any significant non-compliance with the consumer duty, proposed business changes impacting risk profiles, and new or significantly altered products or services.

Additionally, the FCA will continue to scrutinise whether senior management functions are being carried out appropriately under the Senior Management and Certification Regime (SM&CR). This letter follows a similar one published in February 2022, reflecting ongoing regulatory priorities and expectations.

To read the FCA's portfolio letter, please click here.

FCA publishes portfolio letter for Lifetime Mortgage Providers

In a further letter, The FCA has also set out the key strategies and priorities for lifetime mortgage providers (LMPs) in 2025. The letter references the challenging economic conditions faced by both borrowers of lifetime products and lifetime mortgage providers in recent years, before detailing expectations for providers.

During 2025, the FCA will engage LMPs on their culture and controls, focusing on the following priority areas:

• Consumer Duty – mortgage and credit activities should embed the Duty, examples of which include ensuring products and services are fair value and designed appropriately for target markets. Appropriate affordability assessments should be used.
• Financial resilience (for non-dual regulated firms) – LMPs should ensure adequate financial resources are in place.
• Operational resilience – firms should have adequate systems in place to mitigate operational risks.
• Financial crime and fraud – LMPs should remain aware of criminal misuse.
• Sustainable finance – LMPs should ensure sustainability related claims are accurate and not misleading.

To read more, please see here.

Regulatory developments for FCA regulated entities

Permission to appeal to the Supreme Court granted for KVB Consultants Limited v Jacob Hopkins McKenzie Limited – scope of s39 FSMA remains unsettled.

The case KVB Consultants Limited v Jacob Hopkins McKenzie Limited and others revolves around investment schemes managed by Jacob Hopkins McKenzie Limited (JHM) and the scope of section 39 of the Financial Services and Markets Act 2000 (FSMA). KVB Consultants Limited (KCL) appointed JHM as an appointed representative and JHM were involved in eight property development investment schemes. These schemes failed, leading investors to sue JHM, associated individuals, the special purpose vehicle (SPV) companies involved, and KCL.

The core issue was whether KCL was responsible for JHM’s conduct under section 39 of the Financial Services and Markets Act 2000 (FSMA).  On 9 July 2024 the Court of Appeal upheld the High Court's decision finding that KCL was responsible for JHM, but provided further clarification on key points:

1. Liability Confirmation: The Court of Appeal confirmed that KCL was liable for the actions of JHM under section 39 of FSMA. This was consistent with the High Court’s decision.
2. Scope of Responsibility: The appellate court emphasised that principal firms cannot exclude liability for their appointed representatives through contractual terms that do not reflect the actual conduct of business. This reinforced the High Court’s stance on the importance of oversight and compliance.
3. Contractual Terms: The Court of Appeal highlighted that KCL’s attempt to limit its liability through specific contractual clauses was ineffective. The court stressed that such clauses must align with the factual reality of the business operations.

KVB have now been granted permission to appeal the Court of Appeal's decision at the Supreme Court (notably commentators have said that there is a tension between the Court of Appeal's decision in KVB and its earlier decision in Sense Network). This leaves the law around appointed representatives and the scope of section 39 of FSMA unsettled, until the Supreme Court hand down their decision.

To read our blog on the Court of Appeal decision, please click here.

Government launches third consultation into regulating buy-now-pay-later products

Following the initial consultation in 2021, the new Labour Government has launched a third consultation into regulating buy-now-pay-later (BNPL) products. In the latest consultation (which runs until 29 November 2024), the Government has set out draft legislation which proposes a new category of regulated agreement – a Regulated Deferred Payment Credit (DPC) Agreement. 

The provision of BNPL products by third party lenders is going to be the focus for now so that consumers have access to clear, simple, and understandable information. The Government will continue to monitor merchant provided BNPL products to monitor for substantial growth in that market. Further regulation is likely if substantial growth outside of the DPC agreements is likely to result in consumer harm.

Following the consultation, the FCA will then develop an information disclosure regime to incorporate the requirements of a BNPL product in the FCA handbook. The FCA rules will be based on the requirements of the consumer duty to represent fair value, good outcomes and reduce the potential for consumer harm. 

To read RPC's blog, please click here.

Proposed Changes to the Safeguarding Regime for Payments and e-Money Firms

In September, the Financial Conduct Authority (FCA) published its Consultation Paper (Consultation) on the safeguarding regime for payments and e-money firms.

The Payment Services Regulations 2017 (PSRs) and the E-Money Regulations 2011 (EMRs) require payment institutions (PIs), small and large electronic money institutions (EMIs) and credit unions to take steps to protect "relevant funds" received when the firm makes a payment, or in exchange for e-money.

The Consultation has flowed from the FCA's concerns that poor safeguarding practices across the payments and e-money industry have resulted in consumer harm, particularly with respect to vulnerable consumers. It proposes significant changes to the safeguarding regime in the hope that the proposals will improve industry practice and provide greater protection from harm to consumers.

The proposal is for a two-stage approach, with the first stage being interim rules to clarify existing requirements, followed by end-state rules to replace the existing requirements. The end-state rules (which represent a CASS-style regime) will require relevant funds and assets to be held on trust.

The FCA intends the new regime to apply to PIs, EMIs, small EMIs and credit unions. The consultation phase will be completed in December 2024 and the FCA will then publish its final interim rules in the first half of 2025. The indication is that firms will have 6 months to address their internal operations to ensure compliance with the new interim rules before they come into force. 

If you want to know more about the key changes proposed, click here.

Relevant case law updates

First-tier Tribunal rules SDLT higher for failed sub-sale scheme 

The First-tier tribunal has determined that the Stamp Duty Land Tax (SDLT) resulting from a failed sub-sale scheme, commonly known as the husband-and-wife scheme, is greater than the SDLT that would have been owed had the scheme not been implemented.  A worrying development for any adviser/insurer facing claims for such a scheme – given that the additional tax would form part of a claim.

In this case, A and B jointly purchased land, with A holding 57% and B 43%. They executed a supplemental deed where A would transfer 56% of their shares to B for £119,100 resulting in ownership of 1% for A and 99% for B.

The tribunal rejected the argument that section 45 of the Finance Act 2003 should disregard the original contract. Instead, it determined that section 45 treated the contract as two separate agreements: one for a 56% share and another for the remaining 44%, leading to SDLT on the 44% not sub-sold. The chargeable consideration included both the original consideration for the sub-sold part and the value of rights transferred to B – leading to a higher total SDLT bill.

The ruling confirms that such schemes are ineffective and taxpayers may face higher SDLT liabilities than anticipated.
To read more, please click here.

With thanks to this week's contributors: Alison Thomas, Cory Gilbert-Haworth, Eleanor Jones, Hattie Hill, Heather Buttifant, Lauren Butler, and Kerone Thomas