A year after they published their interim findings in March 2018, we now finally know the outcome of FCA’s review of the motor finance market. Whilst the focus of FCA’s attentions was to an extent telegraphed in their interim report, the final report still makes quite compulsive reading and begs the question – what happens next?
The key issues identified in the review fall under 4 broad headings:
FCA has significant concerns about the way lenders remunerate car retailers and credit brokers. FCA consider that conflicts of interest arising from links between the broker commission and the interest rate have led to consumer harm on “a potentially significant scale”. From data collected from firms representing around 60% of the market, FCA estimated that 560,000 customers could be paying £300m more annually in interest costs as a result of these types of commission models.
In the light of their findings FCA will be consulting on possible remedies or interventions to address this perceived consumer detriment. In the meantime, FCA wants lenders to review their systems and controls around commissions in the light their findings and go on to state “where harm or potential harm is identified, this should be addressed”. It’s not clear from the language used whether FCA considers that a back-book review is necessary however the wording of this statement could imply that in some cases it might be.
FCA do not give any indication of timescales for their proposed consultation on potential remedies but it would be surprising if they haven’t already given some thought to potential remedies so a Consultation Paper could come out fairly quickly.
2. The Provision of Sufficient, Timely and Transparent Information
As in other market studies, FCA has used mystery shopping to review the provision of information to consumers by motor finance firms. FCA found that in many cases disclosures made during the initial contact were, in their view, incomplete, misleading or lacked balance. FCA CONC 3.3.1 states that all communications, both oral and written, with customers must be clear, fair and not misleading. They must also be balanced and not disguise or omit important information or warnings. FCA makes clear that this applies to oral as well as written communications – in effect firms cannot rely on simply giving important information in supporting documents, potentially given at a later stage in the sales process. This has important implications for the sales process and the way that firms communicate information. For credit agreements such as PCP and HP FCA found that in many cases brokers were not complying with the requirements around “adequate explanations”. Only a small number of brokers disclosed during the initial contact that they may be paid a commission for arranging finance. FCA questioned whether giving this information later in the sales process would be “sufficiently early to effectively alert the customer to the potential conflict of interest or that there may be scope to negotiate on the finance as well as the vehicle and other price elements”.
FCA expects both lenders and brokers to review their disclosure policies and procedures to ensure that they are complying with the disclosure requirements.
3. Lender Controls CONC 1.2.2R requires a funder to “take reasonable steps to ensure that other persons acting on its behalf comply with CONC.” Essentially FCA expects lenders to pro-actively monitor compliance by brokers – they cannot simply rely on contractual provisions obliging brokers to comply nor on the fact that the firm is FCA authorised. And, whilst most lenders indicated they had procedures to monitor compliance, in light of FCA’s findings they questioned the extent to which lenders were monitoring in practice. In light of this FCA requires lenders to review their systems and controls for monitoring brokers and lenders will be expected to be much more pro-active in this area.
FCA reviewed the affordability and creditworthiness assessment procedures of 20 lenders and 8 out of the 20 lenders could not provide FCA with sufficient information for FCA to assess compliance with the rules in CONC. FCA reminds firms of their obligations though does not specifically require them to conduct a review.
We can see from the above that there are some immediate actions required by both lenders and credit brokers in reviewing their systems and processes in certain key areas. FCA will expect firms to have evidence that they have conducted these reviews.
But what about the longer term? It’s clear that FCA has serious concerns about the structure of some commission arrangements between funders and credit brokers. It is here where they feel the need to make some sort of market intervention and will be putting forward proposals for consultation in due course. And, as we can see if we look back through the annals of regulatory history, there have been a number of times in the past when the FCA and its predecessors have intervened in commissions arrangements in financial services markets.
Going back to the very dawn of the current statutory basis of regulation, in 1988 when the original Financial Services Act came into effect, LAUTRO, the regulatory body at that time for life assurance and unit trust companies, sought to introduce a Maximum Commissions Agreement that limited the amount of commission that could be paid by product providers to insurance and investment intermediaries. However, unfortunately for LAUTRO, the European Commission held the agreement to be anti-competitive and it had to be abandoned after 12 months. In its place the regulators brought in “hard disclosure” of commissions at point of sale and in all cases the intermediary had to disclose to the customer in cash terms the amount of commission that was being received. This was coupled with rules banning or limiting other benefits that might be offered by product providers in place of commissions, such as marketing allowances, training or entertainment, in order to circumvent the rules.
Unfortunately over time it was considered that the hard disclosure of commission was not sufficient to protect consumers from harm so in 2006 the Financial Services Authority launched the Retail Distribution Review, one of the outcomes of which was that, with effect from 31st December 2012, product providers could no longer pay commission for the sale of certain types of products and, instead, intermediaries had to charge fees to their customers.
So what might we glean from this for the motor finance sector? If I was a betting man, I would expect to see proposals for tightening up the rules around the structure of commissions arrangements between funders and credit brokers. Whilst this has proved problematic for regulators in the past from a competition perspective, it may be easier post Brexit. This could be linked to some sort of hard disclosure at point of sale of the cash amount of commission received by the credit broker – at the moment this only has to be disclosed on request. There is then likely to be a post implementation review of the effectiveness of the measures a year or so after they come into effect. And if the measures are not considered to have been effective in addressing the perceived customer detriment we cannot rule out a move to ban commissions altogether in the longer term in favour of credit brokers charging fees.
And with the imminent implementation of the Senior Managers regime later this year, it is clear that FCA are expecting lenders to take much more responsibility going forward for the way they monitor the activities of the credit brokers (including motor dealers) who support them.
Steve Bloor, Technical Director, CCAS