The FCA’s first year of regulating consumer credit hasn’t been without it’s challenges. But as Jonathan Minter found out, the industry remains optimistic over the regulatory future.
In April 2014 the Financial Conduct Authority (FCA) took over regulation of the UK consumer credit industry, marking arguably one of the biggest turning points in the mod¬ern history of the motor finance industry in the UK.
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Whereas the previous regulator had been a much more hands-off type organisation, the FCA made no bones about its intention to make sure the industry was operating in an acceptable manner and treating customers fairly. "Shoot first and ask questions later," FCA chief executive Martin Wheatley once famously declared.
Companies that wished to continue oper¬ating in the industry were required to apply for interim permission, with landing slots for full FCA authorisation applications begin¬ning at the end of 2014. Many companies have since sent off their full application.
The initial reaction to the FCA, both before it came into power, and once it had done so, was mixed. While in some lights it was viewed as an opportunity to improve the industry, there was also a lot of fear around it. Paul Harrison, head of motor finance at Auto Trader, says: "I think some of the initial ‘fear’ from the car industry came from deal¬ing with a regulator and a regime that was largely unknown."
Andy Gruber, director of Alphera Finan¬cial Services UK, agrees with this, saying: "When new topics hit the market, the initial reaction is often of uncertainty and poten¬tially fear over what it might mean. As everybody was working through the application process for the permissions, people realised this was a very big change, and forced a lot of people to take time out of running their day-to-day business to focus on the topic of FCA regulation and what was required."
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By GlobalDataLee Streets, director at Evolution Funding, outlines some these potential fears people had: "You had concerns that it could have a material impact on your business, what the costs of the authorisation could be and, speaking as a small but growing to medium-sized operation, we were concerned about the time aspect of this – we’re not large enough to throw significant resources at this, so a lot of time spent on this has been from myself and other directors.
"Other concerns were potentially some of the complexities of the requirements. There were a lot of sourcebooks to read and go through. It’s then also down to interpretation – as it’s a principle-based regulator how do you interpret those principles?"
As more and more companies have got used to the FCA, and more specifically started preparing to go through their authorisa¬tion application, these companies have got to know more about the new regulator.
As this has occurred, many have found their fears replaced with a more communica¬tive regulator than they expected.
Harrison says: "The feedback I get from the industry has generally been remarkably positive, particularly the telephone support received by lenders and dealers. And certainly many firms have been surprised at the quick turnaround time from application to authorisation."
The FCA has had to be efficient in the authorisation process, as almost 50,000 firms applied for an interim permission. The FCA does not expect all of these to apply for full authorisation, however.
Speaking at Credit Today’s Credit Summit in March, Christopher Woolard, director of strategy and competition at the FCA, said: "Our experience elsewhere tells us that a change in regulatory regime is often a time when people stop and reflect on their business models, and some may choose to leave.
"Inevitably through the natural life cycle of a business, some sole traders will take the chance to retire, business models will change, and the Government may make some changes to exemptions – such as the extension of the instalment exemption announced last week.
"In some areas where we have seen poor practice, we expect that some firms will not meet out requirements when we assess their applications. So we are not expecting all 50,000 firms who have interim permission to either apply or become authorised. However most will, and are, submitting their applications."
Alphera has already been through its application process. Gruber describes the process as involved, and quite lengthy and cumbersome. He adds: "We were lucky that we are an organisation big enough to have a dedicated project team. Dealers and small organisations found it much harder, where a lot of the work, discussions and documentation requirements were done by senior stakeholders in the company themselves, which meant working weekends and long evenings. It also meant locking themselves away from the business, just to get the application done, which has an impact on day-to-day business."
In its business plan for the 2015/16 period, the FCA said it had identified risks common across the consumer credit sector which it intended to look at. In particular, it highlighted poor practices when assessing affordability before credit agreements are entered into as an area it intends to look at over the coming months.
Specifically the FCA highlights looking at multiple and repeat borrowing. At the moment the FCA is looking at the issues surrounding affordability, and plans to issue a consultation paper this year which will clarify the regulator’s expectations of firms on the topic.
This clarification couldn’t come too soon for dealers and brokers. As a principles-based lender, the FCA’s regulations are often open to a variety of interpretations, with affordability currently falling under this category. Unsurprisingly this has led to different funders coming up with different interpretations.
James McGee, managing director of Northridge Finance, notes that affordability is just one area where regulation is still up for interpretation: "We think it’s fair to say there are various interpretations on affordability and sustainability, with dealer remuneration packages still to be decided in totality. As lenders we need to ensure all our systems have the ability to cope with any potential changes and, where we can, we consider the dealer circumstances."
According to Streets, these different interpretations can still be quite far-reaching. He says: "We’re seeing completely different mes¬sages from different lenders in terms of what they each perceive to be treating customers fairly or how a sales procedure should oper¬ate. So you’ve got some funders saying every customer has to have the same outcome rate and some are saying you can have some var¬iance. Some are saying you can’t have fees any more, others are just reducing. Some are even putting fees up."
These differences cause genuine difficulties for brokers. As Streets says: "As a broker what you really want is consistency because if you’re working with 22 different funders, you need to make sure you can capture from the customer or dealer the information to satisfy most of them first time around without asking for more information.
Gruber acknowledges that the affordability question is a challenging one for lenders thanks to a current lack of clear direction from the FCA on the topic. He says: "Clarity on what really good looks like would be useful. Obtaining sensitive customer information in a car dealer showroom environment is always going to be a challenge, and making sure that information is accurate and correct at the time is where we have concerns with regards to some of the practices in the marketplace."
Harrison points out that, while he understands how these differences can cause frustration and difficulties for brokers and dealers, it’s important to remember the lenders are also still getting their heads around the new regime for the first time as well. "Over time I’m sure we’ll see lender policies become more aligned as the FCA’s position on consumer credit becomes clearer," he says.
When the FCA does look at affordability this year, it will no doubt let those it regulates know a bit more about what it considers to be a fair approach to affordability, which will no doubt be a positive for the brokers, the dealers, the lenders and ultimately therefore the end-user.
While firms scramble to understand what the FCA wants, it’s important to remember that the past year has also been a learning curve for the regulator.
At the FCA, Woolard says: "We will be keeping a close watch on the impact of this year’s changes – on the market and on consumers, and our work on debt management and the credit card market will come to fruition.
"We need to keep making sure that our rules are really working in the best way for the market and for consumers, and adjust them where needed."
An example of this is some credit broking rules the FCA introduced in January. Although these rules were brought in without a consultation period beforehand, the FCA has since begun a consultation on them. The FCA is also asking for suggestions on future policy approaches to broker remuneration.
In its business plan, the FCA also admits that the experience had been, and continues to be, a learning experience: "In this relatively new area of regulatory responsibility, we are particularly mindful of the potential unintended consequences that may flow from our intentions. "
It continues: "We will continue to monitor the impact of our interventions and consider the potential consequences. We may also need to be flexible and to adjust our approach if there is an unforeseen impact."
While this language may seem different to Wheatley’s famous "shoot first, ask questions later" quote, those Motor Finance speak to are unanimous in saying the FCA has been helpful when questioned, and easy to work with.
Harrison, for example, says the FCA has always been open to feedback from the industry.
One example of this he brings up was with its views on the sale of GAP insurance in showrooms, where the FCA radi¬cally changed its plans after feedback from the industry.
At the same time, Streets says: "Everything we’ve done with them, they’ve been very keen to help. We even got phone calls from them at the back-end of last year asking about our application and reminding us that our window [for applying for full FCA authorisation] closed at the end of December.
"From talking to others, I also believe that if people have had problems with finishing their application on time, the FCA have been extending the window for a month or two, so overall it would suggest they’re looking to work with businesses."
Where it may seem that the language may have softened slightly, is most likely due to the fact that the FCA spent much of 2014 dealing with payday lenders, a market which appeared to require sterner warnings than the motor finance area.
In addition, Streets suggests the FCA may have used stronger language publicly to get people’s attention, even if it was willing to work with businesses the whole time.
Overall, the individuals Motor Finance speak to are relatively happy with how the first year has gone. Smaller businesses especially say they’ve found working through the FCA full authorisation process a time-consuming approach. However those that have become authorised seem satisfied that, having completed the work, their business are actually stronger for it.
Gruber sums up what he’s heard from the partners Alphera has worked with: "Overall it’s been a very positive year for the industry. It’s forced all players to look at topics like customer satisfaction and orientation and focus. Overall, speaking as someone who’s already submitted our application, I think the whole FCA cultural change will be a positive one for the industry."
The general consensus is that for the remainder of 2015, the FCA’s business plan is on the right track. Harrison says he wasn’t surprised to see the FCA begin to shift away from specific products, such as payday loans, to broader cross-market issues such as affordability.
The general hope is that, as both the FCA gets to know the industry and the industry gets to know the FCA, there will be an increasing level of consensus on what the various FCA regulations mean in a practical sense, and the grey areas that currently exist, allowing for the wide variety of interpretations, will disappear or at least begin to amalgamate.
Just over a year ago the industry, fresh from the recession and experiencing the rapid growth that was to remain for the rest of 2014, saw the FCA with a mixture of curiosity and fear. Now, with the majority of the industry having been authorised, in the midst of getting authorised or in the process of preparing to become authorised, it’s clear that a lot of knowledge has been exchanged in both directions.
While there are clearly still a number of areas that need to be worked on, and indeed are being worked on, there’s now a basis for optimism in future.
