As the FCA moves from ‘authorisation’ to ‘supervision’ mode, managing director of Consumer Credit Compliance Ian Beardmore explains just how seriously companies should take the regulator, and what to expect in the future
Consumer credit licensing has arguably been the biggest single factor affecting the automotive industry in the UK over the past 18 months.
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Since the Financial Conduct Authority took over regulation of consumer credit from the Office of Fair Trading (OFT) in April 2014 motor dealers all over the UK have had to analyse and fundamentally change how they do business.
Operating under the mantra of ‘treating customers fairly’, the FCA has introduced new, more stringent policies and procedures that have brought all companies that sell finance, not just motor dealers, in line with the policies and procedures of other financial institutions, such as banks, insurance companies and financial advisors.
When the interim permission window closes on 31 March, the FCA will switch focus from authorisation processing to policing authorised businesses, known as ‘supervision’.
I suspect there will be a small number of people who will just stop offering finance and I suspect there is a number out there who are not authorised by the FCA that continue to offer finance as an option.
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By GlobalDataThe brave and the stupid
The FCA has already identified individuals and is looking at people who have had an interim permission that has lapsed but are still selling finance. That’s only for the brave or stupid. They are looking at fines and imprisonment. It’s reputational damage as well. The information is published on the FCA website.
The FCA team at the moment are focused on the authorisation process. They have a deadline of 31 March to achieve. Naturally, when that application process comes to a close, the bulk of the authorisation team will be in a supervision role.
Even if you are investigated, the FCA is reasonable enough to say that if you are demonstrating you are trying to do the right thing for the customer they will take a different approach to those that are blatantly dodging it.
If you get caught offering finance without authorisation, I don’t think there’s any defence. You will have to make a brand new application and that could take six to 12 months if the FCA uses its full legal timelines. That’s a long time if that’s core to your business. The FCA will also take a dim view of the firm’s application and fitness and propriety at this stage.
It’s also not advisable because dealers are effectively limiting their potential to sell a product. Finance is not a dirty word anymore. It’s more acceptable to take things on finance and if you can’t legitimately offer that to your customers then you’re losing out. It’s not just the commission you receive on finance; it’s about the profit you’d make on selling the product.
Plus, being authorised offers kudos to the business. In the days of the OFT, to receive a licence was reasonably straightforward. Businesses and owners have to go through much more rigorous vetting and anyone who receives authorisation should be proud and use it as a selling point.
However, I think there are some people in that position now and there will be more after 31 March – intentionally or otherwise. We’ve seen throughout the past 18 months that dealers have missed their slots. They have to make a new application and stop selling finance. We’ve had many customers from the automotive sector in that
situation."
Commission disclosure
The biggest thing I think the industry faces is commission disclosure. The question the FCA asks is: Why should one customer be charged one rate for a financial product and another a different rate to maximise the dealer’s commission? This is already being addressed by a majority of lenders as they strive to achieve the FCA’s mantra of ‘treating customers fairly’ for themselves.
I’m sure the FCA will make it mandatory for all customers, as they have done with financial advisors, mortgages and insurance brokers, imposing regulations where dealers have to disclose the commission they are earning as they already have to for some customers and that will be the bitterest pill for the dealers to try and swallow.
This has been on the cards for many years and the FCA taking over regulation is just a catalyst to it happening. In virtually all the other areas they deal with, we know that happens.
Bailey’s appointment
There is a lot of thematic work going on at the FCA at the moment and I am sure that when Andrew Bailey takes over, he will want to show strong leadership and demonstrate that under his leadership the FCA can drive further confidence in the markets they regulate for consumers.
The impact on motor dealers will be felt by FCA reviews, particularly around sales commission and commission disclosure and by those dealers who are now authorised by a strong supervision model that challenges them to demonstrate what they said they will do on their application.
How many of these dealers submitted their application ticking the boxes saying they had in place a regulatory business plan, compliance policies and procedures and a compliance monitoring document, along with a number of other requirements, but don’t actually have them? Even if they do have some or all, what are they doing to monitor these and provide management information if requested?
With him being from a banking background and with the pressures that they have been under I can see him driving further change at the FCA to ensure the same confidence that the Prudential Regulatory Authority have been re-installing.
Ian Beardmore is managing director of Consumer Credit Compliance.
