FLA’s Stephen Sklaroff
looks at plans for the future regulation of financial
services.

 

Photograph of Stephen Sklaroff, FLAJust over a year
ago, the coalition government inherited what they believed was a
flawed financial regulatory system. Since then, the Treasury and
the Department for Business, Innovation & Skills have set out
plans – including draft legislation – to reorganise it.

The Financial Services
Authority (FSA) is to be broken up, and its functions split between
a new Prudential Regulation Authority (PRA) at the Bank of England,
and the Financial Conduct Authority (FCA).

But the future of consumer
credit regulation – including motor finance – remains unclear. In a
recent consultation paper, the government said its preferred option
was to transfer credit regulation from the Office of Fair Trading
(OFT) to the FCA. But it looks as if we may need to wait until
later in the year for confirmation.

The FLA’s view is that who
does the regulating is far less important than how they do it. The
fundamental point is that there should be a clear distinction
between the retail savings and investment markets, where the main
risk lies with the depositor, and the consumer credit markets,
where the main risk lies with the lender. One regulatory size will
definitely not fit all.

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This is important, because
consumer credit is a vital part of the economy, enablingms of
people to improve their quality of life. 70% of the UK population
used credit in 2009-10, and nearly 100,000 firms – most of them not
banks – currently have a consumer credit licence with the OFT. FLA
members alone provide £50bn of consumer lending each year, of which
around
£12bn goes on cars.

We need a regulatory system
specifically designed for credit, rather than one borrowed from
another part of the current FSA Handbook. Consumer credit
cannot be treated as an afterthought.

Requiring lenders to hold the
kind of capital reserves needed by deposit-taking banks makes
little sense. An inappropriate regime would risk a sharp further
contraction in a consumer credit market already shrunk by a third
since the start of the credit crunch.

It is also important the
government sets a realistic implementation timetable. They have
already announced a delay for transferring second-charge mortgages
to an FSA-style regime, and seem now to be taking more time to
think about what a new consumer credit regime should look like. But
there is a real risk of prolonged regulatory
uncertainty.

We are therefore urging the
government to devote sufficient resources to this huge project, and
to build on the regime which already exists. Let’s improve those
areas of the current Consumer Credit Act which don’t work well –
but, after all the recent regulatory upheaval (including the
Consumer Credit Directive, introduced only a few months ago), let’s
not throw the baby out with the bathwater.

Stephen Sklaroff is
director general of the Finance & Leasing
Association