In April last year the Financial Conduct Authority (FCA) took over regulation of the consumer credit sector from the Office of Fair Trading (OFT). With this change came the challenges of obtaining authorisation from the FCA to continue to offer finance to customers and maintaining compliance with the FCA’s rules going forward – a more onerous task than under the OFT.
The new rules, which have been in place since 1 April 2014, state that once authorised, a firm that offers consumer credit – like a car dealer or a fleet leasing company – must continue to follow them, posing an ongoing compliance requirement.
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As of last April firms should have implemented appropriate internal compliance controls and established an audit trail for monitoring those controls to demonstrate compliance. One of the additional challenges of the new rules is that they’re ‘principles-based’ and therefore have a tendency to be very open-ended. Firms must decide how to interpret them. For example, the FCA has recently emphasised the need for those offering finance to consider the affordability of the option to their clients, specifically: "A firm must pay due regard to whether the credit product is affordable and whether there are any factors that the firm knows, or reasonably ought to know, that may make the product unsuitable for that customer."
What does that mean in practice? With principles-based regulation like this, it’s difficult to strike a balance. Does a dealer do a full income and expenses analysis and risk losing the sale, or do a less rigorous affordability check and risk a complaint in the future? Proportionate application of the rules is a real challenge, and an area that’s often misunderstood.
These misunderstandings can present genuine risks. Not only is the FCA capable of direct enforcement, handing out fines and bans to those in the industry, but complaints can be made to the Financial Ombudsman Service, with awards for compensation being made against firms. It’s possible the courts might declare consumer credit contracts unenforceable if the regulations have not been followed.
As well as the FCA, there’s also the potential that lenders will withdraw their support. Non-compliance is a risk for them and they may lose faith in dealers or leasing companies that pass them non-compliant business.
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By GlobalDataSo, the risks are there and the initial challenge of putting the necessary processes in place is a real one. But, when dealt with in a timely and comprehensive way, the challenge can be quickly overcome, and offer the potential for some positive outcomes too.
Firms fall into various categories, from enthusiastic adopters through to those who completely ignore the requirements. As with all regulatory issues, the best results come from taking steps to have a good understanding of the requirements and implementing positive change – meeting the rules, monitoring progress and using the process as a springboard for making efficient and innovative changes to business practices.
Ben Mason is chief executive officer at Compliancy Services
