Bill McCaffrey, Julie Devlin and Zain Akhtar of CMS Cameron McKenna Nabarro Olswang LLP offer their views on the City regulator’s recent letter to motor finance executives on implementing the FCA’s outcomes-focused approach to consumer protection, the Consumer Duty.
On 1 March 2023, the Financial Conduct Authority (FCA) published a portfolio letter on “Implementing the Consumer Duty in the Motor Finance Providers Portfolio”.
The letter introduces a more outcomes-focused approach to consumer protection and reiterates that the FCA expects implementing the Consumer Duty to be a top priority for the CEO (or directors) personally.
They need to ensure that good outcomes for customers are at the heart of the firm’s strategy and business objectives, and firms’ boards and senior management should embed the interests of customers into the culture and purpose of their firms.
In this letter, the FCA notes that although its work on the Consumer Duty pre-dates the cost-of-living crisis, it is now particularly important as consumers face increasing pressures on their household finances and implementing the Consumer Duty provides further opportunity for the sector to build public trust.
The FCA also makes clear that implementation of the Consumer Duty by the motor finance sector will be a priority since it considers there to be “existing drivers of harm in this portfolio”.
The Consumer Duty will come into force on 31 July 2023 for new and existing products or services that are open to sale or renewal, and 31 July 2024 for closed products or services.
Application of the Consumer Duty
Annex 1 to the letter describes how the Consumer Duty applies to firms in the Motor Finance Providers portfolio and what the FCA expects to see from firms in respect of the following key issues in implementing the Consumer Duty:
- Motor Finance lending products are designed to meet the needs, characteristics, and objectives, of your intended customers.
- Motor Finance lending products and services provide fair value.
- Firms communicate in a way that supports consumer understanding and equips consumers to make effective, timely, and properly informed, decisions.
- Firms provide support that meets consumers’ needs throughout the life of the product or service.
- Firms to be clear on their roles in the distribution chain and meet their commitments under the Consumer Duty.
- Firms must understand and be able to evidence the outcomes their customers are getting.
- Firm’s board or governing body will need to monitor whether customers are getting good outcomes and whether further action is needed to comply with the Consumer Duty.
Key issues to consider
Annex 2 to the letter flags the following key issues that Motor Finance Providers should consider set against each of the four outcomes of the Consumer Duty:
Products and services
The FCA warns that firms should consider their approach to affordability in light of the Consumer Duty, in particular the requirement to avoid causing foreseeable harm. The FCA also notes that the complexity of motor finance products can result in consumers being unable to understand how they work and may put more focus on weekly or monthly costs instead of the total amount payable; which in-turn makes it difficult for consumers to adequately compare products and understand their suitability. The FCA expects firms to ensure that the product design meets the needs of the consumer, that adequate information is given to consumers so that they can understand the benefits and risks of an agreement and make informed decisions.
Financing alternative fuel vehicles
The FCA also highlights issues arising from financing required for alternative fuel vehicles (AFVs) as the government has set a target of no ‘new car’ sales of petrol or diesel cars by 2030 and to be net zero by 2050. The increased complexity of providing bundled products could cause significant confusion for consumers about their rights and protections as a result of the types of agreements required. The FCA expects firms to pay regard to the design of products which may include the funding of charging points and other ancillary services as well as the funding of the vehicle. Firms will need to design and deliver support to retail customers such that it meets their needs and ensure that customers do not face unreasonable barriers to end such agreements, given the different methods available.
Price and value
The FCA expects firms to ensure that products represent fair value for customers throughout their lifecycle and do not have features that exploit customers who might have a limited ability to get products or services elsewhere, such as by charging unjustifiably or unreasonably high fees or interest rates to groups, such as those with a poor credit history.
Commission models and disclosure
The FCA states that certain commission models may cause consumer harm without appropriate oversight in place and create potential conflicts of interests for sales staff or agents. The FCA is also focusing attention on whether its ban on discretionary commission models in motor finance and amendments to commission disclosure rules (as outlined in PS20/8) are being complied with by both lenders and credit brokers, including motor dealers.
Firms will need to act in good faith towards retail customers, and distributors will be required to maintain, operate and review product distribution arrangements for each product they distribute to avoid causing foreseeable harm to retail customers.
With regards to the distribution chain, finance providers and those broking finance (including dealerships) need to consider their respective roles, i.e. whether they are acting as manufacturer, distributor or are co-manufacturers and distributors. Firms are manufacturers if they create, develop, design, issue, manage, operate, carry out, or (for insurance or credit purposes) underwrite a product or service. There may be multiple manufacturers for a single product or service. A firm would be considered a co-manufacturer where they can determine or materially influence the manufacture of a product or service. This would include a firm that can determine the essential features and main elements of a product or service, including its target market. Where firms collaborate in this manner, they must have a written agreement outlining their respective roles and responsibilities to comply with the Consumer Duty rules. So, in the event of a problem, it is clear which firm is accountable.
The Consumer Duty expects communications to be tailored according to the complexity of the products and the characteristics of the customers intended to receive them, including characteristics of vulnerability. Firms will also need to test that information to see how it is likely to work, and subsequently monitor how well it is working in practice.
Control over dealer networks and oversight of these by the lender
The FCA expects Motor Finance Providers to have adequate oversight of their dealer-broker networks, and monitor point-of-sale compliance with the FCA’s financial promotion rules in the Consumer Credit sourcebook (CONC). Firms must ensure that appropriate oversight is exercised so that customers have the right information with which to make effective, timely and informed decisions. The FCA intends to undertake work to ensure compliance in this area.
Evolving business models, strategies, and digitalisation of the customer journey
The FCA also highlights potential issues arising from a change in consumer behaviour and attitudes from ownership to usership models and the increased digitalisation of the motor industry. The FCA expects firms to ensure that customers’ online journeys are such that they understand the options available and are suitably informed to make the right decisions.
The FCA highlights issues arising from the cost-of-living crisis and the increased number of customers facing difficult circumstances, personally and financially. As a result, the FCA expects firms to provide the support that meets the needs of customers, including those with characteristics of vulnerability, throughout the life of the product or service. The FCA also highlights issues relating to forbearance arrangements, together with the systems and controls to implement tailored forbearance taking account of customers’ individual circumstances, and firms’ handling of complaints with effective and transparent procedures.
The letter also sets out the FCA’s other priorities of financial resilience, technology, cyber and resilience, data-led regulation, ESG and D&I as areas for firms to give due consideration to.
Firms will be at an advanced stage of their implementation plans for the Consumer Duty and the FCA will continue to support firms in embedding activities in the run-up to the July 2023 deadline. Firms should be prepared to discuss Consumer Duty with the FCA and to provide it with information on the reviews and assessments conducted as part of the embedding process.
Firms are strongly encouraged to re-prioritise and make the relevant changes in accordance with this letter to embed the FCA’s expectations into their dealings with customers now, especially in light of the impact of the pandemic and the implication of the rising cost of living. In order to implement Consumer Duty on time, many firms need to work and share information with other firms in the distribution chain. However, some firms may need to accelerate their work on this important aspect of implementation as the implementation deadline looms.