The FLA, the FCA, finance providers and compliance companies each have their hopes and worries for the change of regulation in the car finance industry, reports James Wood and Richard Brown
On 1 April 2014, the Financial Conduct Authority (FCA), which replaced the Financial Services Authority (FSA) in April this year, will become responsible for consumer credit regulation. The Authority takes responsibility from the Office of Fair Trading (OFT), bringing the conduct of car finance business regulation under a single financial services regulator.
The OFT and FCA sent out a joint letter, dated 15 July 2013, outlining the upcoming changes to the consumer credit regulation environment. From September 2013, all licensed credit businesses are required to register with the FCA in order to obtain ‘interim permission’ to continue the activities firms are currently licensed for.
If firms do not register with the FCA, they will not be able to engage in regulated consumer credit activities from 1 April 2014 and the FCA has warned if current licence category details are incorrect, firms could risk operating illegally and potentially face delays when attempting to register with the FCA from September.
Businesses will be able to register online from September and will be charged a fee, currently proposed at £150 for sole traders and £350 for most other firms, with potential exemptions.
Current OFT licence holders are encouraged to visit the OFT’s consumer credit register and check their firm’s name, address, company details and that the firm’s current licence covers all the activities the firm wishes to engage in after 1 April 2014.
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The FCA will write to firms again before the interim permission system opens to offer a detailed explanation of what is required to ensure firms remain compliant. After 31 March 2014, the final day of consumer credit regulation by the OFT, firms will need to complete a more detailed application process in order to obtain FCA authorisation. The timetable for authorisation has not been confirmed but will depend on the size and type of firm as well as the activity conducted by the firm. The OFT has stated it will consult on more detailed proposals this autumn; potentially providing more information about the changes and how they will affect businesses.
The motor finance industry will face a series of challenges from the change in regulator, not least of which is the short timescale, which could cause liquidity supply problems for customers, according to Stephen Sklaroff, director general of the Finance & Leasing Association (FLA), the trade body representing car finance in the UK, and John Fellows, head of compliance at First Response Finance, the used car finance provider.
Sklaroff says an "orderly transition" from the OFT to the FCA is needed to ensure busiconfidence and continuity is not disrupted. Although Sklaroff hopes firms can rely on the FCA to ensure "their full authorisation will be completed in a timely fashion", he notes the greatest difficulty with FCA implementation may be "the scale of the change and the speed of the timetable", a challenge for the regulator and a worry for the industry. "We have yet to be told how the FCA will manage the process in terms of the number of staff involved, the online procedure and indeed contingency plans.
"We should also note that although the new regime starts in April 2014, the final version of the rule book won’t be published until March 2014. There’s a lot to do in a short time."
Fellows agrees the timescale implemented by the FCA could potentially be a problem, but feels the new regulator is driven by political pressures to deliver on expediency, which could lead to problems in the future.
There could also be problems with the implementation of the new regulatory regime as an increase in the number of firms being regulated would necessitate the on-boarding of a great deal of staff members, which could lead to training and quality control issues.
"The devil is in the detail," says Fellows. "Until we have that detail we will not know the true significance or otherwise of any
According to Skarloff, the FCA, which currently regulates 26,000 firms, could be facing 40,000 company regulation applications and 100,000 new Approved Persons, individuals who have been sanctioned by the Prudential Regulation Authority and/or the FCA to perform one or more Controlled Functions on behalf of an authorised firm. (A full list of Controlled Functions is available on the FCA website: fca.org.uk/firms/being-regulated/approved/approved-persons/functions.)
Adapting to the increase in regulatory responsibilities could put a strain on FCA resources, leading to issues for firms under the FCA’s jurisdiction.
However, the FCA maintains it is institutionally capable of dealing with a large number of companies and their requests.
"As an organisation the FCA is used to dealing with a large number of companies and their requests," says a spokesperson for the Authority.
"By starting this process now it not only gives firms time to make sure they contact us, it gives us the necessary time to ensure the transition is as smooth as possible."
Without further detailed information from the FCA regarding the changes, the Authority has yet to manage the expectations of those in the industry, argues Fellows.
"We are yet to understand what the new regulatory framework will contain," he says.
While Fellows and Sklaroff acknowledge the FCA’s work and intention to work with the credit industry, Fellows says the industry itself will not be able to understand fully the significance of the changes until they are announced, which could lead to a series of "unintended consequences."
There are also concerns the regime may disrupt credit markets; Skarloff believes the proposed regulatory environment is more complex than its predecessor and will require firms to adapt, again prompting concerns of future credit shortages. Many non-bank lenders and financial intermediaries may have limited experience of past FSA regulation and could find difficulty adapting to new regulations, as well as older regulations which will run concurrently. Skarloff cites the continuation of the Consumer Credit Act (1974) alongside the Financial Services and Markets Act (2000) as an example of potentially complications.
Again, this may cause some lenders to exit the market and hamper the vital "supply of affordable, responsibly-provided credit" to the millions of customers who rely on it, he explains.
Fellows echoes Skarloff’s concerns that the FCA could create "a disproportionately complex regulatory system", and fears "small and regionalised lenders will exit the market, which may potentially restrict access to consumer credit".
Fellows says although the FCA has "recognised" the potential lending shortfall, existing banks cannot be expected to fill a gap in the market.
"Many of these exiting businesses will have been lending to customers that the banks simply won’t lend to because of the associated higher risks and lower margins."
While there is the potential for confusion and uncertainty about the regime, the FCA has made attempts to allay fears and create a stable transitory environment, such as the joint letter and its advice for adequate preparation, something Skarloff feels was an "important move" which he hopes will signal regular communication with further information throughout the year.
Firms can elect to receive regular email updates from the FCA, the OFT has information available on its website regarding transition requirements, and, according to the FCA spokesperson, "businesses are aware there is change coming and they need to act."
Although Sklaroff praises the consistency of the message from both regulators, the FLA has also felt the need to encourage firms to check they have the necessary licences to cover their business through till 2016 with the aim of minimising any disruption to the motor finance industry.
The letter also states businesses may receive additional regulation transition support from trade associations or industry bodies, and Sklaroff highlights a number of measures undertaken by the FLA to ensure members are kept abreast of the latest developments.
"We have dedicated member groups looking at different aspects of the new regime, as well as a Regulatory Reform Group which meets monthly to look at general developments," he says.
Alongside these, the FLA is running a series of conferences and seminars for members on a wide range of topics, including the overall architecture of the new regulatory body and detailed application in areas like financial incentives. Skarloff adds the real challenge will be to reach firms that are outside the membership of trade associations, a task in which the trade press "will have to play a key role".
Fellows agrees the credit industry has been well represented by the trade associations. However, while the government, FCA and OFT focus their dialogue on trade associations and consumer lobbying groups, a significant number of consumer credit licence (CCL) holders, which are not members of any trade association "have had little opportunity to voice their concerns".
A relevant body
For those CCL holders unsure who to speak to for clarification Fellows’ advice is "to join a relevant trade body that can give guidance on the key changes and how they may affect individual businesses."
Paul Guy, managing director of Automotive Compliance, which hosts a guide to the regulatory changes on its website, suggests independent dealers should check their CCLs now before they register for their interim permissions with the FCA in September. "In some cases even dealers’ basic categories have not been applied correctly, which may not have been a problem in the past. However, in applying to the new regulator for interim permission, all categories will be checked and errors could result in suspension of trading until discrepancies to their licence are rectified," he explains.
Although the evolution of the regulatory environment could possibly lead to a period of uncertainty for the motor finance industry, all sides are hoping a combination of the diligence of industry bodies and communication from the industry regulators will provide firms with the resources to ensure the best is made out of a potentially difficult situation.