David Wood examines the main concerns for dealers and retailers under the FCA regime
For consumers, the relatively easy availability of credit has become a feature of everyday life, while for retailers it remains key to driving sales growth. However, effective regulation is needed to ensure consumers are adequately protected and everyone can continue to share in the benefits. For the same reason more than 50,000 businesses involved in the provision of credit are still adapting to a massive cultural shift following the transfer of regulation from the OFT to the FCA last April. The FCA takes a much more proactive approach to regulation than its predecessor, as shown by a detailed rule book affecting all businesses involved in consumer credit.
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Now we’re almost a year into this new regime, what are the issues retail businesses involved in the provision of credit products should be most concerned about? Here we examine some of the principal areas in which dealers and retailers have been required to review their business governance and practices.
The FCA places a firm emphasis on the importance of acting with integrity and ‘treating customers fairly’ (TCF). While this will be an intrinsic part of the culture of the majority of businesses, they must demonstrate that TCF is given a higher priority in selling credit products than the need for driving sales and growth. The TCF principle must be a "top down" agenda item with senior managers focused on how they recognise, ensure and demonstrate good customer outcomes in credit provision.
In this new environment the senior leadership of the organisation is being made even more accountable for standards and can face sanctions for non-compliance. People holding certain senior positions, such as directors, must now receive formal FCA approval. The fact that FCA rules prohibit indemnities or insurance against such personal liability means that it’s imperative senior management engages with the FCA’s compliance requirements.
Promoting finance products
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By GlobalDataPromoting credit facilities is no longer solely a matter for the finance provider. Dealers and retailers must ensure that the way they promote sales through credit products complies with the FCA’s financial promotion rules. Businesses need to reconsider how offers of sales discounts and other incentives to encourage sales through the take up of credit facilities are presented to their customers. This means close collaboration between finance providers and their retail partners – a joint approach may help the dealer/retailer to meet its own obligations.
Affordability assessments, commission disclosure requirements and incentives
The new regulatory requirements include the need for a broker independently to carry out an affordability assessment in relation to any customer to whom it offers a finance product. As for commission and other remuneration arrangements, many lenders are already looking at such schemes to ensure they don’t breach the FCA’s requirements on incentives, for example by encouraging mis-selling of finance products. Brokers may have their own independent obligation to disclose the existence of any remuneration arrangement between them and the credit provider, but working with their finance partners to agree a joint approach can help ensure that all parties meet their obligations in this area.
Supervision by the FCA
Perhaps the most challenging aspect of FCA authorisation is that of supervision. Businesses providing credit can expect contact from the FCA to discuss their compliance procedures. Store cards and business practices in selling finance in the largest dealerships and retailers will be squarely on the agenda. FCA enforcement activity so far suggests that the largest businesses will be under considerable scrutiny because their practices are likely to have a greater impact on the consumer.
Conclusion
Many of these changes may involve fundamental changes in business practice, but non-compliance can carry a high business and personal cost. Many finance providers will already have discussed their impact with their retail partners, but such businesses should always consider taking their own independent advice on how the FCA rules affect their business and address the kinds of concerns mentioned in this article.
David Wood is a partner at DWF
