Richard Brown and Jonathan Minter talk to a panel of brokers about their views about, and preparation for, the Financial Conduct Authority

Since it’s conception, the Financial Conduct Authority (FCA) has struggled to earn the backing of the motor finance industry.
Its initial offerings did little but encourage scepticism, as much of its suggested regulations simply did not fit motor finance, while many also complained that the timetable for change was too rapid.

The work of the Finance & Leasing Association and compromises made by the FCA since then has helped dampen some of the more notable problems. But there is still confusion about the upcoming regulation, a worry that smaller brokers may be forced out of the market, and a general lack of confidence in the FCA. Motor Finance spoke to a group of brokers to find out just how much progress has been made

How far along the Financial Conduct Authority application process are you?

Richard Hoggart, managing director of DSG Financial Services: At this stage all we can do is register for interim permission which takes five minutes provided you have ensured that your licensing is fully up to date with the right categories in advance of your FCA application.

Shaun Armstrong, managing director of Creditplus: Part permissions already organised. The process has been straightforward; however, clear guidelines from the FCA have taken time.

Nigel Hawkins, group sales director of Jigsaw Finance: We have applied for our interim permission having added categories D and E to our consumer credit licence (CCL). The process has been straightforward to date.

Matt Heaney, operations director of Car Loan 4U: Before applying for interim permission we needed to amend our existing CCL to include all of the correct categories. This process was relatively simple although the Office of Fair Trade (OFT) paperwork can be lengthy. This was all approved within a few weeks and we applied for our interim permission before the end of November.

Graham Hill, director of GHA Finance: I have applied and received back interim permission as have many brokers I regularly talk to.
Toni Nicholson, marketing coordinator, Oracle Finance: We have already secured our interim permission with the FCA, which was a relatively simple task to complete through the online application.

Has the process given you confidence in the eventual regime? Or has the process decreased it?

Hoggart: It seems to me that the FCA isn’t sure what it is going to do differently, but it has asked people to register and pay a fee while considering what it needs to do.

Armstrong: Compliance and governance will be more onerous, which I agree with. Making owner-operator and SME businesses more transparent and having to show improved trading standards are all good news. This will stop one-man operations starting in asset finance, which has to provide better protection for consumers

Hawkins: No view as yet, other than to say the general view is that this regime will have teeth. In terms of the structure it would make sense to have one regulatory body, but the industries they are covering are very diverse and everything seems rushed.

Hill: Total lack of confidence, I’m not even sure what the objective is, other than to make lending money to consumers and small businesses even more difficult. Sufficient legislation exists, what needs to be done is introduce finance and loans into the national curriculum and spend some of the vast amount of money being spent to transfer responsibility from the OFT to the new FCA on education.

Nicholson: The journey from the OFT regime to the FCA has been clearly laid out in terms of timescales. We are familiar with the FCA Consultation Paper CP13/10, however the new Conduct of Business rules for consumer credit will only be nailed down once the rules are published.

Is there anything you are still unclear about in the process or the coming regulation?

Hoggart: Is it really much different than where we already are? The emphasis seems to be on treating customers fairly and approaching everything from the best interests of the customer. Since the FSA regulated general insurance introduced TCF and then the ECCD this has been the approach anyway.

Armstrong: Not now guidelines have been released.

Hawkins: Yes. Until the outcome of the recent consultation document is known I think there are still a number of issues which require final confirmation. For example, if motor dealers will be considered a lower risk as the selling of finance will be deemed a secondary service, then why would a finance broker be considered a higher risk if all he does is process a dealer’s credit application? The selling of the finance – the risk – will be concluded by the dealer.

Heaney: There are still plenty of things for the FCA to clarify before it takes over and its overall impact still can’t really be felt. It’s leaving it late to clarify its position on any changes that would need to be made and implemented.

Hill: The whole industry seems to be confused. The timescales are ridiculous and smack of steamrolling given the total lead up time. Vehicle finance lease broking has been included within the ‘lower risk’ category when it was excluded in the past which will add to red tape.

Throughout the process of establishing the FCA, there have been fears it would reduce the number of brokers in the market. Is that still true?

Hoggart: No idea why it would affect brokers negatively. There is nothing onerous or prohibitive from what I have seen, anymore than before. Perhaps small used car dealers might be affected which might affect small used car dealer-oriented brokers, but I doubt it.
Armstrong: Yes some smaller operations will consider their future, however, as I mentioned before this is an improvement to the industry

Hawkins: I believe the process of application, potential costs, implementation of the required reporting could see a reduction in licence holders in the future. Depending upon their market, I could foresee a number joining larger operations on a self-employed/employed basis.

Heaney: I think finance companies should welcome a potential reduction of brokers in the market. The introduction of the FCA should give lenders clarity on which of their brokers takes compliance seriously.

Hill: It depends on the final rules. The FCA has revised its estimate of consumer credit firms to 50,000. At the end of 2012 there were 81,000 live licences of which 64,000 were held by companies that are still trading/in existence. The question is therefore: does the drop in expected numbers reflect companies that fall out of scope or a drop in brokers trading? My feeling is that we will lose a number of brokers.

If brokers do leave the market, will that present an opportunity for you?

Hoggart: Not at all. Small used car dealer brokers are not on our radar.

Armstrong: Not a great deal of change. The UK market has seen six to eight super brokers for several years competing with each other. There will, I am sure, be a 5-10% increase in business opportunity for these operations.

Hawkins: Potentially, but I don’t see brokers creating networks at this stage due to the potential risk of issues arising from appointing representatives i.e. compliance and monitoring etc. Therefore there will probably be an opportunity to employ more people.

Carl Eccles, industry director, Car Loan 4U: As an online, direct-to-consumer operator we try to capture the customer in the early stages of the buying process. If dealers are unable to obtain finance due to not having the broker relationship, the customer is extremely likely to go online, where they will come across our services enabling them to continue the purchase they wanted.

Hill: Not for me personally as I will be turning my attention to more consultancy work away from brokerage. I believe there will be a substantial move towards dealer finance away from brokers who have to deal with the new rules as well as distance selling etc.

Nicholson: Companies that do not treat customers fairly may find it more difficult to step up to the new FCA regime. This in turn creates an opportunity for quality firms to grow still further.

There were fears in the industry the FCA would apply a framework adapted from the Financial Services & Markets Act. How confident are you there has been enough change from this model to one which is more responsive or applicable to the consumer credit market?

Hoggart: I can’t offer expert opinion here, save to say that I am yet to see regulations that will change the way we do business.
Armstrong: Compliance and governance are all good things to improve on. However the FCA main focus was not asset finance brokers. The selling of key products such as hire purchase have now been placed under the FCA radar; it’s far too early to see if they regulate this space accurately

Hawkins: On the face of it the current legislation surrounding consumer credit remains in force with the addition of the General Principles of Business/reporting etc. Again I think the view is that the FCA has the power and will penalise poor business practises, whereas the previous regime appeared to be invisible.

Eccles: Very confident. Over the last couple of years the FLA has worked extremely hard and closely with the FCA to protect the car finance sector against such changes and has clearly demonstrated the sector’s commitment to the FCA’s with regards to changes and improvements they are looking to bring in.

In six months’ time do you expect there to be fewer brokers in the car finance market? Why? What about in a years’ time?

Hoggart: I am unsure whether some brokers operate a sustainable model anyway regardless of the FCA.

Hawkins: Not necessarily. If a broker embraces the legislation and operates with like-minded introducers then theoretically there’s nothing to fear and it will be good for the industry. Smaller brokers may seek some form of merger with a larger broker.

Eccles: I would expect there to be fewer brokers and car dealers offering finance, mainly because of the perceived ‘hassle’ that applying for interim permission with the FCA brings. Putting this together with the additional levels of appropriate systems, controls and compliance procedures that the FCA may require might be enough to put plenty of people off from applying to the FCA. I think this will be felt mainly in April 2014 and nothing will majorly change after this.

Hill: The last statistics I saw just before Christmas showed that only 10,000 companies had applied for interim permission out of the suggested 50,000. My feeling is that broker numbers will drop within six months and further decrease marginally in 12 months, but without knowing the full implications and likely U-turns it’s impossible to say.

Nicholson: Overall there are huge sums of money provided to the UK economy through credit brokerage and the new regime means that the FCA will treble the number of authorised firms under its control. This will mean that some firms will fall away, but that can only be good for the market to weed out those firms that fail to adapt to the requirements and needs of today’s customer.