Locke Lord partner Joanne Davis, and paralegal Tim Anson offer advice on the key requirements of the Financial Conduct Authority’s expectations on funders and retailers for Treating Customers Fairly

Product suitability and performance is an ongoing area of key concern for the Financial Conduct Authority (FCA). This is seen most notably with TCF Outcomes 2 (that products and services are designed to meet the needs of identified consumer groups) and 5 (that consumers are provided with products that perform as firms have led them to expect). There are also consumer credit specific rules and guidance, such as that at CONC 2.2.2 G that require firms not to target customers with products that are unsuitable.

As consumer credit only became regulated by the FCA in April 2014 there’s little substantive practical guidance that the FCA has published on how firms can specifically develop and sell regulated credit products without falling foul of regulatory requirements. However, some insight can be taken from a report published by the FCA’s predecessor, the FSA, in 2007 entitled Treating Customers Fairly in Product Design, about how firms can comply in practice with the requirements under PRIN, TCF and CONC.

TCF in product design

The 2007 paper focused in practical terms on how firms can deliver the TCF outcome concerning product design. Although the guidance provided in this report was not intended to be applied to credit products,

it is still useful guidance that can be applied to all businesses operating in the motor industry sector that are providing financial products.

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One of the key messages in the FSA report, which continues as a key message from the FCA, was that when firms are seeking to ensure fair outcomes are delivered when developing new products, it is important that an in-depth assessment of the risks associated with the product is conducted. In particular, firms should analyse whether an identified target audience is capable of adequately understanding those risks. Naturally, the more risks a product poses, the greater the need for a comprehensive set of systems and controls that ensure this risk is monitored.

Applying this to consumer credit products such as hire purchase and personal contract plans, dealers and funders should ensure that an extensive set of systems and controls are in place to ensure the customer base is fully informed of the product before agreeing to its terms. This is particularly true given the high number of consumers who have opted for these finance options, and the number of providers that now offer these products, particularly PCP.

Once the consumer has agreed to the terms of the product, it is important for the business to continue to monitor the success of its product. In particular, firms should assess whether the right consumers are being targeted. Businesses should have measures in place to assess whether the product is the most suitable finance option for the target audience and use this data to refine the design process and the intended audience. If through ongoing monitoring it is discovered that the product is unsuitable for a sub-section of the target consumer group, measures should be taken to ensure the product is no longer sold to that group.

Data gathered by the business should be relayed back to senior management to ensure the product design can be amended where necessary. As an example, if data shows that a significant number of people who entered into a PCP had intended to own the vehicle from the offset, analysis should be carried out as to whether sufficient efforts had been made by the business to explain alternative options, such as a hire purchase.

Another key issue is the level of communication between the funder, who possesses a high understanding of the different finance options, and the retailer who may not be as familiar with these. Finance companies should assess whether sales representatives, including dealers, fully understand complex finance products and are able to communicate these to consumers effectively. If not, representatives and intermediaries that have received specialist finance training should be available to assist the consumer with specific finance-related queries. Product information guides can also be a useful material to explain key product features.

In light of the TCF outcomes, in particular Outcomes 2 and 5, businesses providing consumer finance products to consumers are strongly advised to carry out internal assessments on whether they have met all of the recommendations, above.

Personal contract plans

The personal contract plan, in the writers’ opinion, is an extremely beneficial finance product for consumers that operates well in the motor finance sector. It is a product that is being explored more and more in the leasing sector due to its popularity. Customers enjoy the options and flexibility that PCPs bring and it is currently one of the most popular ways for consumers to finance the purchase of a new car.

It’s important that dealers continue to communicate to consumers key facts such as the amount of interest they will repay over the course of their loan. If this is likely to be significantly higher than the interest rate under alternative products, then this should be highlighted and secondly, dealers and retailers must be very clear to consumers about the nature of the balloon payment at the end of the loan and provide information of the payment date in advance of its falling date, together with regular communication on the end of term options available to ensure its ongoing suitabilty. It is recommended generally that all businesses involved with selling consumer finance products carefully review their practices to ensure they are fully complaint with the FCA.