With 100 working days to go until the FCA takes over, Richard Brown reports from the CCTA Conference in Nottingham
Following an opening day dedicated to payday lending, the second day of the Consumer Credit Trade Association conference, billed as ‘The year of the climb’, was well attended by the car finance industry as it, alongside all retail lending, prepares for regulation by the Financial Conduct Authority (FCA) on 1 April 2014.
Familiar names and faces from the sector present at the Nottingham Belfry included directors of The Car Finance Company, Billing Finance and Oyster Bay Systems, customer reference agencies Callcredit, Equifax and Experian, and the leasing and consumer finance advisory team of Grant Thornton.
From speaking to attendees at breakfast, the prevailing mood was one of believing all requisite processes were under way to be ready for the FCA although, with much of the regulation to be finalised, attendees were hoping to garner any extra or crucial information that may have been overlooked.
The morning session began with the chair for the day, John Fellows, head of compliance at First Response Finance and CCTA vice-chairman, acknowledging with grim humour that the “regulatory environment hasn’t exactly stood still” of late. The FCA, said Fellows, presented both the “most ignificant change since 1974” and a “Herculean workload” for the Association.
Although Fellows acknowledged the brief timetable for change was not of the FCA’s making and the removal of “rogue traders” in the name of consumer protection was welcomed, the Authority still had areas of concern. Finance customers want a stable economy and freedom of choice, said Fellows, not “19th Century paternalism”, and the challenge for every firm would be to “articulate appetite for risk”. While rules remained unclear and appeared to be focused on high-interest payday lenders, small lenders were not being helped, and the rules could, if embraced, restrict credit and particularly impinge on brokers.
Representing the regulator and “keen to engage” with the industry and appreciate the “diverse business models” was Nadege Genetay, head of banking, lending and protection at the FCA. From April 2014, the Authority will become the single regulator for conduct within financial services and be responsible for 50,000 firms with credit licences, triple the number of firms overseen by the Financial Services Authority (FSA).
Genetay outlined the FCA’s objectives as consumer protection, competition and market integrity. The Authority held a ‘vision’ of “reset conduct standards” and was “not out to get anybody” but would put consumers at the heart of any future regulatory conditions. Its three powers would be (1) to control authorisation of firms and individuals to provide financial services; (2) to supervise businesses, dependent on their size and nature; and (3) the “important tool” of enforcement. On the second point, lower risk companies could expect a lower level of inspection and, Genetay clarified, brokering and debt-counselling activity would not automatically propel a firm into a higher risk category with a concomitant rise in regulation.
Genetay assured delegates these powers would be used proportionately and the FCA had no intention to constrain business or innovation. “We have the power to make new rules,” she explained. “We can change standards quickly, following consultation, where appropriate”. However, the consumer finance industry would no longer be constrained by the “lowest common denominator” – those companies adhering to the minimum of requirements for optimum profit. The FCA would be “incredibly mindful
of the importance of credit” and would look to the industry for feedback to the Authority regarding the impact on consumer access to funds. “We’re very keen for you to tell us what is found daunting,” she added.
Compared to the previous regime, the FCA will have increased flexibility and more resources, including the instruction to ban products and change rules. It will intervene earlier, have better access to information, take more action against higher-risk firms and publish data on firms which consistently generate complaints while striving for better standards and access to redress.
“We want firms to meet minimum standards and have the right people responsible for actions,” Genetay added.
In short, Genetay listed the FCA requirements for firms as:
– Meeting threshold conditions for authorisation, including naming responsible individuals.
– Holding high-level principles for business, and systems and controls proportionate to the scale of business (for instance, banks would not be held to the same covenants as dealers who broker).
– Demonstrating the suitability of individuals within a business and of products for customers.
– Declaring their authorisation and regulation by the FCA (a change from the initial consultation which proposed interim disclosure and was rejected on grounds of cost and effort).
– Continuing the conduct standards held by the FSA and the Office of Fair Trading, (OFT) including industry codes such as Debt Management Protocols and those outlined in the Consumer Credit sourcebook (CONC).
– Meeting reporting requirements, which were slowly changing; companies which are compliant may report in the “old style” for a limited period at the start.
Genetay also summarised reporting requirements as declaring what firms do – brokering, debt management, lending – and the scale of what they do, alongside proving consumer agreements and advertisements meet the FCA’s criteria. Meanwhile, oversight of debt management companies would
include capital requirements, detailed client money requirements, checks to ensure signposting to free advice on debt and compliance with rules on lead generators.
With consumer credit licences ending on 31 March 2014, Genetay closed her address by highlighting the FCA had received 18,000 applications for the Interim Permissions regime since 31 October 2013, including 3,500 sole traders, of which 15,000 had been completed. The FCA will announce dates for
full authorisation starting in 2014, with “landing slots” for particular firms, especially those which will act as appointed representatives for third parties. Fees for authorisation, advised Genetay, would vary
between £100 and £15,000, depending on the complexity of a business, while already authorised
firms would pay lower fees and the FCA aimed to provide an “indicative” structure for annual fees.
Offering insight “from a creditor’s perspective” and gathered from dealers, regulators, trade associations and customers, Mark Smith, founder and managing director of Car Finance Company, said it was time to say goodbye to the Consumer Credit Act (CCA) and “that comfortable feeling of knowing where we stand”.
The FCA rule book, said Smith, will be more dynamic and is to be welcomed. Media pressure, compounded by “bad behaviour”, had prompted a political desire to reform the regulatory process. The rule book would help companies prevent market failures, he added, and would equal the “big bang of 1986” in its resonance.
The products a customer receives will be “right in the sights” of the FCA, which has both the willingness and ability to intervene early, with immunity. “If you give someone a loaded gun,” said Smith, “somebody will get shot”.
Smith had simple advice for attendees – to look at what the FCA would like: financial services markets run well, customers receiving the same message as companies from the regulator, and companies protecting the consumer while remaining competitive. In addition, companies should examine their level of risk exposure and any potential detriment to end-users, wholesale funders and any parties in between.
While his company makes a point of explaining its products in full, Smith raised the rhetorical point: “Should we consider all our customers to be incompetent [of understanding products]?” While some customers thanked Car Finance Company for the disclosure, others felt “insulted” by the detail of the process, leading Smith to ask “are telephone directory-sized terms and conditions informative and effective?” Customers are allowed to make a bad choice, said Smith, “and its not always our fault”.
Smith also questioned whether an extended transparency of business aims would require a fresh approach and, given the differing spectrum of customer needs, whether the aim of the FCA was to make credit inclusive or exclusive.
As for whether the FCA would inhibit market entrants, Smith said if he were to begin his company now, he would find the level of regulation, emphasis on consumer trust, need for a model of ensuring accountability and fines for companies and individuals “off-putting”. The FCA, added Smith, would “deep dive” into markets, using “substantial resources”, for which the industry was paying. It would employ “robust monitoring” with early intervention and an ear for consumer forums. It would get inside the sales practices of businesses, “probably humiliate” bad companies and would “instinctively follow the money”.
Now, he said, was therefore the time to assess the intention of products and staff remuneration. FCA principles, however, were not unfair or uncalled for. “The FCA is going to do a lot of good,” he said, and
those who did not like it “maybe should consider leaving”.
Considering how the industry had ended up in such a state, Smith conceded “there are a lot of people who have done things the wrong way”. Again raising a question, Smith wondered if the industry has brought upon itself a regulator which will drive out the worst companies, and which had previously operated as a cartel.
In the ensuing Q&A session, Smith said his company would deal with the system of dealer principles in a different manner to much of the industry, whereby dealers would submit their own applications to the
FCA, and Car Finance Company staff would therefore not need to become an appointed representative, which, Smith added, may not be “the right route” for car dealers, a demographic already held in poor
Smith said interaction with the FCA had helped the company’s preparations. A team from the Authority had visited his headquarters in Portsmouth, while Car Finance Company had visited the FCA roadshow in Canary Wharf, giving Smith “a real understanding” of their purpose. He said avoiding a restriction to the level of consumer lending in the UK was a KPI for the Authority. “They don’t want us to leave,” he
Joanne Davis, consumer credit partner at DWF LLP, reassured delegates with a comparison between the CCA and CONC, saying “it actually isn’t that bad, a lot of clients are nearly there”, although “a big journey” lay ahead.
Although the CCA remains, parts have transferred to CONC, which will be under full review until 2019 when the Act may “disappear” and which, attached as a 600 page annex to the FCA publication CP
13/10, should be used as a “sourcebook” for companies. “We may know about the rules,” said Davis, “but some are different”. The Financial Services and Marketing Act 2000 (FSMA) and Financial Services Act 2012 will become statutory instruments with effect over the transfer of consumer credit regulation, meaning companies will have to change their documentation and pre-contract processes. The current system of legislation under the OFT will be replaced by one working under a framework of 11 principles for business (PRIN), which are “hugely important” and must be embedded.
The framework will also include high level standards (SYSC), and companies will have to update their Treating Customers Fairly policies to reflect six mandatory outcomes delineated by the FCA.
Regarding timeframes, Davis advised firms will have a six-month ‘grace period’ from 1 April in which the FCA will not take action based on new rules, but firms will have to demonstrate accordance with the previous CCA and OFT guidance and adjust their compliance manuals. Although companies may not need to supply data immediately, they should be examining what, and how, alterations must be made to supplying data, said Davis.
Regarding structure, companies must follow secondary legislation as set out in the Total Charges for Credit Regulations of 1980 and 2010 and the Exempt Agreements Orders of 1989 and 2007, in Appendix 1 of CONC. Rules relating to PRIN, SYSC and other functions are contained in the Consumer
Credit (High Level Standards and Interim Regime) Instrument 2013. Compulsory jurisdiction changes will come under the Financial Ombudsman Service, while applicable reporting obligations, appointed representatives and Approved Persons are laid out in the FCA supervision manual (SUP) and complaints handling is covered by the Dispute resolutions: Complaints (DISP) guide carried over from the FSA. The FSMA will be used as a powerful toolkit by the FCA and “if the rules don’t get you, the
principles can”, explained Davis. “If you have any incentive schemes, they must not encourage irresponsible lending,” he warned.
However, the Authority will be limited in particular aspects. Davis gave the example of Section 75, which will remain as a retained provision under the CCA rather than a rule-making power. The FCA will
also have to work with the inflexible provisions of the Consumer Credit Directive (CCD), such as the restriction to warning notices in the Promotion of Collective Investment Schemes and that prescribed
principles of business must not contradict the CCD. Under this framework, the FCA will be reviewed until 2019 to assess whether a rules-based alternative can provide the same level of consumer protection. A firm cannot be convicted by both the FCA and under the CCA for the same breach, and the compliance level of lower-risk activity by small firms may be covered by the application of SYSC supported by a relevant trade body.
Davis placed emphasis on the expectation by the FCA for businesses to have strong systems and controls, bringing together senior management, controlled functions and auditing. “It’s so important,” she said. “It will empower senior managers to make decisions” and offer companies a “huge review” of their outcomes and incentives, and bring into focus how a customer may benefit from a financial product.
Davis reminded those companies now applying for Interim Permission (IP) to list all their planned credit activities and said they face “an awful lot to do in a tight timeframe”. Although many businesses may be
up to date, not all companies had completed the necessary documentation to prove it. And Davis recommended firms not to let their brokers or dealers “lag behind” in the matter, particularly as many do not have the facility to check their IPs
Summarising after the presentations, Fellows said there remained “many questions to be answered but the FCA is listening.” He urged companies to send on their questions through the CCTA and agreed
with Smith’s point that “those companies who besmirch the industry” would leave it. The FCA would mean more trainers, compliance officers and regulation. “Will it bring benefit to customers?” he asked.
“The jury is out”.