The long awaited final part of the FCA’s review of the motor finance sector has arrived; are there any nasty surprises lurking for the industry to be worried about? The answer would appear to be ‘possibly’, and if the grounds for concern expressed here are justified, that would have implications for the whole of the intermediated CCA finance market, not just the motor specialists.
The headline findings from the report relate to the use of differentiated commission structures, which the FCA believe are causing substantial detriment to consumers by creating an inherent incentive for credit brokers to maximise their commission through selling deals out at the highest possible interest rate. Frankly, the only surprise here is that it has taken the FCA quite so long to reach that conclusion. Policy intervention will almost certainly follow; most likely changes to CONC designed to ensure that lenders must be able to justify differences in commission rates paid by reference to extra work carried out by the broker.
The FCA also make comments in respect of Affordability, and the adequacy of the assessment processes adopted by lenders. The main concern appears to be a perceived focus by lenders on their own credit risk rather than on the consumer’s affordability risk. However, since the research which underpins these findings was effectively contemporaneous with the recent changes to the CONC rules on the subject, the results are probably not surprising, and further policy intervention appears unlikely at this stage.
What is perhaps more surprising, though less obvious, is the potential direction of travel which emerges from reading the sections of the report dealing with the provision of pre-contract information and adequate explanations to consumers, and the compliance oversight of credit brokers by lenders.
On the former point, the FCA acknowledge that their mystery shopping exercise stopped well short of the point of entry into a credit agreement; as such, they “cannot rule out that compliant disclosures and explanations would have been provided subsequently”. In practice, such information will tend to be provided at or shortly before the point of contract, on the basis that lenders will not want to incur the costs of the exercise unless/until they reach this stage. This approach has always been justified as compliant on the basis that it is still ‘in good time’ before entry into the agreement. In this report, however, the FCA say that it is ‘unclear’ whether this is right, and question whether such timing would allow a consumer to take ‘an informed decision’ about entry into the finance agreement.
The underlying FCA assumption appears to be that consumers should be given much more information about the potential finance agreement, much earlier in the application process. It is also clear that the FCA believe that credit brokers need to be doing a lot more to ensure that consumers are made aware much earlier in the process that a commission payment may be made, where that could affect the broker’s impartiality or impact the consumer’s transactional decision. What is perhaps more surprising is that the FCA findings appear to be based on the assumption that CONC compliance regarding commission disclosure goes further than this. Disclosing the amount of a potential commission may only be necessary on request, but it is implicit in the FCA comments that credit brokers will always need to pro-actively disclose sufficient detail regarding commission arrangements (including the fact that commission may vary according to funder and/or product) so as to ensure that a consumer understands the potential conflict of interest that these arrangements may create. Simply saying that a commission may be payable does not seem to be sufficient in the FCA’s mind.
Linked to their comments on information disclosure are the FCA’s comments on the lengths to which a lender must go in order to ensure that that requisite information is provided to consumers, both as regards commission disclosure and pre-contract information. The FCA take the view that whilst lenders may broadly adopt a reasonable approach in theory, they are not convinced that credit brokers are being sufficiently monitored in practice. This could have particular ramifications for pre-contract disclosure requirements if the FCA do decide that this needs to happen (or at the very least, commence) much earlier in the application process. The lender may be able to require the credit broker to carry out these requirements, but will always remain responsible for the adequacy of the approach which is adopted.
Of course, none of this is currently explicit, and we will need to wait and see what transpires in the form of CONC changes. However, staying compliant under the FSMA regime is so often a matter of reading the runes, and this latest indication of the FCA direction of travel on the subject of credit broking could have distinct compliance implications for all lenders in the intermediated market.
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