Franchised dealers, carmakers and finance houses have until December 3 to respond to detailed proposals on the Financial Conduct Authority’s new regime for consumer credit.
NEED TO KNOW
|♦ FCA takes over regulation of consumer credit from OFT in April|
|♦ Consultation period ends on December 3|
This month the FCA, which takes over the regulation of consumer credit from the Office of Fair Trading next April, published a 193-page document outlining its proposals and asked for feedback from businesses.
FCA regulation will apply to any dealer or carmaker selling goods or services on credit. The FCA said proposals will allow it to provide stronger protection and better outcomes for consumers than the existing Office of Fair Trading/Financial Services Authority regime.
Martin Wheatley, FCA chief executive, said: “Our aim is to create a regime that protects consumers and allows businesses to operate. There is a balance to be struck here, and to make sure we get it right we want to hear from as many interested parties as possible.”
Franchised dealers should apply for interim permission from the FCA before April 1, 2014 (those who apply before November 30 will get a 30% discount on the £350 fee), or cease selling credit.
There will be a six-month transition period following the switchover, during which the FCA says it will not take action against firms unless they breach existing Consumer Credit Act requirements or OFT guidance.
After obtaining interim permission, organisations will need to obtain full FCA authorisation within two years of the switchover. The FCA said costs will be proportionate and based on the company’s size and type and the risk it poses to consumers.
An alternative is for a dealer to take an ‘authorised representative’ route, where it has a contract with one or more FCA authorised ‘principal’ lenders. A final option to be an ‘agent’ under the control of one principal lender is not thought likely to be popular among franchised dealers.
‘Fit and proper’ assessment
One of the FCA’s crucial aspects of authorisation will be whether the applying company is ‘fit and proper’. Assessment may include previous dealings with regulators; the quality of internal systems and controls; skill levels within the organisation, the complaints record and the financial crime risk posed.
On a positive note, the FCA predicts that motor dealerships, where credit brokerage is a secondary activity, will be regarded as low-risk companies, as will companies involved in selling vehicle lease contracts. It has not specified new requirements for the motor trade in its consultation paper.
Low-risk companies will be able to apply for limited permission, instead of full authorisation, and these firms will be subject to reduced ‘approved persons’ checks.
Key elements of the proposed regime include:
♦ Affordability checks for every credit agreement, to ensure that only consumers who can afford a loan get one
♦ A requirement for all advertisements and other promotions to be clear and fair, with the FCA empowered to ban misleading adverts
♦ Dedicated supervision and enforcement teams that will crack down on poor practice and unauthorised business
The FCA has much stronger enforcement powers than the OFT and has consistently shown its teeth. Last month, it fined Clydesdale Bank almost £9 million for failing to treat its mortgage customers fairly and in July it fined Policy Administration Services £2.8m for poor complaints handling on mobile phone insurance policies sold by Phones4U.
An important part of the way the FCA supervises firms currently is to require companies to regularly submit data about their business activities e.g. business mix, customer mix, revenue, profit, assets, financial resources and complaints.
It is not proposed that firms holding interim permission will be subject to the submission requirements. However, once full permission has been obtained, organisations with revenue from credit activities of more than £5m will have to submit reports every six months via the FCA’s GABRIEL electronic reporting system. Other firms will need to report annually.
Dealers will need to keep records of all complaints received, and details of how they were resolved. These records should be retained for a minimum of three years. In practice, many dealers already carry out these actions.
Current OFT rules allow firms to carry out certain activities related to arranging loans, defined as ‘credit intermediation’, without a consumer credit licence. However, under the FCA, all such activities will be classed as ‘credit brokerage’ and will require authorisation.
The Finance & Leasing Association said the new rules go far beyond the payday lending sector and “have implications for all UK credit customers”.
FLA director general Stephen Sklaroff said: “The FCA recognises that the timetable for implementing the new system, which includes a new 400-page rulebook, is very challenging and says that it expects a reduction in the availability of credit in some markets. The industry will be working with the FCA in the coming months to try to minimise any adverse impact on customers.”
Sue Robinson, director of The National Franchised Dealers Association, said: “While we support the FCA’s new proposals on how it will regulate consumer credit, there is some concern that they may impact on a consumer’s ability to source finance and in turn purchase a car. The NFDA is also concerned about the extra burden these new proposals may put on businesses.
“As it is likely that the penalties for businesses who do not comply with these measures will be high, it is imperative that a strong awareness campaign is undertaken by the FCA in conjunction with trade associations and finance providers.
“We would urge all dealers to engage with the registration process for interim permissions as soon as possible to ensure they will be able to continue to provide credit once the FCA begins to regulate in April 2014.” One independent motor finance expert, who asked to remain unnamed, said: “I think it’s likely the smallest car dealers doing only a little credit business won’t want the trouble and expense if they’re facing £3,000 in fees, training and compliance to get FCA authorisation.”
James Tew, chief executive of motor finance software provider iVendi, said of the 50,000 consumer credit licences held in the UK, some 20% were not expected to renew under the FCA.
Samantha Cripps, sales development manager at Alphera Financial Services, said: “With the changing regulatory framework with the FCA, it is more important than ever that motor retailers are comfortable with motor finance and the sales processes involved.
“There is a huge opportunity for salespeople in car dealerships to be able to add real value to the car-buying process, ultimately generating trust and repeat business from the consumer.
“However, to avoid missing out on these opportunities, it is important that dealerships get on board with the new FCA regulatory framework sooner rather than later.
“The industry is likely to change as of April 1, 2014, but there are steps which need to be taken around obtaining interim licences and training of staff in the meantime. If dealers do not have the legal and financial knowledge to prepare for changes in-house, it is vital that they start to consult with their providers as soon as possible.”