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What are the FCA consumer credit rules?

The Financial Conduct Authority published its finalised rules for consumer credit companies at the end of February.

They include a stipulation for commission disclosure to customers before they sign a credit agreement. That is required if the dealer is acting as a finance broker and that commission could potentially affect the impartiality of the dealership, business manager or broker in recommending a particular product, such as if it will earn him more than other suitable products, or could have a material impact on the customer’s transactional decision.

Read the FCA's frequently asked questions.

Separately, if a customer requests it, the dealer/broker must disclose, prior to the agreement being signed, the amount, or likely amount, of any commission, fee or other remuneration payable to them by the lender or third party.

The FCA has also clarified that, where practicable, firms should facilitate customers shopping around for credit by offering a quotation search facility.

They should also, when undertaking a credit reference search, not leave evidence of an application on file where that customer is not yet ready to apply, due to it potentially damaging the customer’s credit history.

All complaints regarding motor finance, including verbal ones, that cannot be resolved in the same business day must also be logged and reported by firms with full FCA permission, with details of the number of complaints received, closed, upheld and outstanding and the redress paid. Dealers with less than £5 million of annual revenue from credit-related regulated activities will be required to submit reports annually. Those with larger revenues will report more often, with details of financial data, volumes of customers and volume of credit approvals. Records must be kept for three years.

Under the new regime, which starts on April 1, consumer credit providers will need to ensure they give customers the right information to make informed choices, that their services meet consumer needs, and that people in difficulty are treated fairly.

Martin Wheatley, FCA chief executive, said: “The FCA will take a tough approach to consumer credit with stronger powers to clamp down on poor practice than the previous Office of Fair Trading regime. Our supervision of firms will be hands-on and we will closely monitor how providers treat their customers.

“We will respond quickly to any issues that are identified and there will be swift penalties for any firm or individual found not to be putting consumers’ interests first, including possible enforcement action and consumer redress.”

The FCA also said companies were expected to comply with the ‘spirit’ of its new rules, and not merely the ‘letter’ of them.


Principals and appointed reps

An appointed representative (AR) is a firm or individual that carries out regulated activities under the supervision of another firm that is directly authorised by the FCA.

It means the authorised firm, typically a lender, takes responsibility for ensuring that the appointed representative meets the FCA requirements and is accountable for the products the AR sells, the advice it gives and for ensuring it delivers the ‘treating customers fairly’ outcomes.

For some smaller dealers, it could mean less of a financial and reporting requirement.

However, one finance industry source said many lenders are reluctant to act as principals and appoint ARs within the motor trade due to the risks involved.

The FCA is engaging with the motor finance industry to resolve this.


Is not being authorised an option for dealers?

For franchised dealers, reliant on customers being able to get finance at the point of sale in order to purchase their car, lack of authorisation would leave the business severely restricted, with customers required to arrange their own funding. The Finance and Leasing Association (FLA) reported that 70% of retail car purchases were funded at point of sale last year.

As Hitachi Capital Motor Finance managing director Gerald Grimes put it: “This is draconian regulation, really designed to protect the customer, but the customer’s expectation is that they can go in to a dealership and it will provide them a finance option. There’s no way they would expect to go to buy a car and not be offered a finance option.”

The FCA has also pointed out the risks to dealers that continue to offer motor finance, or settle customers’ balances on part-exchanges, without its authorisation. Such firms and individuals breach Section 19 of the Financial Services and Markets Act 2000, a criminal offence punishable by a maximum prison sentence of two years and a fine.

In addition, FCA enforcement powers include action through the civil courts such as injunctions, asset freezes, winding up and bankruptcy and publishing warnings against specific firms and individuals.

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