Regulator-in-waiting the Financial Conduct Authority
promises to be more aggressive and more sector-specific than its
predecessors, but there is little sign yet that the coming regime
will make special distinctions for the motor finance industry.
Richard Brown reports.
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By the end of 2012, after the erosion of public trust in
financial services following payment protection insurance, split
capital trusts, mortgages and pensions mis-selling, the Financial
Services Authority (FSA), which part-regulates the motor finance
industry, will be no more.
Two agencies will have taken its
place, with the Financial Conduct Authority (FCA) having the
greatest mandate to “protect and enhance” how funding is sold to
those wishing to buy a car.
In December 2010, the Treasury and
the Department for Business, Innovation and Skills jointly
consulted on transferring responsibility for consumer credit
regulation from the Office of Fair Trading (OFT) to the FCA by the
end of 2014.
The Treasury has confirmed to Motor Finance that
this would be under a similar layout to the Financial Services and
Markets Act and that the government will confirm its decision on
consumer credit regulation by the end of the year.
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By GlobalDataUntil 2012, the FCA is in
consultation, to “consider what sort of regulator society wants…
and what this means for its design and its style of operating”
according to the FSA’s conduct unit paper The Financial Conduct
Authority: Approach to Regulation.
Finance & Leasing Association
(FLA) director general Stephen Sklaroff has written an article in
Motor Finance warning that lengthy consultation promotes
the “risk of prolonged regulatory uncertainty”.
Meanwhile, Jo Owens, a consumer
finance lawyer at Gateley LLP, wrote an article saying “the
timetable for reform is too tight”, demanding “robust impact
assessment… before any reforms are enacted”.
Market contraction
risk
Either way, the change of regulator
“will only work if the framework is appropriate”, said Paul
Harrison, the FLA’s head of motor finance.
“Otherwise the market is likely to
contract significantly,” Harrison added.
The FCA will have expanded powers
to publish notices of those companies who have had products amended
or banned. Previously, firms were only named once investigations
were completed.
“Where the regulator decides to
take no further action after it has made public the fact that
enforcement has commenced, it will be required to publish the fact
that it has issued a ‘notice of discontinuance’,” confirmed a
Treasury spokesperson.
The FLA is cautious to welcome such
measures, however.
“Intervention in product design and
immediate bans of products that cause consumer detriment, like all
regulation, will need to be carefully planned,” said Harrison.
“Regulators will need to consult
with the industry to make sure its proposals will not cause
business to shoulder large costs and exit the market.”
Alternatively, Credit Action, the
consumer education charity, believes that, given the expense to the
individual in buying a car, the current FCA proposals could go
further to provide appropriate consumer protection.
“Consumers are the lifeblood of the
car finance industry,” said Liz Dunscombe, Credit Action’s director
of project and partnership development. “They have the capacity to
drive improvements in standards for the benefit of all and must be
sufficiently empowered by government.”
Proper
scrutiny
In government, those with the power
to influence the eventual reach of the FCA include the Treasury
Select Committee, which opened an inquiry in to the accountability
of the new body on 16 August.
“It is particularly important that
an institution as powerful as the Financial Conduct Authority
should be subject to proper scrutiny,” said committee chairman,
Conservative MP Andrew Tyrie.
Tyrie recently called for tax cuts
for business while criticising the Big Society and the green
strategies of his party.
Tyrie, the committee and the
inquiry are all aware of how little faith the general public
currently has in financial services, and will therefore ensure the
FCA will not be an expensive and toothless entity.
However, as the committee has
members of both government and opposition, it includes members of
the Labour party who set up a system now being blamed for much of
the current financial mess.
Introducing the inquiry in June,
financial secretary to the Treasury Mark Hoban MP said the FCA
“will address flaws in the ‘tripartite’ model that contributed to
the financial crisis”, and the government was “determined to
strengthen the financial system”.
Burden of risk
The government’s preferred option,
according to the consultation paper, is to transfer credit
regulation from the OFT to the FCA, though this has yet to be
confirmed.
Bringing regulation under one body
may appeal but the FSA currently operates under the Financial
Services and Markets Act, geared toward banking and savings
regulation, whereby the burden of risk lies with the consumer and
makes little sense in the credit market.
“One regulatory size will
definitely not fit all,” wrote Sklaroff. “We need a regulatory
system specifically designed for credit, rather than one borrowed
from another part of the current FSA Handbook.”
If the FCA were to introduce the
FSA’s approach to the sale of insurance to the sale of credit, “it
would mean every dealer finance lender, independent or captive,
would have to take full responsibility for the sales made by every
dealer selling their finance products”, said Harrison.
“In the credit market, the risk is
with the lender,” Harrison added. “Lenders may choose to exit the
POS market rather than take on the enormous costs of ensuring
dealer training and compliance.
“This proposal, if it went through, would be the most damaging
to the dealer finance market, especially those small dealers
selling used cars.”
