It’s fair to say that firms are always keen to know ‘what’s coming’ from the FCA in order to anticipate the regulator’s concerns.  Typically, this has been achieved by looking at the FCA’s business plan and sector views, but more recently the FCA has taken the approach of issuing portfolio strategy letters to groups of firms to explain where it perceives potential harm to exist and indicate what firms should do to address that.

It’s well known that the FCA’s review of the motor finance sector means that lender oversight is a key theme for firms, but the portfolio strategy letter to credit brokers gives more detail around where the FCA believes credit brokers need to focus their attention.  For motor dealer credit brokers, the key areas to focus on include:

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  1. Firms not understanding their regulatory requirements, including what FCA permissions they need and the requirement to submit accurate data returns (as failure to do this could result in firms paying the wrong fee, poor customer outcomes, and even FCA action).
  2. Poor staff oversight such that sales practices may go unchecked, with the potential to increase the risk of mis-selling and fraud.
  3. Misleading or inaccurate financial promotions which may cause consumers to make uninformed decisions.
  4. Failing to explain the level of service provided (or other factors likely to influence the customer’s credit decision) such as the dealer’s receipt of a commission in relation to the finance referral, and whether they act with multiple lenders.
  5. Failing to provide adequate or relevant product information (where the dealer is responsible for giving this to the customer) to enable consumers to make informed choices about finance products or taking reasonable steps to ensure recommended products are not unsuitable.
  6. Failing to consider or manage risks to their business arising from technology such as cyber-attacks and inadequate IT resilience.

It’s no surprise that as a result of the above, the FCA is planning further supervisory work for brokers, which will focus on:

  • Reminding firms of their obligation to complete accurate regulatory reporting (including confirmation of their details annually, as required by the Handbook), failing which it will use enforcement action for non-compliance.
  • Encouraging firms to stay up to date with FCA obligations by registering for the FCA’s Regulation Round-Up and using the FCA’s suite of regulatory videos.
  • Working with finance providers to assess each stage of the customer journey, what information is provided and by who, as well as oversight of staff and appointed representatives, including credit brokers’ business models to identify potential harms.
  • Working with credit broker firms to ensure that they are addressing the potential harms identified above.

These letters are new territory for credit brokers, who may not see FCA regulation as core to their business model given that broking activity will be secondary to their main goal of selling vehicles.  However, don’t be fooled into thinking that the letters are mere recommendations that a firm can choose whether or not to follow. The FCA has indicated that it expects firms to proactively address the content of these letters, and may take action where they do not!

In addition, it’s important to note that the FCA is not keen to pigeon hole firms into one portfolio, and so a firm could find itself on the receiving end of multiple portfolio strategy letters due to its business activities.  Where this is the case, firms must act upon all letters received, by reviewing policies, procedures and staff training to ensure that they can demonstrate that they have addressed these potential consumer harms.  Equally, this isn’t a one-off effort from the FCA.  Its intention is to issue the letters to the firms every two years in order to pre-empt potential customer harm, and so firms not only need to act on this letter, but watch for future letters that may highlight different issues to be addressed.

So, what next?  The expectation from the FCA is clear.  Firms need to take action now to address any shortcomings in their business model arising from the above, because if the FCA comes knocking, and firms haven’t taken the time to do this, FCA enforcement action is likely to ensue…

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Written by Gemma Napper, partner, financial services,  Shoosmiths LLP