Russell Kelsall, partner, and Alanna Tregear, solicitor, from UK law firm TLT, outline some of the areas they predict the FCA could focus on, and the potential impact to the market, including product selection, remuneration of sales staff, commission structures and responsibility for add-ons
The FCA is looking at the role of finance providers, dealers and consumers. But what could be its likely focus? And is it likely to significantly change the market?
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Product selection
The FCA’s rules for consumer credit are contained in the Consumer Credit Sourcebook (CONC). It provides detailed rules and guidance which supplement the high-level Principles for Businesses, which includes treating customers fairly. CONC requires a dealer or broker to recommend a product which is not unsuitable to them. Unlike mortgage regulation, there is no ‘best interest’ rule. There are many reasons for this, including, most obviously, the process of securing a sizeable mortgage is an understandably slower process.
Sellers of credit finance also do not need to be certified, but mortgage advisers do. There is nothing inherently wrong with this: Different markets need different rules.
However, the FCA will probably want to understand why dealers and brokers suggest (or, where appropriate, recommend) certain products to customers. It will want to know the steps taken to qualify the customer for the product, and how it can be justified as being ‘not unsuitable’. The sales process and documentation will play crucial roles in how well the FCA perceives the motor finance market to be working; the better the explanation, the lower the risk of action.
Remuneration of sales staff
There is a clear focus from the FCA around avoiding mis-selling. While the FCA has not banned certain remuneration structures, it has made it clear that firms which incentive sales must have clear policies and procedures, and regular audits, to avoid structures encouraging bad behaviours.
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By GlobalDataMany firms are already putting clear policies in place to reduce the element of remuneration driven by commission, and making sure remuneration is based on a number of factors and not just the sales.
Commission structures
Commission structures in the motor finance market continue to develop. This is both the way structures operate – with many lenders having different models – and includes disclosing the existence of commission to customers.
Disclosure to customers was introduced by the Office of Fair Trading’s guidance issued in November 2011. The FCA made a specific rule broadly requiring the existence of commission to be disclosed in CONC.
However, the Courts have been very active in disputes on commission disclosure. The UK Supreme Court decided in Plevin v Paragon Personal Finance (1) Ltd [2014] UKSC 61 there could be an unfair relationship where commission was not disclosed, depending on its size. The Court of Appeal also unhelpfully awarded commissions to customers in McWilliams v Norton Finance (UK) Ltd [2015] EWCA Civ 186, where the existence but not the amount was disclosed, and Nelmes v NRAM plc [2016] EWCA Civ 491, where neither the existence nor the amount was disclosed.
But the position appears to be changing in favour of lenders, brokers and dealers, with the High Court’s recent decision in Commercial First Business Ltd v Pickup [2017] CTLC 1. Time will tell whether full disclosure of the existence and amount is required by the FCA.
Responsibility for add-ons
Following an unhelpful Court of Appeal decision in Forthright Finance Ltd v Ingate [1997] 4 All ER 99, customers are arguing the mis-selling of any add-on, whether or not it is financed by a regulated credit agreement, was done as the lender’s deemed agent. This is a potentially broad argument, but there are a number of points to say it is incorrect.
The customer’s argument is that if they were mis-sold PPI or GAP at the point of sale, but this was not financed by the lender, the lender is still responsible for the mis-selling under the unfair relationship provisions. But there are a problems with this. For example, if a dealer sells a car seat which turns out to be unsatisfactory, does the customer have a claim against the lender where (a) the lender provided no finance to pay for it and (b) it was simply sold to the customer at the point of selling the credit? The answer must surely be no.
The FCA may, however, wish to look at the selling of add-ons and the extent to which (if any) the finance provider has any involvement in those sales, or is aware of those products.
The FCA review is expected to last over a year and complete in 2018 or 2019. We expect it to contact dealers, brokers and motor finance providers to ensure information is gathered on a formal and informal basis, but more regularly.
The FCA has said it will, following the review, assess whether and how to intervene in the market. Even if the FCA finds a well-functioning market, it will normally propose changes to the regulatory requirements – see, for example, the FCA’s recent work in the credit card market.
There has never been a better time for lenders, brokers and dealers to review policies and procedures. Just because something has been done for a period of time does not mean the FCA will have no issues with it. The FCA is looking at the market with fresh eyes, and will want to ensure consumers are adequately protected. But there is also an opportunity for the industry to put forward arguments about what can be done to make the market work better. Is the customer journey as good as it should be? It is certainly the case a customer receives a lot of paperwork, but is it all really necessary?
The FCA may see this review, combined with Brexit, as an opportunity to simplify the sales process and ensure consumers are given more accessible information. For example, the strict form of the SECCI could be removed after Brexit, allowing lenders to communicate in a more interactive way.
The FCA may also look again at creditworthiness and affordability. So far, the FCA has been clear it is very much a matter for each lender to introduce compliant processes on creditworthiness and affordability. But motor finance is different from other markets.
For example, the borrower is tied into an agreement for a shorter period than a mortgage, the rate of interest is normally fixed, and (for PCP) the vehicle’s value is guaranteed at the end.
But is there any real need for change in the motor finance market? The issue is probably best summarised by Adrian Dally, head of motor finance at the FLA, who said: “The motor finance industry is committed to responsible lending and to high standards of customer service. We will continue to work closely with the FCA to ensure they have a good understanding of this highly competitive and diverse market.”
But whatever views the FCA comes to, it must bear in mind the importance of this industry to UK consumers.
