Motor Finance – FCA Final Findings
FCA has now published the final findings from its motor finance review. These identify a number of significant areas of concern and FCA is to consult on possible remedies to address some of these. The key issues identified in the review are Commission, The Provision of Information, Lender Controls and Affordability.
FCA has significant concerns about the way lenders remunerate car retailers and credit brokers. FCA consider that conflicts of interest arising from a link between the broker commission and the interest rate have lead to consumer harm on “a potentially significant scale”. FCA initially reviewed contracts between some of the largest lenders (accounting for around 45% of the market) and their top dealers to identify the different types of commission models being used. They found that models where the amount of commission was linked to the interest charged provided strong incentives for brokers to arrange finance at higher rates. FCA then collected data from lenders to assess whether these arrangements led to higher finance costs for customers and, across the firms in their sample which represented around 60% of the market, they estimated that 560,000 customers could be paying £300m more annually in interest costs as a result of the commission models. FCA also found that some of these models effectively broke the link between the customer’s credit score and the rate they were charged as customers with a good credit score, who might normally obtain a lower rate, were charged a higher rate as a result of the commission structure.
FCA point out that there is already guidance in CONC 4.5.2G which states that a lender should only offer or enter into a commission agreement providing for differential commission rates, or for payments based on the volume and profitability of business, where this is justified based on the extra work for the broker. This guidance could include where the commission rate as a percentage of the amount of credit varies according to the interest rate charged to the customer, however there is no evidence of additional work required under these commission structures.
In the light of their findings FCA is going to consult on possible remedies or interventions to address this perceived detriment. FCA requires lenders to review their systems and controls around commissions in the light their findings and also state “where harm or potential harm is identified, this should be addressed”. It is unclear from the language used whether FCA considers that a back book review is necessary however the wording of this statement could imply that it might be.
FCA do not give any indication of timescales for their proposed consultation on potential remedies.
The Provision of Sufficient, Timely and Transparent Information
FCA has used mystery shopping to review the provision of information to customers. Due to the nature of mystery shopping FCA could only assess the early stages of the sales process so their analysis is to an extent incomplete. FCA found that in many cases disclosures made during the initial contact were, in their view, incomplete or misleading. FCA CONC 3.3.1 requires that all communications with customers are clear, fair and not misleading. They must also be balanced and not disguise or omit important information or warnings. FCA makes clear that this applies to oral as well as written communications – in effect firms cannot rely on simply giving important information in supporting documents. This has important implications for the sales process and the way that brokers communicate information. For credit agreements such as PCP and HP FCA found that in many cases brokers were not complying with the requirements around “adequate explanations”. Also FCA found only a small number of brokers disclosed during the initial contact that they may be paid a commission for arranging finance. FCA questioned whether giving this information later in the sales process would be “sufficiently early to effectively alert the customer to the potential conflict of interest or that there may be scope to negotiate on the finance as well as the vehicle and other price elements”.
Where the lender has delegated responsibility for the provision of information to the broker FCA expects the lender to ensure that the broker complies. FCA expects both lenders and brokers to review their disclosure policies and procedures to ensure that they are complying with the disclosure requirements.
CONC 1.2.2R requires firms to “take reasonable steps to ensure that other persons acting on its behalf comply with CONC.” In accordance with this rule FCA expects lenders to pro-actively monitor compliance by brokers. They cannot simply rely on contractual provisions obliging brokers to comply. Whilst most lenders indicated they had procedures to monitor compliance, in light of FCA’s findings they questioned the extent to which lenders were monitoring in practice. FCA concludes that there is little actual monitoring by lenders of brokers’ compliance with CONC. In light of this FCA requires lenders to review their systems and controls for monitoring brokers.
FCA reviewed the affordability and creditworthiness assessment procedures of 20 lenders and 8 out of the 20 lenders could not provide FCA with sufficient information for FCA to assess compliance with the rules in CONC around affordability and creditworthiness. FCA reminds firms of their obligations though does not specifically require a review by firms.
There are some immediate actions required by both lenders and brokers in reviewing their systems and processes in certain key areas identified above and FCA will expect firms to have evidence that they have undertaken the required reviews.