Is the motor sector keeping up with regulation?
[Article published in December edition of Auto Retail Bulletin.]
This month I have been visiting clients across the UK who have embraced regulatory compliance during 2017. As a result, their staff is more confident, customer complaints are down and sales are on the rise.
It’s certainly encouraging to see that effective compliance does not mean putting the brakes on, but is enabling sustainable growth free from regulatory intervention. It’s also encouraging to see that firms are now being more proactive, putting appropriate measures in place because they believe it is the right thing to do: and not just because the regulator has told them to.
Let’s revisit 2014 when the FCA took over responsibility for the consumer credit sector from the Office of Fair Trading. For firms in all sectors, the focus at the time was to become authorised so they could continue to trade. Many firms put in place the minimum documentation and controls and, in some cases, written procedures did not reflect what was really happening day-to-day in the business.
Throughout 2015 and 2016 the FCA concentrated on the authorisation of some 30,000 consumer credit firms, and on supervising priority areas, such as payday lenders. During this time motor finance was treated as part of the wider consumer credit sector and was not subject to any special attention.
In April 2017 this changed. The Bank of England raised concerns about a sharp increase in car finance related debt and the FCA started to review the sector. As a result transparency, conflicts of interest, staff incentives and complaints procedures have all been put under the spotlight. The FCA has also signalled clearly its role as an enforcement agency, with its first notable investigation of one motor finance firm for failings in their affordability assessments.
Many of these thematic concerns will continue into 2018 and the FCA will continue to investigate and act against firms in breach. To add further pressure the General Data Protection Regulation and Senior Managers Regime also loom large on the horizon.
So, as the pace of regulation increases, the challenge for all motor finance firms is to ask themselves three questions:
1. Do you understand what is expected of you today, and how that has evolved from 2014?
2. Are you currently operating to the expected standard, and if not, how are you moving toward this?
3. Do you have the capability, and capacity, to maintain compliance and keep up with regulatory change?
To help firms make an accurate assessment of their current position, let’s discuss what the FCA expects of a firm operating under consumer credit regulation.
FCA rules state that firms should have processes and controls that are appropriate and proportionate to the nature, scale and complexity of their business. These must be designed to ensure fair customer outcomes and be supported by a culture that puts things right for customers who have not been treated fairly. To achieve this it is important to build strong regulatory foundations.
Broadly speaking, a firm should establish eight key interdependent elements:
- Appropriate and relevant compliance procedures
- Compliance monitoring
- Compliance management information and oversight
- Culture, incentives and treating customers fairly
- Independent assurance
- Regulatory relationships
1. Appropriate and relevant compliance procedures
When we visit firms we often see compliance procedures that are detached from daily operations. We regularly observe staff who struggle to recall basic and relevant procedures let alone follow them correctly. Compliance procedures should be embedded in the business and kept up to date with changes in both regulation and the firm’s needs. We encourage firms to invest time reviewing how they operate in practice and then identify and address the gaps in their policies, systems and controls – particularly their complaint handling procedures, which are high profile at present.
Once firms have appropriate procedures in place, staff must be regularly trained on what they are and how they should be followed. This includes how to recognise and deal with a complaint properly or follow a sales process in a compliant way.
Specific one-to-one training is also very useful for those carrying out specialist roles such as a firm’s Approved Person (AP). The first step is to help an AP fully understand their responsibilities and then build their capability and confidence in dealing with relevant matters.
It is recommended that firms have access to appropriate skilled compliance expertise.
FCA rules suggest a requirement to have an in-house compliance function appropriate to the “nature, scale and complexity” of the business. It is imperative this person has a sufficient credibility to be able to raise the issues that need addressing. Smaller firms without their own dedicated compliance function should strongly consider engaging external support, as should larger firms that identify skill or resource gaps.
4. Compliance monitoring
Firms should implement a comprehensive compliance monitoring programme, based on the risks that the firm is exposed to. The purpose of this is to ensure all staff, appointed representatives and agents are following procedures. This can be a time-consuming task, but it is a firm’s responsibility to evidence this is in place and working effectively. For example, the individuals or appointed representatives who represent a higher risk should be monitored with greater rigour and, if necessary, have additional support. Equally, where it can be evidenced that an individual or appointed representative presents a lower risk, their monitoring can be reduced or less frequent.
The monitoring output should be regularly reported to the firm’s governing body. This acts both to reassure senior managers that monitoring taking place, and to alert them of any systemic failings that need to be managed.
5. Compliance management information and oversight
Firms should ensure their governing body has appropriate and timely compliance management information to enable them to accurately monitor compliance on an ongoing basis. This may include business volumes and trends, complaints types, volumes and trends, product bias, funder bias, funder declines and cancellations, the results of compliance reviews and feedback from customer satisfactions surveys.
When issues or adverse trends are identified, they must be investigated and, where appropriate, corrective action plans need to be developed. This approach enables the governing body to have transparent oversight of its business and risks; allowing it to make appropriate decisions.
6. Culture, incentives and treating customers fairly
It is important to recognise the way that a firm manages performance and incentivises staff will drive behaviours. This will influence the wider culture of the business and can impact on the firm’s ability to treat a customer fairly.
Staff incentives, remuneration and performance management was the subject of FCA Consultancy Paper CP17/20 published in July. This Consultancy Paper highlighted that 40% of firms’ incentives schemes represented a high or very high risk of customer detriment.
Firms have been asked to identify and manage factors that may increase risk to their customers. A high-risk scheme that is counter balanced with factors to reduce risk can still result in fair customer treatment. This re-emphasises the need for incentive schemes to reward staff for good customer outcomes and be prepared to penalise staff if they put other interests ahead of customers.
We are pleased to observe examples of some firms that are proactively embracing this concept; reinforcing with their staff, the need to put the customer at the heart of their business. As a result, they have increased sales revenue and improved performance of their key compliance indicators.
7. Independent assurance
The regulator encourages firms to use an independent third party to review and assure their systems and controls. Firms who expose themselves to external scrutiny, commonly known as a third line of defence, typically learn faster and address issues sooner. In the long-term, this approach saves time and resources, resulting in more customers being treated fairly and a healthier, more robust business. It also demonstrates to the FCA that the firm has a clear commitment to compliance.
8. Regulatory relationships
FCA Principle 11 is the requirement to deal openly and cooperatively with the regulator. In practice this means that firms should report information accurately and on time. Also they should engage with the FCA at the earliest opportunity when they find issues that may be systemic or require action.
The pace of regulation is likely to increase
Since 2014, when the FCA began regulating consumer credit firms, there has been a significant amount of change; in consumer behaviour, market opportunities and regulation. In fact, the pace is likely to increase, when the FCA announces an update on their work in the motor finance sector, in Q1 2018.
The onus will remain on firms to ensure their compliance capability keeps up with the commercial needs of their business, their customers’ needs and regulatory requirements. The best results will be achieved by firms who have a positive attitude to compliance. Those that put their customers at the heart of everything they do will flourish and rise above the competition. Those that do not face the prospect of fines and remediation that can far out-weigh the cost of getting it right in the first place.