Last week, the FCA published its letter to the Supreme Court calling for an expedited decision on whether to allow an appeal by two lenders on the Court of Appeal car finance commissions case. Whether the appeal is allowed at all and, if so, whether the Supreme Court ends up taking a substantively different view to the Court of Appeal are far from safe bets. For asset finance as much as any other lending sector, a more robust solution is needed.
At least 25,000 of the 40,000 consumer credit firms regulated by the FCA are ‘secondary’ credit brokers - car dealers, retailers, dentists, double-glazing firms, and others whose main trade is not finance. The need for these firms to be FCA authorised and regulated should be removed, and instead professional finance brokers should be responsible for the full customer journey.
What needs fixing with 'secondary' brokers?
The Court of Appeal found that consumers can be confused by the role of secondary credit brokers - how they work and how they are paid
The firms' primary interest is (naturally) selling their goods or services, not necessarily finding a good deal on the finance for their customer
The authorisation and compliance burden and cost has become a real burden to what are often small businesses, and many have given up, impacting their ability to sell their goods and services
The ‘Appointed Representative’ option (where another firm takes regulatory responsibility) has become as expensive and burdensome as being directly authorised
Even firms with the best intentions struggle to keep up with the FCA’s multitudinous requirements for regulated firms....
...and while the FCA reacts quickly to any late paperwork with fines or cancellation warnings, it appears to lack the resources to enforce compliance with conduct rules, such as ensuring that car dealers cooperate if a customer decides to arrange finance with a competing firm
With the introduction of new regulation of Buy Now Pay Later (BNPL), the Government has scoped out retailers from needing to be FCA authorised, creating a major contradiction in the system between BNPL and other consumer credit
How could deregulation work?
Deregulating firms that currently act as secondary brokers will shift more regulatory responsibility to professional finance companies. Here’s how it could work:
All 'secondary' broking firms would need to partner with an FCA-authorised professional finance broker, or work with a single authorised lender, with the authorised firms taking full responsibility for compliance
The professional broker or lender is likely to require the firm to ask its customers to use self-service technology solutions ('regtech') to apply for finance and receive relevant information, as is now standard for many other financial services, using either self-service terminals or the customer’s own device
There would still also be a vital role for a more traditional (non-self-service) broking service, particularly for business finance - but with these brokers increasingly using technology to manage workflow and keep full audit trails
It should be obvious to all consumers that professional broking firms earn their income from commissions, removing the need to differentiate betwen ‘sophisticated’ and ‘non-sophisticated’ customers as imagined by the Court of Appeal
Brokers would disclose their average commission levels before the broking service is provided, in their ‘About our services’ (sometimes called 'Terms and conditions’) notices and if - probably rarely - the actual commission turns out to be significantly different from this, a further disclosure would be made before the finance agreement is signed and customer acceptance confirmed
Better for consumers
Ten years on from the start of the FCA regulation that led to non-finance firms being regulated rather than only registered by the Office of Fair Trading, it’s time for a fundamental change to how consumer
credit broking is reguated, supported by new technology. Deregulation of non-finance firms will support firms directly impacted as well as professional finance brokers and lenders, and improve outcomes for users of all intermediated financial services.
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