Last week’s announcement by the FCA of the final findings of its long-running car finance review could have significant implications across the indirect channels of the asset finance market, and not only for regulated agreements.
Here are three reasons why:
1. Lenders may have to conduct regular compliance checks on introducers
In my view the biggest impact of the FCA’s report has attracted relatively little attention.
This is the FCA’s statement:
“We were particularly concerned that some lenders appear to take the view that it is sufficient to check that a broker is FCA-authorised, as it can be assumed that they will be compliant with FCA rules (as the FCA will monitor compliance).”
The regulator linked this to an existing requirement for lenders to take reasonable steps to ensure that persons acting on their behalf are themselves compliant.
The FCA might have got itself confused here, as an introducer is surely acting on its own behalf when broking, not that of the lender (unless they are Appointed Representatives).
In any case, FCA Principles for Business require lenders to conduct their business with due care. It would, for example, seem careless to accept introductions from a firm that is misleading customers about finance on its website.
If lenders must now go further and carry out regular due diligence on their introducers, as the FCA seems be implying, this could involve regular testing of firms’ policies and procedures. There’s a risk that could become untenably costly and burdensome in many cases, particularly for smaller firms dealing with multiple lenders.
2. The replacement for Difference in Charges (DiC) commissions could shift power between brokers and between brokers and lenders
As expected, the FCA concluded that existing commission models lead to poor outcomes for a significant number of consumers, with lenders’ controls not mitigating the risks sufficiently.
There’s no guidance yet on what the FCA will do about this, but many banks still using DiC arrangements will now be looking to replace them. Given the strength of the FCA’s views, they may feel obliged to do this for both consumer and small business finance.
If brokers can’t now set prices, lenders must do so. In a competitive market it shouldn’t make much difference to most prices, although the FCA clearly expects otherwise in some cases. The change will require negotiations between lenders and brokers. Will it shift the balance of power, and perhaps returns, from brokers to lenders? Will larger brokers negotiate better deals than smaller firms?
The effects are likely to be complicated. For better or worse, we will be moving away from a model that generally works fairly for asset finance brokers and their customers. DiC isn’t perfect but it facilitates a viable - often not more than that - return for hundreds of independent asset finance brokers serving small businesses across the country.
Having to abandon DiC, driven by what appear now to be largely historic problems in the consumer car finance sector, does not auger well for asset finance and UK small business finance more generally.
3. Simplification and technology is looking more necessary (and possible) than ever
The need for increased supervision from lenders, together with new commission models, are only two drivers for change in the indirect asset finance channel. In its report last week, the FCA also flagged concerns over affordability assessments and product explanations.
All of this has to be considered alongside other regulatory developments including:
- Extension of the Financial Ombudsman Services’ jurisdiction to more small businesses and the increase in maximum compensation limits
- The FCA’s Senior Managers and Certification Regime taking effect for motor and asset finance firms in December
- For the growing number of signed-up firms, the Lending Standards Board’s rules for asset finance.
It’s early days still, and I look forward to hearing the views of experts from the motor finance industry at the International Asset Finance Network Forum on April 4, but I consider three outcomes from all of these developments are looking possible:
- The role of many existing limited permission firms (firms that aren’t in the financial sector, such as car dealers) will change. The broker or lender will provide terminals, or apps on the customers’ own device, to enable the customer to enquire about finance and make an application. Their staff won’t discuss finance direct with customers. Firms may then ditch their FCA permissions and instead become Introducer Appointed Representatives of the brokers or lenders they deal with.
- Existing lenders, or even possibly new fintech entrants, will simplify products for regulated customers. In the motor finance market, and possibly more widely too, products will be easier to understand, with fewer charges or options. Where affordability is not obvious there could be more focus on flexible hire rather than credit solutions.
- Some smaller asset finance brokers may decide to merge to help them secure viable commission rates and to deal better with extra supervision from lenders whilst maintaining independence. Mergers could also deliver benefits in helping the firms to become better positioned to raise block finance, or for sale.
* Julian Rose is Director of consultancy Asset Finance Policy. His publications include Apex Insight reports on Used Car Finance, Retail Point of Sale Finance, and other sectors. He is joint author with Stephen Bassett of the A to Z of Leasing and Asset Finance, published in February in a revised and expanded second edition. He is also the author of the annual Asset Finance 50 (AF50), published in association with Asset Finance International.