Is the new era of FCA regulation achieving its purpose?
It is clear that most in the asset finance industry have one aim: to achieve a better deal for customers. But how are the FCA helping to achieve this?
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- Is the new era of FCA regulation achieving its purpose? - August 22, 2015
Introduction from Editor Carl Daufer
It is clear that most in the asset finance industry have one aim: to achieve a better deal for customers. But how are the FCA helping achieve this? Martin Ward and Charlotte Healey from Shoosmiths LLP look in detail at the new era of FCA regulation.
Who should be interested in this?
Anyone concerned with new developments in regulation.
Is the new era of FCA regulation achieving its purpose?
Since April 2014, regulation of the consumer credit market is carried out by the Financial Conduct Authority (FCA). The operational objectives of the FCA are:
- Securing an appropriate degree of protection for consumers;
- Promoting efficiency and choice in the market of financial services;
- Protecting and enhancing the integrity of the UK financial system.
It is clear that most in the asset finance industry have one aim: to achieve a better deal for customers. This generally is in line with the FCA’s objectives. However is this currently happening? With asset finance companies becoming increasingly regulated, this article looks at several key areas of consumer finance which are affected by the new era of regulation under the FCA; in particular: credit broking, affordability, advertising and enforcement.
What agreements are considered to be regulated?
Regulated agreements are agreements which fall within the Consumer Credit Act (CCA) and/or Financial Services and Markets Act 2000 (FSMA). They are defined as any ‘consumer credit agreement' or ‘consumer hire agreement', other than an exempt agreement.
A consumer credit agreement is an agreement between an individual and a creditor by which the creditor provides the individual with credit of any amount. Prior to April 2008, consumer credit agreements only included agreements where the credit provided did not exceed £25,000. This financial limit has now been removed.
A consumer hire agreement is an agreement made by a person with an individual (the hirer) for the bailment of goods, provided that it is not a hire purchase agreement and is capable of subsisting for more than three months.
The meaning of “individual” includes partnerships of two or three persons, and unincorporated bodies provided they are not entirely made up of bodies corporate and are not a partnership.
Not every consumer credit and hire agreement is regulated. Exempt agreements include (amongst others):
- Agreements made with high net worth individuals (as strictly defined).
- Agreements entered into wholly or mainly for business purposes and the total amount payable exceeds £25,000.
- Agreements secured on land (in certain circumstances).
- Agreements exempted by the small number of repayments to be made.
Even if an agreement is not regulated by the CCA, the introduction of the agreement to a creditor can still be a regulated activity. This has caused much confusion for introducers, credit brokers and lenders alike. It is quite usual to have a situation where the agreement between a lender and a customer is exempt from CCA regulation (because one of the above exemptions apply), but the introduction to the agreement itself is considered to be a separate regulated activity. This introduction can be considered an aspect of credit broking for which FCA permission is needed.
The FCA has recently published a guide entitled Consumer Credit Permissions: Common Misunderstandings. In publishing such a guide, it appears that the FCA accepts that it has not been absolutely clear as to which permissions a firm needs. A section of the guide is dedicated to common misconceptions regarding FCA permissions required for credit broking. Some firms believed that permission is not required if they only introduce business to brokers (and not to lenders). The FCA has now confirmed that effecting an introduction either a broker or a lender will constitute a regulated activity for which permission is required. Indeed, all firms in an introduction chain will require permission if each is acting in the course of business.
It therefore appears that there could have been greater clarity provided by the FCA as to what permissions were exactly required. Whilst this confusion remains, there is a risk that firms may operate without the required permissions or be applying for permissions which are not necessarily required. This cannot be a benefit for any party, in particular consumers.
A key aim of the FCA is ensuring customers only enter into agreements which they can afford to repay. The requirement to assess the customer’s credit worthiness is set out in the Consumer Credit Sourcebook (CONC).
Whilst it makes sense to attempt to ensure that customers can afford a financial product, the requirement of assessing affordability and creditworthiness is not necessarily as straightforward it may appear.
The FCA does not prescribe what checks should be made to assess creditworthiness and affordability, which may create a presumption that the creditor has reasonably assessed the customer. The FCA states that lack of prescription should assist creditors so creditors can make a reasonable assessment of affordability in each individual case. However, the reasonableness of any assessment is open to interpretation, and one asks whether it should it be left to the lender to decide the extent of the assessment.
What is more, creditors are required to be forward looking when assessing their customers, as CONC 5.2.3 refers to having regard to such future changes in circumstances, insofar as they may be reasonably likely to have a significant adverse impact on the customer. Some may say that this ‘crystal-ball’ requirement is placing a too heavy burden on lenders, and consumers need to take more responsibility for ensuring that they only enter into affordable agreements.
The FCA has stated that one in five advertisements from consumer credit firms fall short of the FCA’s financial promotion expectations. More encouragingly, the FCA has stated that once firms were made aware of their shortcomings, they were quick to make changes. As such, it would seem that FCA oversight in this particular area is working, which can only be deemed to be beneficial to consumers.
CONC states that any advertisement must be clear, fair and not misleading for consumers. The main shortcomings with advertisements have been that important information was either missing or difficult to find. This has been generally been simple to remedy. The FCA will continue to monitor and will be working closely with firms to improve advertising standards to the benefit of consumers.
When consumers are able to place their trust in lenders’ promotions, it will increase the integrity of the UK financial system and create healthy competition in the financial marketplace. It is open to debate as to how regulation can actually assist with increasing public trust. However, if it is apparent to a consumer that they are provided with all the relevant information to make an informed decision before, during and after the selling of a financial product, then this can only help move towards this overall goal.
In the Office of Fair Trading days, it was widely considered that sanctions were not diligently enforced in the event that regulated firms were found to be breaching regulations. The FCA has sought to change this. The role of enforcement is to help the FCA change the behaviour of firms by making it clear that there are real and meaningful consequences for those firms or individuals who do not play by the rules.
Credible deterrence appears to remain central to the FCA’s enforcement approach. Their aims are described as follows:
- Bringing more enforcement cases and pressing for tough penalties for infringements of rules;
- Pursuing more cases against individuals and holding members of senior management accountable for their actions;
- Pursuing criminal prosecutions, including insider dealing and market manipulation;
- Taking action to tackle unauthorised business;
- Prioritising obtaining compensation for consumers.
It would seem that the FCA is taking enforcement seriously. By way of example, in March 2015, the Bank of Beirut (UK) Ltd was fined £2.1million and stopped from acquiring new customers from high-risk jurisdictions for 126 days, as a result of failing to cooperate and providing misleading information to the FCA. In addition, the FCA fined two approved persons at the bank. In May 2015, Stewart Ford, former chief executive of Keydata Investment Services, was fined an unprecedented £75million by the FCA for mis-selling so-called ‘death bonds’; in particular by saying that the bonds were eligible for inclusion in customer’s ISA accounts, when they were not.
It is hoped that publically reporting sanctions imposed by the FCA will deter non-compliance from other firms and will go some way to restoring integrity and public trust in the financial marketplace.
What does the future hold?
It remains too early to tell whether the FCA and regulation of the asset finance and consumer finance markets as a whole is achieving all of the aims it set out to achieve. Firms have had to make significant changes so as to comply with the new regulatory framework. In this new framework, there remain issues with FCA permissions, and potential pitfalls in the way that the FCA expects lenders to assess affordability. It will be interesting to see how these areas play out in the months and years to come.
The new regulatory dawn has made it clear that the FCA will be quick to jump on misleading advertisements and promotions, and will not be shy in levying eye-watering fines on firms, and their approved persons in the event that either customers or the FCA are misled. To this end, it appears that the FCA has quickly achieved its purpose in these two areas.