From 1 April 2014, the FCA will have responsibility for the regulation of activities relating to consumer credit including credit broking and debt adjusting.
This will impact on the majority of the UK's motor dealers, who currently hold consumer credit licences from the OFT.
Most motor dealers regularly carry out activities such as introducing customers to finance companies for the purpose of entering into hire and hire purchase agreements and arranging for the discharge of existing finance on vehicles taken in part exchange. This currently requires them to a hold a consumer credit licence from the Office of Fair Trading (OFT) covering categories C (credit brokerage), D (debt adjusting) and/or E (debt counselling).
From 1 April 2014, these will be regulated activities under the new Financial Conduct Authority (FCA) regime for consumer credit. The new regulated activity of 'credit broking' will comprise not only introducing customers to finance providers, but recommending regulated agreements and assisting with other preparatory work such as completion of application forms.
What steps should motor dealers be taking to ensure they can carry on trading and remain compliant after 1 April 2014?
If you are a motor dealer holding a consumer credit licence, you need to check now (if you have not already done so) that your licence details are correct and that you hold the correct categories for the activities you wish to carry on post-April.
You then need to apply to the FCA by 31 March 2014 for interim permission to continue your consumer credit-related activities by way of a simple online process. You need to do this even if you already hold FCA authorisation for insurance-related activities (as many motor dealers do).
Applying for full authorisation
Dealers holding interim permission will be called up to apply for full authorisation within a three-month 'application period' at some point between 1 October 2014 and 1 April 2016.
The application form is not yet available, although this is expected to be very detailed and to require submission of a full business plan, together with details of your products and the systems and controls you have in place to ensure regulatory compliance.
You will need to demonstrate that you satisfy the FCA's standards known as the 'Threshold Conditions', both when you apply for authorisation and throughout the period you are authorised. For example, you will need to demonstrate the competence and ability of management and that the firm's affairs are conducted in an appropriate manner regarding the interests of consumers and integrity of the UK financial system.
Persons in certain positions within your firm (for example, those directing the firm's affairs and responsible for maintaining proper systems and controls) will need to be authorised as 'Approved Persons' by the FCA. This means they will owe personal obligations to the FCA and may face individual sanctions if the firm does not meet the FCA's requirements.
It is expected that, following authorisation, dealers will be supervised by a specialist team with an understanding of the industry.
Alternatively, dealers can apply to become Appointed Representatives (ARs) of other firms holding full authorisation, such as a motor finance providers. However, most finance companies are understandably reluctant to appoint ARs as this will mean taking on full responsibility for the ARs' regulated activities.
If you are a dealer with a finance provider willing to appoint you as AR, you cannot be appointed until your principal has obtained full authorisation. You will therefore need to obtain interim permission to cover you in the meantime.
You will then need to enter into a written agreement with your principal once they are ready to appoint you as AR.
There is a new lighter touch 'limited permission' regime designed for motor dealers and other firms considered to be 'lower risk'. If your main business is selling vehicles and your consumer credit-related activities are secondary to your business, the limited permission regime may apply.
If you qualify for limited permission, you will be subject to more limited scrutiny by the FCA and lower fees. Your reporting obligations will also be limited.
However, if you are already directly authorised by the FCA for other activities (such as insurance mediation), you will not be able to apply for limited permission and will need to apply for full authorisation. This applies to a large proportion of the UK's motor dealers (around 50%), many of whom have already indicated that they propose to seek limited permission without appreciating that this option is not available to them.
If you are a dealer currently authorised for insurance-related activities, the options are therefore:
- To apply for full authorisation;
- To seek appointment as an AR for your credit-related activities;
- To cease your insurance-related activities and apply for limited permission to carry on credit-related activities;
- To cease your credit-related activities and deal with cash sales only;
- To seek to become an AR for your insurance-related activities and apply for limited permission for consumer credit (although this is likely to prove difficult, as only a small number of firms are prepared to act as principals for insurance and it is unlikely they will be able to meet the demand from dealers).
What will being authorised mean for dealers?
You will need to make sure that you comply with the rules set out in the FCA's new consumer credit sourcebook (CONC), which comes into force on 1 April 2014 (although there is a six-month 'grace period' to enable firms to implement measures to ensure compliance).
You will also need to ensure you comply with the FCA's high-level principles set out in the Principles for Businesses (PRIN) module of the FCA Handbook, such as conducting business with integrity and with due skill, care and diligence, and treating customers fairly (TCF). This will mean ensuring your policies are clear, effective and meet the FCA's exacting standards, and that your staff are trained appropriately.
TCF will be a particular priority for the FCA from 1 April 2014, and you will therefore need to review your consumer credit policies and ensure they are consistent with the principles enshrined in TCF. In practice, this will mean ensuring products are appropriately targeted, that customers are provided with clear information and advice in 'plain English', and that customers are treated on a case by case basis taking into account their own personal circumstances.
It is expected that there will need to be a significant culture change within many firms to ensure the interests of customers really are at the heart of their business. This will extend to looking at, for example, staff incentive schemes, which are very much a focal point for the FCA at the current time, to ensure these focus on putting customers first rather than being sales-driven.
You will also need to ensure you are compliant with the rules set out in the SYSC module of the FCA Handbook, which extend to ensuring appropriate management information is being provided to senior management, and that management are acting on that information; also, that there are appropriate audit processes within your business to ensure regulatory compliance. The types of systems and controls you have in place should reflect the scale and complexity of your business.
It is expected that the FCA will be a far more proactive regulator than the OFT. The FCA has already made it quite clear in its recently published guide for consumer credit firms new to FCA regulation that 'non-compliance is not an option at any time'. This approach will be combined with strong enforcement powers, such as the power to fine firms unlimited amounts and ban them from the market.
There are some changes to customer-facing documentation which will need to be implemented as of 1 April 2014 to ensure ongoing compliance. This will mean updating status disclosures appearing in communications you send to customers.
There will also be updates to the finance documents you use (agreements and some pre-contract information) to show the FCA as regulator in place of the OFT. This may require changes to your EPOS systems to ensure the correct documents are being produced.
From 1 April 2014, consumer credit advertising will fall within the FCA's financial promotions regime, which has broader application than the current OFT regime. Existing requirements relating to the inclusion and prominence of representative examples and APRs will continue to apply. There will also be an overriding requirement for financial promotions to be 'clear, fair and not misleading', which not in itself new. However, CONC gives guidance on what this actually means, which goes beyond existing requirements to use plain and intelligible language and to be easily legible. For example, you will need to ensure that, every time the benefits of a finance product are communicated, you give the customer a fair indication of relevant risks to give a balanced view.
What should motor dealers be doing to ensure they stay compliant?
- Applying for interim permission by 31 March 2014;
- Talking to finance providers to find out whether you can operate as an AR;
- Reviewing your consumer credit policies for compliance with Consumer Credit Sourcebook (CONC) and the Financial Conduct Authority's high-level principles including TCF;
- Ensuring the required changes are made to documents and systems ready for 1 April 2014;
- Reviewing your management processes and reporting systems to ensure you are able to demonstrate compliance;
- Seeking professional advice where required.
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