Lenders and brokers alike have been anxiously waiting for the FCA to publish their final findings following a thematic review of the Motor Finance sector, originally launched in 2017.
The regulator began their review, concerned largely with commission structures, the communication of vital information (that allows consumers to make informed decisions), lender controls and affordability assessments. Critically for almost every business within the sector, the findings highlight a potential for consumer harm as a result of the shortcomings noted below.
The review’s findings show that increasing “difference in charges” (DiC) provide strong incentives for brokers to arrange financing at higher interest rates (as the salesperson’s commission increases with the interest rate that the customer is charged), but the regulator also had serious concerns in relation to decreasing DiC and scaled commission structures. These findings have resulted in the FCA calling out lenders for not doing enough to monitor the risks to consumers that arise from their commission schemes.
In the final phase of the regulator’s work, they sampled 1,000 motor finance agreements from firms making up 60% of the motor finance market. From this, it was noted that commission arrangements were incentivising needlessly high-interest rate charges for low- and high-risk customers alike. They estimate 560,000 customers are paying in total £300m more annually in interest costs as a result.
It remains likely that the FCA will intervene to reduce the risk, potentially by banning DiC or creating policy provisions which act to reduce the discretion brokers have over setting interest rates. This could result in some firms having to look at past business practices to ensure cases, where crystallised customer detriment have been identified, are remediated.
Lack of Information
The regulator also visited 122 motor retailers to find out if the information provided to potential customers is clear and transparent, at least to the point that they are able understand the risks involved and make an informed decision as part of the finance process.
The FCA noted that in some cases the salesperson was quick to start negotiating an overall finance deal with a particular focus on one product over another without considering whether alternative options should be offered. This has led the regulator to believe firms are not being completely open about the availability of different products.
Furthermore, there is a concern around where disclosures are being made. It has been found that brokers aren’t always disclosing the fact that they earn commission or aren’t doing it prominently enough. The FCA is urging firms to ensure they are compliant with CONC rule 4.5.
Lack of Controls to Mitigate Risks
During its review, the FCA questioned 20 firms (representing 60% of the market) about the controls they have in place to monitor compliance by brokers in line with CONC rules and regulations.
It was found that although in principle, the framework of lender controls seemed reasonable, too many lenders still see their brokers as being responsible for their own compliance. Consumer credit regulation requires continued oversight, meaning lenders will need to do more to ensure they understand exactly what is happening in their broker network.
Assessment of affordability
The final part of the review investigated whether lenders are taking the right steps to ensure that they lend responsibly, especially by appropriately assessing whether potential customers can afford the product in question.
It was discovered that motor finance lenders are unduly focused on credit risk, as opposed to affordability, and that current checks are insufficient to uncover the customer’s ability to repay, with lenders solely relying on the customers self-declaration of income. The FCA notes that lenders must take income into consideration and any estimates of income or expenditure must be “reasonable in the circumstance”.
Stuck in gear
With everything being taken into consideration, it is clear that the sector as a whole has a long way to go to reach the regulators expectations.
Huntswood has produced a short summary document outlining the key findings from the regulators review, as well as providing an overview of how we have supported firms in the sector to continuously deliver good outcomes for consumers and firms alike. Our motor finance specialists are on call to discuss the findings of this review and what they mean for your business.