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  • Has the FCA just sounded the death knell for limited permission firms? Posted on 08 March 2019

    As the Evening Standard delicately put it on Wednesday this week, having taken over consumer credit from the “light touch” Office of Fair Trading some five years ago, the Financial Conduct Authority is now firmly in charge and is sinking its teeth into lenders’ backsides.

    The FCA has shown its teeth on consumer credit several times this week, including the publication on Monday of the final findings of its review of the car finance market. The regulator was not happy, it has to be said. It railed about dealer commissions arrangements; explanations that car dealers provide about finance; and how firms assess the affordability of car finance applications.

    All of this has some substance, although as has been pointed out, the industry has moved on leaps and bounds since the FCA took control, and there’s little recognition of this. Quite whether what’s needed now is a nudge or a boot is unclear, although the FCA’s inclination is all too clear.

    But this week’s report raises a more fundamental question about the new consumer credit regulatory regime. Can it really make any sense for one of the world’s most significant financial services regulators to have to supervise around 15,000 small businesses (my estimate) that are in business to sell products and services other than financial services?

    There are some clues about what the FCA thinks about this in the report this week. The regulator said:

    “We were particularly concerned that some lenders appear to take the view that it is sufficient 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 FCA reminded lenders that they are required to take reasonable steps to ensure that persons acting on behalf comply with CONC, the section of the FCA handbook that contains the consumer credit rules (words taken from one of the rules in CONC, for those interested it’s CONC 1.2.2R).

    Is an FCA-authorised car dealer, or a bicycle shop, or a dentist acting on behalf of a lender when they make an introduction? I would argue absolutely not, they are acting on their own behalf. Only firms who are Appointed Representatives are acting on behalf of the lender (most non-financial sector businesses introducing customers to lenders are ‘limited permission’ authorised firms).

    It’s true, of course, that the lender still has a duty under the FCA’s Principles for business, to exercise due care in running its business. It would, for example, seem careless to accept introductions from a firm that is misleading customers about finance on its website.

    There’s a big difference between these two concepts. If a firm is required to take steps - even ‘reasonable’ steps - to ensure compliance of its introducers, it seems difficult to see how that wouldn’t involve spending time with them to inspect and monitor how they carry out their regulated activities.

    Quite apart from the cost of doing that for the lender, imagine would it would mean for the car dealer, the bicycle shop, or the dentist - particularly if they want to work with more than one lender to help secure the best deal for their customers.

    So, I think the FCA has got this wrong. Yet we have to look at it from their point of view. It must be uncomfortable knowing there are thousands of authorised small businesses out there that aren’t following the regulator’s rules.

    The FCA doesn’t publish any data, but it would be interesting to know how many limited permission firms have been fined for missing the deadline for their annual return, or have been late paying their annual fees. What are the chances that these firms have ever studied the details of the FCA handbook (available online, or order your printed copy for £3,325)?

    The FCA didn’t ask to regulate non-financial sector firms, and this week’s report makes it fairly clear that having authorised them, they now can't monitor their compliance. So, what’s the answer?

    It surely can’t be for every lender to have to, in effect, regulate every firm introducing customers. Perhaps limited permission firms should all become Appointed Representatives of specialist Principal firms - but there’s plenty of room for debate on how effective and efficient those arrangements are.  

    The solution may come from technology. As the FCA acknowledges, most begrudgingly, in its report the increase in car showroom quotation systems may help to achieve compliant processes. In the retail point of sale finance sector - where there is rapid staff turnover so making building compliance expertise very expensive - there are many new fintech solutions emerging, many with major investment firm support behind them.

    We may be heading, perhaps over 5 to 10 years, to a situation where there is just no need for limited permissions authorisations. If firms aren’t in the financial sector, they will introduce customers either to large brokers if they want to offer finance from multiple lenders, or direct to individual lenders using in-store terminals operated by the customer (or apps on the customers’ own device).

    With a bit of facilitation and clarity from the FCA on this, thousands of introducing firms could then be made Introducer Appointed Representatives rather than requiring their own authorisation (IARs are appointed by brokers or lenders with full FCA permissions, and can only make introductions, they do not discuss finance with the customer).

    The FCA would surely be happy to have more time to focus its attention within the financial services sector, and if the technology really delivers at point of sale (and I wouldn't suggest it necessarily does today in either motor or asset finance, but take a look at consumer retail point of sale for some leading-edge systems) it seems to benefit lenders, dealers and their customers.

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