While we are waiting for the results of the FCA’s review of motor finance, due to be published in September 2018, now is a good time to look at the bigger picture to see what other big themes the FCA is looking at, and what its priorities are, writes Ian Mason, partner at Gowling WLG.
Culture is a very big theme for the FCA. Andrew Bailey, the FCA CEO, made an important speech about it in March 2018, and at the same time the FCA issued a Discussion Paper (DP 18/2 Transforming Culture in Financial Services) in the form of a collection of 28 essays from academics, industry leaders and regulators.
It is noteworthy that much of the thinking about culture has been developed around the experience of banks, looking back at the financial crisis that started in 2007. Many of the 28 essays are focused on banks.
So what does culture, in the FCA sense, mean in the context of the motor industry? How does a poor culture, for example as demonstrated by the Libor rate-fixing scandal in the banking industry, transfer across to car showrooms?
There are some universal themes. First, what example is senior management setting, what is the ‘tone from the top’? If the management tone is very permissive, that anything goes – which Andrew Bailey characterised as the culture prior to the financial crisis – then staff will push boundaries beyond compliant and ethical behaviour. This links to a second aspect of culture, which is focused around the role of reward in driving good behaviour, or sanctioning noncompliant behaviour.
In the FCA’s update on its review of motor finance published in March 2018, the FCA identified one of the areas of concern as how firms are managing the risks around commission arrangements for dealers.
In summary, the FCA is concerned about the different commission structures between lenders and dealers. Where dealers are acting as credit brokers, the incentive structures may give rise to a potential conflict of interest by the dealer, which could lead to higher finance charges for the customers.
Also, although not mentioned by the FCA, car sales staff will be incentivised by commission; however, best practice would be for the car finance element to be handled by a separate member of staff, trained in FCA regulation.
The FCA’s approach to enforcement has evolved. In the early days, the FSA/FCA would often state that it was “not an enforcement-led” regulator. After the financial crisis, the FCA’s CEO at the time, Martin Wheatley, stated that he would “shoot first, ask questions later”, although he later said he regretted saying this.
The current – and still quite new – FCA director of enforcement, Mark Steward, has adopted a policy of opening more investigations, on the basis that the FCA is “taking a quick look” at whether misconduct may have taken place, so the fact that a firm or individual is under investigation does not necessarily mean that the result will be a sanction such as a fine.
This is borne out by the figures: the FCA has opened 75% more investigations over the past year, but until June 2018 it had imposed only £3.8m in fines, compared with £163.3m for the five months in 2017. The current 2018 total is at a lower level of fines than in 2017.
However, although the idea is to close investigations quickly, in practice this may well be more difficult, and most investigations will involve the FCA requesting a significant amount of information and carrying out a lengthy programme of interviews. This takes time, and the reality is that many FCA investigations run into years, rather than months.
Linking in with the approach to enforcement, the FCA is also looking to bring more cases against individuals, particularly those in senior management. The FCA has been criticised in the past for not bringing enough cases against directors and senior managers – particularly against the senior management of banks following the financial crisis – and in 2016 the FCA responded by introducing a new Senior Managers and Certification regime (SMCR), which applies to banks, insurers and some other large firms.
However, the FCA intends to roll out the SMCR to all regulated firms – around 50,000 firms. This will include FCA-regulated firms in the motor industry, which for example arrange motor finance or regulated insurance products such as warranties.
On 4 July 2018, the FCA published the near-final rules on the extended SMCR, which means operators can now begin seriously preparing for implementation on 9 December 2019.
The SMCR has increased the emphasis on personal accountability. The current statements of principle for approved persons will be replaced by individual conduct rules, although the content of the conduct rules is similar.
Individuals who are currently registered as approved persons in the motor finance industry will be transitioned to become regulated under the SMCR, and they will want to ensure that the scope of their responsibilities is clearly documented, and that there is a good audit trail of the management and compliance information that they receive, and evidence of challenge by them.
The experience of FCA investigations is often that reporting is poorly documented or very informal, and this does not create a good impression with the FCA. There will be an increased risk of sanctions against individuals such as fines, given the emphasis on personal accountability.