There is a common misconception in the motor finance industry that provided your agent has the relevant FCA permissions to carry out the regulated activity for which you have appointed them, then your obligation to monitor, supervise and control stops there. DWF partner John Perez writes.
The very least that many believe is required is perhaps an annual audit carried out by the relationship manager where a cursory review of FCA related activities is carried out, with the audit focused more on commercial performance and meeting key performance indicators that are very often not focused on FCA compliance at all.
Firms need to be aware that within the FCA’s Consumer Credit Sourcebook (CONC) and the overarching supervisory requirements, firms are obligated to take reasonable steps to ensure that agents acting on their behalf are complying with the provisions set out in CONC, see CONC 1.2.2.
Motor finance lenders will typically engage with third-party agents in two distinct parts of the customer journey: at the beginning of the journey through their introducer, be it brokers or motor dealers, then at the end of the journey, should a customer default on the loan.
These are both areas where regulators have highlighted risk if the engagement is not focused on doing the right thing for the customer. We know that the FCA will be reporting shortly on its review of the motor finance industry, with particular focus on the selling process at the front end, to include commission structures in place between lenders and their introducers.
If we analyse the selling process, lenders are relying exclusively on their dealer or broker agents to explain the various products that may be on offer, in a way that the customer will understand and enable them to make an informed choice. This crucially important task is not easy, and will normally have a significant bearing on the decision the customer ultimately takes.
Yes, of course, the lender can rely on the voluminous documentation that the customer will be given at the pre-contract stage; however, it is the initial conversation between dealer and customer that will very often dictate how the deal will be modelled and which finance product the customer will take.
Can lenders satisfy themselves – and more importantly, the regulator – that they are taking reasonable steps to ensure that their introducers are complying with the requirements within CONC? What will ‘good’ look like here? Will an internal audit function and a review of management information discussed at various committees suffice, or will this extend to lenders being obliged to carry out an external audit function on their network of dealers where a deeper dive review of the sales process is carried out?
The same applies to the last part of the customer journey when a customer defaults on the loan. Here, a lender will typically instruct repossession agents – and possibly third-party agents – to collect arrears or take legal action. This is where a customer will very often be at their most vulnerable. Will the lender’s obligation to take “reasonable steps” extend so that the regular audit function is one that focuses primarily on the agent’s compliance with the provisions contained in CONC? In addition to this, will the regulators expect to see some form of independent external audit function on those areas of regulated activity that pose the greatest risk of customer detriment?
Lenders can no longer simply rely on their agents’ own FCA authorisations to tick the box that they have taken reasonable steps to ensure compliance with CONC: that responsibility is extended much further. We have seen evidence that some lenders are taking serious and significant steps to ensure their agents are complying with the provisions in CONC; however, this is still not commonplace in the motor finance industry. All too often, agents’ practices that are proven to have systematically breached the provisions in CONC go unchecked and unnoticed by lenders, suggesting that no proper controls and supervision of key aspects of the transaction are routinely taking place.
Lenders will be well advised to review their own internal and external audit functions to ensure compliance with the clear provisions within CONC, and also that they have taken reasonable and appropriate steps to ensure that their agents are complying.