Regulated asset finance brokers are unlikely to have missed the fact that they are required to implement the FCA’s new Consumer Duty rules by the end of July. They will have received a ‘Dear CEO’ letter from the FCA last week setting out ‘key things for firms to consider’.
This blog is intended to help guide brokers on next steps following that FCA letter. In particular, I hope to reassure brokers that this is no reason to stop providing their vital services to regulated customers.
So here are my suggestions. Apologies this is a longer than normal blog, but I know many brokers have a lot of concerns, so I want to get into some details:
1. Stick to being a ‘distributor’ rather than ‘co-manufacturer’
The FCA makes a jargony distinction between ‘manufacturers, co-manufacturers, and distributors’ of products. Lenders are manufacturers. Brokers are - or should be - distributors. The FCA suggests the roles can overlap, where a broker can ‘determine or materially influence’ a product, and that this can happen if the broker is making pricing decisions or determining target markets.
I would suggest the bureaucracy that comes with being a co-manufacturer is just not worth considering. So, for regulated business, brokers should leave lenders to:
Set rates. So this means no DiC for regulated customers but please note this is only to avoid becoming a ‘co-manufacturer’. It is not because anyone - including the FCA, no matter what some industry experts are suggesting - is saying that DiC is against customer interests. Indeed with sensible controls, it is very much in customer’s interests, see my earlier blogs including here. And this does not preclude exceptions. So when lower rates are needed to win deals, or higher rates are needed to cover unusually high broking costs, there's nothing to stop brokers discussing and agreeing these with lenders.
Define the target markets. They can be done fairly widely so it should not become a constraint to making asset finance available to businesses who need it. The practical consequence of this is that brokers should expect lenders to provide more specific guidance on their target markets. Again, this does not preclude exceptions, providing they are the lender's decision (as surely is always already the case?).
2. Make your Vulnerable Customers Policy Consumer Duty-ready
It’s very common for regulated firms across the financial services industry to have boilerplate Vulnerable Customers Policy. They contain long explanations of different types of vulnerability and generic methods for dealing with them, such as the TEXAS process. Too often, the one thing they don’t consider is what specific considerations apply to vulnerability in a particular market and for a particular product.
It’s simple enough to fix. It’s almost certainly going to be about confirming what already happens anyway - for example helping the customer by suggesting they bring in their accountant or a colleague to the discussion if the customer doesn't have the strongest finance skills. Setting out a few examples like this in the Policy will transform it from boilerplate to Consumer Duty-ready.
As part of their own Consumer Duty implementation, expect a wealth of guidance from lenders on types of vulnerability to look out for in asset finance target markets, and how to deal with them. That should all arrive by the end of April.
3. Stay focused on meeting customer needs
Consumer Duty is all about delivering good outcomes for customers, which for asset finance brokers means helping customers to get a competitive deal that meets their needs. It’s really no different from when FCA regulation started in 2014 and the application then of the Treating Customers Fairly principles. This is essentially Business as Usual for asset finance brokers, just with some fine-tuning.
Nowhere in the FCA rules – existing, or new under Consumer Duty – is there are requirement to fill in piles of paperwork about each deal. A broker who is confident in their skills and procedures, confident that their customer needs are being met, and confident customers will confirm they are happy, has nothing to fear and no reason to introduce any new box-ticking.
If your advisers, lenders, or anyone else suggest new forms to complete, new boxes to tick, they are missing the point. On the very first page of the FCA’s final guidance on Consumer Duty, the regulator states that the Consumer Duty is ‘underpinned by the concept of reasonableness’ and that what is expected of firms will be interpreted in light of what is reasonable given the circumstances, including the nature of the product, the characteristics of the customers, and the firm’s role.
For asset finance brokers, providing a very straightforward product to business customers, and having only a ‘distributor’ (not ‘co-manufacturer’ - see above) role, the FCA’s expectations appear logical and proportionate.
* From time to time, there are mentions of 'unscrupulous brokers for whom it certainly wouldn't be BAU. In my time in the industry, I’ve only ever seen firm evidence on one, a firm that is long departed. It’s no surprise, as a broker doesn’t exist without funding lines, and funders would soon cancel those if there’s any ongoing problems. If you disagree, please let me know, and I’ll update the blog accordingly. And if I am wrong on this, then at least now the FCA will have a stronger basis to intervene.
4. Introduce simple and low cost testing
If there’s one thing that’s radically new about Consumer Duty, it’s that the regulator has decided it’s useful to hear from customers about what they think about the service they are receiving, rather than assuming that good policies and procedures automatically achieve good outcomes. That's good news, because we know that users of asset finance broking services are overwhelmingly happy. All brokers need to do is to (slightly) formalise how they prove it.
One simple method: On a regular basis, email a 2-minute survey to customers and ask them a few questions. Collate and review the results and perhaps take the opportunity to call anyone who raises any concerns or makes any suggestions. The cost of doing this should be very small, and who knows, maybe every now and again it could even help win some new business?
5. Post 30 April, document your Consumer Duty implementation.
I know some lenders are already asking brokers to advise how they are implementing Consumer Duty. That’s a bit odd, as the onus right now is on lenders to share the information that brokers need, including product information and target markets. But as soon as that information is provided (it should be received by 30 April, and ideally lenders will share drafts much earlier and invite feedback) - brokers need to be ready to firm up their plans.
The key document is a gap analysis, to spot any areas where the firm's procedures can be closer aligned with the new rules. It shouldn't be a major exercise (see Next Step, below)
6. Keep your FCA authorisation (or if you cancel, do it for entirely different reasons)
Some brokers appear to be wondering if keeping their FCA authorisation is worth the cost and trouble, given that only a small minority of business tend to be with regulated businesses. If you've read this far, it’s probably no surprise if I say I believe this is unnecessary.
The direct cost of authorisation for smaller firms are bad enough. The FCA annual fees increases appear utterly unreasonable and I just don't understand the FCA's justifications. One possible remedy is to ‘downgrade’ to limited permissions credit broking, which is all most brokers really need anyway. Some lenders still seem to take the view that brokers must conduct regulated debt counselling and adjusting services, but worth having that discussion.
But it’s the indirect costs of FCA authorisation that are the real problem. From my conversations with brokers, these usually arise not from the FCA, but from advisers interpreting (and, in my view, ‘gold plating’) the regulations. No suggestion here that brokers can pay lip-service to the FCA rules. Quite the opposite, I'm suggesting look up the FCA handbook, check the rules, and compare them to any advice you have received.
Consumer Duty barely changes the picture on the costs of regulation. In particular, I'm surprised there's any suggestion that it extends FCA regulation to unregulated customers, as the FCA is very clear on this, stating: “The Duty only applies within the FCA’s regulatory perimeter, so will not apply to unregulated business”.
More generally, I have yet to see any details of Consumer Duty that are likely to increase costs for brokers, other than possibly the requirement for monitoring - but as discussed above, that shouldn’t be expensive and could also deliver benefits. We can also expect other benefits, one being the end of car dealers stopping customers from obtaining better deals through brokers (see blog here).
Next steps
If required by brokers, I will arrange practical sessions on Consumer Duty implementation for brokers in May, either online or in person, at reasonable cost. These will include provision of model documentation. Let me know if you would like further details.
As always, comments on this blog on the post on LinkedIn will be appreciated and will help with reach to the broker community.