This article is a follow-up to my blog in August after the FCA issued its final rules concerning discretionary commission models for motor finance dealers and brokers, and also commission disclosures in consumer credit markets. It wasn’t attracting much attention at the time, but I wanted to highlight some points from these changes of particular relevance to asset finance brokers.
With around six weeks left before the new rules take effect on 28 January 2021, my understanding is that few asset finance lenders have issued clear practical guidance for asset finance brokers. This is unfortunate, as this will have important impacts and preparation time is needed.
To be clear, in my view it is a serious regulatory failure that any asset finance broking is caught by these rules that are aimed at Arthur Daley type car dealers. But we are where we are, so this is now about how to deal with the final rules.
1. Ignore the headlines, it’s not only vehicles
One way or another, directly or indirectly, these rules change how commissions will work for all regulated asset finance broking. That means broking any deal for a regulated customer (unincorporated business or individual) regardless of the asset, size of the deal, and whether the agreement will be regulated or unregulated. More on this below.
2. Yes, tractors are in scope for the ban on Difference in Charges…
When the FCA issued its final rules, in its wisdom it refused to define ‘vehicles’, but in explaining this it referred to ‘agricultural vehicles’ as a type of vehicle. As a result, I think we have to conclude that tractors - together with any other type of road registered vehicle - are in-scope where the agreements are regulated. That’s until the FCA makes a definitive statement to the contrary. That seems unlikely as it would involve a change to the regulations.
3. … but only under £25k
It’s also clear that the FCA’s ban on discretionary commission models applies only to regulated vehicle agreements. That means it excludes regulated broking activities (e.g., broking of a vehicle to an unincorporated business) if the agreement will be exempt (e.g., business use over £25k).
This is odd as the broking activity is still regulated, so if the FCA has such a problem with brokers commissions, why would it restrict its intervention in this way? I think it’s because enforcement of the legislation will be targeted at the lenders, and for regulated agreements the FCA wouldn’t have the necessary powers.
4. Where the ban applies directly, there are simple alternatives
If the lender now imposes a standard commission (e.g., a set amount per vehicle, or a set percentage of advance, or some combination) it’s unlikely to cause too many problems provided asset finance lender act reasonably in setting commission levels.
Brokers will need lenders to offer set commissions that fairly reflect the time these sometimes fiddly deals can take, and to have systems ready to make this work at the end of January. Lenders should build in flexibility, so that for more complicated deals brokers can get paid more (there’s nothing in the rules that prevents this provided it is the lender's decision).
5. Lenders need to be bold about Difference in Charges for other assets
A concern now is how lenders will deal with non-vehicle regulated agreements. Will they be worried about the FCA’s apparent distrust of discretionary commission models, and impose fixed commissions on all regulated asset finance?
Difference in Charges is an efficient way of helping to ensure small businesses get the support they need from asset finance brokers, and especially with some simple controls in place (e.g., maximum commissions unless special circumstances are discussed and agreed) no lender with confidence in its own brokers should have any fear of defending the model to the FCA.
As an industry, we need to avoid ‘regulatory creep’ (where regulation targeted at one problem is applied unnecessarily to other areas) by being bold and defending a model that works for lenders, brokers, and customers.
6. Last but certainly not least, commission disclosures are changing
Even where the FCA’s new ban on discretionary commission for vehicles doesn’t apply, and even if lenders are bold and continue to support existing commission models for other assets, brokers still need to be ready to implement the new commission disclosure rules. Instead of informing regulated customers only about the existence of commission, the broker will have to describe the nature of the commission. For example, is it a fixed or variable amount of commission?
If it’s Difference in Charges, how can this best be described? With care, and a proper understanding of how asset finance works, it can be done in a way that should be seen by business customers as perfectly reasonable. As ever with regulatory changes affecting brokers, it would make sense for lenders to agree a form of wording for this, so that a broker doesn’t have to wade through (probably conflicting) advice from different funders. So far, most guidance on this seems to be about how to explain the nature of alternatives to DiC, which is just missing the point for asset finance.
With clear decisions and appropriate guidance from funders, asset finance brokers can prepare for 28 January and these changes shouldn’t cause too much disruption. Without that action, however, we could be heading for (completely avoidable) problems at the worst imaginable time. Contact me if I can help.