Joanne Davis warns that under the FCA lenders will need to ensure their brokers are compliant
As more information is released regarding the Financial Conduct Authority’s (FCA) plans for the regulation of consumer credit, it’s becoming increasingly apparent that the relationship between lenders and brokers will be a key area of compliance.
The FCA changes mean intermediaries are required to fall under the new credit brokering activity. In addition, revisions to the Office of Fair Trading (OFT) guidance will probably call for anyone who is engaged in credit broking to hold category D&E licences.
The obligations on lenders with regards to their relationships with brokers are also set to rise substantially. Under the FCA’s Principles of Business (PRIN), lenders will be required to put controls in place in agreements with brokers to ensure they are appropriately licensed and running a compliant operation which will require a considerable amount of due diligence from lenders.
Ensuring that brokers observe pre-contract disclosures and sales processes appropriately is one area in which lenders will be required to undertake ongoing monitoring.
If you are a lender, now is the time to implement management intelligence that captures compliance from your brokers, along with prescribed processes and compliance quality checks, while also considering how you can anecdotally provide evidence to the FCA showing that you have sought to ensure your products are being sold correctly.
As to the relationship itself between lenders and brokers, new restrictions will be enforced across a number of aspects. One particular area of focus will be the commercial structure of the relationship between lender and broker.
Under the FCA, the aim will always be to guarantee the right outcome for the customer. Any activity that may unfairly impede such an outcome will fall under scrutiny from the FCA and is likely to be deemed invalid.
In practical terms this legislation means lenders will be required to examine how brokers are remunerated. Volume incentives should be seriously reviewed and payment structures in general will need to be reassessed to ensure that brokers are not rewarded on a basis that increases relative to quantities of sales where this could result in an unfair outcome for the customer or an unsuitable finance product sold. The FCA will also look unfavourably on any form of product bias.
The key motivation underpinning the FCA regime is to place the best interests of the customer at the centre of how lenders and brokers conduct business. Review your Treating Customers Fairly (TCF) policy and think about how this is embedded across your business, as well as the businesses of your broker network, which need to have TCF policies in place too.
Examine the latest rules on brokers and intermediaries as these significantly inform the new requirements, and if you are unsure about any, ask.
By demonstrating you have sought to avoid breaching a rule, even if in doing so you unintentionally have, the FCA is likely to look more sympathetically on you than if you simply avoid asking a potentially difficult question of your broker.
Joanne Davis is a partner in banking and finance, asset and consumer at DWF