The leasing market in the UK is devising a minimum set of standards for its commercial finance brokers, benchmarking a level of quality for the market. Brian Cantwell speaks to three key industry figures to find out more
The UK leasing market has undergone a regulatory challenge to its broker distribution network, after the country’s regulator, the Financial Conduct Authority (FCA), brought commercial finance brokers which performed consumer credit, under its jurisdiction in October 2014.
The brokers are required to be fully regulated if they write any consumer business, even if the majority of the leasing business they write is commercial (unregulated) finance.
In 2014 the result of this was consternation among the broking community, as smaller brokerages or one-man-bands faced up to the daunting and unfamiliar task of reporting to the FCA, and becoming educated about the regulator’s requirements.
During 2015 some brokerages consolidated with larger brokers, some retired, and some may have dropped consumer business. But the majority are expected to work through the regulatory challenge.
As part of that change, on 23 September last year the National Association of Commercial Finance Brokers (NACFB) changed its code of practice for the first time since 1993 to accommodate the regulatory changes affecting the distribution network of the UK leasing market.
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Within the changes was an acknowledgement that there was still a smaller number of unregulated brokers operating commercial finance. The NACFB said some lenders contacted them at the time to refer brokers that they wanted to continue to deal with, but which were not able to gain FCA authorisation due to the business they conducted.
At the September meeting according to the NACFB, one unregulated member questioned whether patron funders would continue to support non-regulated business in the future, with one funder claiming the change to the NACFB’s code of practice make supporting brokers easier.
Part of the answer was something that the NACFB, the Finance & Leasing Association (FLA), and funders in the market were working towards in the second half of last year: a minimum set of standards for brokers to work to, that would enable greater transparency, trust and relationship strengthening for funders and brokers.
The brokers, represented by the NACFB, and the funders, represented by the FLA, are each coming up with their response to be produced this year, by working in close association with FLA members and funders in the market, including Shawbrook, Hitachi, Aldermore, Investec and Close Brothers, among others, and with larger banks like Barclays and Lloyds involved from the peripheries, one source told Leasing Life.
It’s important to note that the standards are non-binding, and are only guidelines to benchmark good business practice. What will be the minimum standard is to be confirmed, but Leasing Life spoke to Adam Tyler, chief executive of NACFB, Simon Goldie, FLA head of asset finance, and Mike Randall, chief executive of Close Brothers Asset Finance, to get an idea of how each party is preparing to work towards a joint document.
The FLA’s angle – Simon Goldie, head of asset finance, FLA
"The NACFB is an associate member of the FLA, and we’re a patron of the NACFB.
Before the meetings the FLA was considering the challenges of FCA regulation, the messages we can convey to our members, and the interaction between funders and intermediaries, which has got more of a focus because of FCA regulation.
"Separately to the NACFB’s work we had been working on some non-binding, good practice guidance for our members to give intermediaries. We are framing it as an expectation. Nothing is in there that will surprise anybody, it’s all about treating customers fairly; about making sure information is clear and so forth.
"We started at some point last year, just before the NACFB started those meetings with the funders. They also were coming from a similar angle as us; how do we explain to brokers what funders are expecting? There’s a duty on funders through the FCA regulation to ensure that brokers are adhering to the regulations. The duty is that they adhere in an appropriate way to the regulation.
"Really these things were happening in tandem, and the NACFB invited me along to what they were doing, so they have seen the document as well, because they are an associate member, they knew what we were doing, and that also for me to understand what they were doing helped when we were redrafting our documents. The NACFB has also revised its code, referencing both our codes in its code.
"The big picture is that both bodies are working to ensure that standards are at the highest possible level; to drive up standards, make our respective members aware of what they are doing, and to assist each other to ensure the funders are saying all the things they need to say about FCA regulation to the brokers, and the brokers understand it.
"Obviously if a business is entering the market, if they join the association as a broker or funder, we want to make sure they understand exactly the requirements of them.
"The FCA authorisation process is coming to an end in March, although they have time to extend if they need to, and then we’ll be into the supervisory regime, and I think both organisations felt a responsibility to lay out what is good practice.
"We had a group that has been looking specifically at good practice, so they have done a lot of the work, but we also sent it to other groups as well, for comment and feedback. We wanted to be as inclusive as possible. It has been a productive piece of work, getting views from members. The drafts have changed, inevitably.
"We should be getting the joint document out in the next couple of months."
The broker’s angle – Adam Tyler, chief executive of the NACFB
"We changed the code of practice back in September, after an exceptional general meeting. There will be a further meeting in November. We expanded the group to bring in Natwest, Bibby, and a couple of others. And we agreed that we follow the NACFB code of practice, but on top of that we want to add in what we call a minimum set of standards for brokers around regulation, so the brokers must comply with FCA regulation.
"What we’re doing at the moment is trying to establish this minimum set of standards based around FCA regulation, our compliance partners, and our funders, and have consensus that it’s the same set of standards.
"Part of this minimum set of standards would be an element of the NACFB’s pre-existing compliance services: so we’ve had 32 broking firms that have now had somebody in to look at them. They report back to the broker, and let them know what they need to work on. What we then plan to do is to work with them to make sure the missing bits are in place. They are then a fully compliant funder, and investors and customers know that broker is compliant. We need to set standards that brokers must adhere to; we’ll police it by performing audits on the broker annually, and that broker will end up with a tick to say I’ve been audited, and the funder is quite happy to deal with them. That’s the plan.
"Locke Lord head of asset and consumer finance (UK division) Jo Davis has now got both audits that are currently being run by two different compliance firms: Compliance Services which Hitachi is recommending, and Simply Biz, and they’re working together. We’re going to align those with recommendations from the funders that are involved.
"Funders can then have assurance of uniformity across the NACFB broking community that they’ll be doing one standard check on behalf of all members.
"The minimum set of standards are going to cover all brokers, because they’re all under the same regulation."
The funder’s perspective – Mike Randall, chief executive officer, Close Brothers Asset Finance
"We have an obligation as an industry to help do the right thing. And I saw last year that there was a gap in the broker market for a quality standard while watching the brokers working on how to get their permissions. I thought that we could help them, as Close Brothers was more fully developed with the regulation because of the size of our business (Close also has a direct-to-consumer proposition).
"We have value to add to the standards and regulatory journey for the brokers. And so we’re not wishing to try and rule by the stick; we’re saying that a regulated environment is where it’s going, and this is why you’re going to have to listen to us and all get in the same room and agree a set of behaviours going forward, so at least you know what standards you’re being measured by.
"I hear a lot of people in the leasing market talking about raising awareness. At the Leasing Life conference the idea was mentioned of the presence of a regulator being linked to reputation, and pushing the reputations up as people from outside the market see it. So really if this is a market response, then it’s a lot more persuasive.
"We’ve taken the initiative back in last September to get as many lenders in the room as possible, with Adam at the NACFB, and Simon involved at the FLA, to say we’ve invested, as Close Brothers, loads of money, time, and effort in understanding in our direct operation, with our direct sales force, how we evidence our behaviour, because we know that’s what the regulators require.
"And the broker market has spent the last year going through commissions review (by the FCA), so that was hard enough for brokers, because they’ve never had to do that before. But I’ve said, well, we would apply our experience of being authorised by the FCA into the broker market. We’re just evolving what is required in terms of behaviour that brokers will have to evidence.
"So we’ve got a lot of funders and FLA members in the room; I invited 22 members in September to talk about the appetite to agree on a joint set of standards.
"If a broker has 20 credit lines, 20 lenders are going to have to go and do 20 health checks on that broker to understand those behaviours. They’ve all got different behaviours; the broker is not going to be able to do its job or lend any money, because it will be busy satisfying the lenders that he’s doing the right thing. So the minimum set of standards is an answer to that problem.
"The minimum standards are aligned to the NACFB code, and also the FLA code of lending. I think we’re making a huge step in the right direction."