The FCA’s new Consumer Duty is a great idea: a form of regulation that focuses on “Consumer Outcomes,” where the FCA regulated company or agent has to put themselves in the shoes of their customer and asks themselves “would I be happy with that.”
By being outcomes focused, this enables to FCA to now hold to account those organisations who have traditionally paid lip service to the rules by being able to demonstrate that all the boxes to a compliant client exchange were ticked, notwithstanding the horrendous results achieved for often unsophisticated and vulnerable clients.
Finally, we see the FCA trying to ensure a level playing field for private customers and enforced transparency for companies operating in the finance sector who have been anything but transparent in the past.
My issue with all of this: why has it taken them so long? The FCA has been aware of problems in the industry for far too long and has taken little or no action to remedy these issues. And when it does, it moves far too slowly!
Take for example the FCA’s investigation into the Motor Finance Industry. The investigation took a considerable amount of time and, credit where credit is due, it delved deeply into a side of the finance industry which is cloaked in secrecy. It reviewed thousands of businesses and hundreds of thousands of finance agreements. It compiled a number of reports during the investigation. Its final one entitled: “Our work on motor finance – final findings” was published in March 2019.
In that report it unearthed some extremely concerning practices where vehicle finance companies had effectively allowed car dealerships to pick the rate of interest they would charge a client and be bonused based on how high a rate they managed to get away with! The practice was widespread and had gone on for many years, predominantly with Personal Contract Purchase (or PCP) agreements where a car buyer has the option to buy a car at the end of a loan term for a balloon payment, or simply hand the car back.
Throughout all of this, the FCA observed, that virtually no car customers were ever told that their monthly car payments were made up of commissions that the dealership itself could dictate the size of.
Having unearthed these underhand dealings, what did the FCA then do? It changed CONC 4.5 in the FCA Handbook effectively banning the use of such incentivised commission structures where car dealerships had wide-ranging discretion on loan terms. However, it did not make those changes until 28th January 2021! Nearly two years after issuing its final report!
And even now, despite its findings, finance companies continue to stonewall requests for commission structure calculations from former PCP clients, who are now becoming PCP claimants.
This is just one example of how the FCA has historically been too slow to act on its own findings and enforce a more level playing field for consumers. The PPI scandal that engulfed the UK is another. And there are many more!
The actual rules for the new Consumer Duty are yet to be released. Many in finance sectors are already commenting that this is likely to mean that commission structures must be spelt out to consumers in order to be enforceable. My concern is that outcomes-based rule books tend to be annoyingly vague and unless this is spelt out in clear and concise terms that full disclosure of any commission must be given, you can guarantee that companies will attempt to “interpret” the new duty in such a way that continues to suit them best – and not the consumer.
By Jamie Patton, Managing Director, Johnson Law Group.