The Financial Conduct Authority (FCA) has published one of its latest ‘Dear CEO’ portfolio letters to credit brokers. The latest letter sets out the FCA’s expectations for firms implementing the Consumer Duty.
What should credit broking firms be focusing on?
The portfolio letter sets out the areas in which the FCA intends to focus its credit broker supervisory work, including:
Commission models and disclosure
One of the key areas, similar to the portfolio letter sent to motor finance firms in March, highlights the FCA’s continued concerns about commission models which operate within the sector. This includes performance management policies, procedures and practices within firms and how they might negatively affect consumer outcomes.
The FCA has raised concerns that, without effective oversight, certain commission models may result in conflicts of interests for sales-based staff. The FCA have raised that this is of particular concern where sales take place in customers’ homes, i.e domestic premises suppliers. It is especially important for firms to review their commission and bonus structures and their surrounding policies and procedures to ensure that they do not encourage poor customer outcomes.
Financial promotions
We have seen a lot of intervention from the FCA over the past 12 months specifically when it comes to financial promotions of credit brokers. The Consumer Duty requires firms to avoid causing foreseeable harm at all stages of the customer journey in addition to existing rules and guidance concerning financial promotions. Firms must ensure that their financial promotions are going through appropriate checks before being published such as sign off from Principal firms for Appointed Representatives.
Use of regulated status
As we have seen in other sectors, the FCA will crack down regulated firms using their regulated status as a ‘halo effect’ to suggest that their non-regulated activities may be less risky or lead customers to incorrectly believe they have recourse to the FOS or the FSCS. Additionally, some firms remain authorised despite no longer conducting regulated activities. The FCA makes it clear that firms should review whether the permissions held are still required and remove those which are no longer needed or cancel their authorisation if regulated activities are not being conducted.
Appointed Representatives (ARs)
In the letter, the FCA brings attention to its new rules to strengthen the oversight of ARs by principals, which came into force on 8 December 2022. It describes the changes it’s making to the AR regime as going ‘hand-in-hand’ with the implementation of the Consumer Duty. Principal firms are currently undertaking work to ensure that they have appropriate controls in place to effectively oversee their ARs’ activities and support their ARs to comply with the Consumer Duty.
Change of legal status
The FCA has highlighted cases of credit brokers changing their legal status, for example from sole trader to becoming a limited company. Under a change in process, firms wishing to do so must now submit a new authorisation application prior to any change (this changes from the previous ‘change in legal status’ (COLS) application). Any firm operating as an AR wishing to change their legal status must speak to their Principal firm before taking any steps to do so.
Consumer support
Under the Consumer Duty, the FCA wants firms to provide a level of support that meets consumers’ needs throughout their relationship with regulated firms. This means customer services provided by firms should enable consumers to experience the benefits of the products and services they buy and ensure they are supported when they want to pursue their financial objectives.
Firms must also ensure that customers do not face unreasonable barriers, for instance when making a complaint. In addition, ensuring that customers in financial difficulty receive fair and appropriate support remains a key priority for the FCA and a key outcome that the Duty seeks to enhance by ensuring that firms act in their customers’ interests.
This latest ‘Dear CEO’ portfolio letter from the FCA is aligned with others that have been sent across the financial services industry over recent months. As the implementation date for the Consumer Duty hurdles towards us, the FCA are ensuring to keep it on the agenda for every firm it regulates. The Consumer Duty comes into force on the 31st of July 2023 for open book products and becomes one of the latest seismic shifts in the way that the FCA approach regulation of the UK financial services markets.
