Broker and intermediary introduced business is an area that writes billions of pounds worth of business each year to the UK asset finance market, so the importance to lenders cannot be overstated.
As we get ever closer to the changeover of consumer credit regulation from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA), this month we are focusing on some “Dos and Don’ts” for brokers, vendors and intermediaries, as well as some other pointers for lenders and their intermediaries to be working on together.
Five broker do's and don’ts
1. Do check you have the right OFT CCL:
If you are a broker or intermediary, then ensure you clarify whether you need category D or E OFT Consumer Credit Licenses before applying for interim permission. If you do not have these licenses when applying for interim permission, you will not be able to practice in these areas until you have received full authorisation. If you are an intermediary, this practice is being rolled into the regulated activity of ‘brokerage’ under the FCA regime. This means that if you were previously an unlicensed intermediary, you will now almost certainly need to be licensed. Remember, by 31 March 2014 you should have applied for your interim permission with the FCA.
2. Do ensure that you comply with OFT Guidance Notes and start working through the sections of the draft consumer credit sourcebook that apply to you:
The new rulebook specifically incorporates large sections of these documents - particularly the guidance on Credit Brokers and Intermediaries and Irresponsible Lending - into rules that brokers must comply with. Previously, guidance was used to demonstrate what constitutes compliance. Now however, significant parts of the guidance documents are actually rules that brokers will have to comply with. It’s vital you understand these and that policies and procedures are subsequently written and implemented. Don't forget your Treating Customers Fairly (TCF) policy.
3. Do make sure the products you sell are suitable and appropriate for the customer:
This is one of the most important aspects for the FCA regime. It is far too broad an area to explore fully here (and is covered in considerable detail by the new rules), but ensuring that products are appropriate for customers - both before and even after an agreement has been entered into - will be one of the key areas the FCA will monitor.
4. Do ensure that information provided at the point of sale is understandable to the customer:
If you suspect that your customers may struggle to understand the information provided at the point of sale, ask lenders to provide you with any more information that you feel would make products more understandable and transparent.
5. Do not forget to be transparent about your status and any commission or other incentive arrangements you have with a lender(s):
Existing requirements under the Consumer Credit Act are being incorporated into the new rulebook – this is one of them.
Lenders and brokers – tips for working together
When it comes to non-compliance, there are some key changes to the typical lender-broker relationship that the FCA is likely to focus its attentions on. The below list provides a top line guide to the areas your compliance department should be focusing on in the coming months:
- Review the way you remunerate your brokers, vendors and intermediaries including structures and payments of overrides to include corporate remuneration against the requirements of the FCA.
- Review your business model, value chain, relationships with your intermediaries and sales-team’s remuneration and objectives.
- Look at your incentive schemes to see if they increase the risk of mis-selling, and if so how are your governance and controls surrounding broker relationships adequate?
- Are there any recurring problems to be investigated and does action need to be taken to address the imbalance?
- Incentives on the FCA’s radar will be ones of significant amounts: disproportionate rewards, inappropriate triggers, product bias or mix bias, as well as corporate incentives.
- Remove high risk features, consider capping maximum payments, look at quality rewards instead and make sure you have good claw-back mechanisms in place as well as introducing firm controls.
- Introduce MI so that you can identify and record all incentives and map risks and mitigants.
- Implement a governance policy on the use of incentives focusing on the TCF outcomes and keep this under review. Allocate senior management to control incentives and be responsible for oversight and production of the MI.
As published in Leasing World – January 2014This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.