Five Consumer Duty tips to keep the FCA happy

News that the FCA is to review historical motor finance commission arrangements should be a concern for retailers.

Even before this measure was announced, the Financial Ombudsman Service reported that in Q3 2023, complaints had increased by 115% to 4,622. It was increasingly hearing from people worried about whether they can pay their motor finance deals.

James Tew, CEO at iVendi, believes the figures helped to prompt a higher level of scrutiny from the regulator, and strongly underlined the need to ensure watertight motor finance processes are in place – ones that didn’t just ensure consumers were being treated correctly, but could also evidence this fact.

“With Consumer Duty having been live since July, the retail motor industry is paying more attention to responsible lending than ever before, and these complaints will largely have been related to deals made under older regulations. However, they are still likely to create a degree of impetus for the regulator to ensure that responsible lending is taking place.

“Retailers should be ready for the possibility of a much higher degree of scrutiny as a result. Processes need to be sound and robust, with impartial audit trails that evidence how they are doing everything that the regulations demand to ensure that consumers are treated with transparency and fairness.”

He pointed out that 9 in 10 complained were raised by “professional representatives”, meaning claims management companies, but the percentage upheld was just 8%, compared to 42% for those brought directly by consumers. However, two recent cases relating to historical motor finance commission arrangements involving Barclays and Black Horse may have set a precedent.

“Although both these cases occurred before the ban on discretionary commission in early 2021, it is their references to CONC 4.5.3R and Principle 6 – treating customers fairly – that raise the most concern.

“For clarity, CONC 4.5.3R refers to the commissions to credit brokers – auto retailer – and the disclosure of commission. Retailers need to ensure that they understand the rules and communicate effectively any commission or fees. This will include any bonuses paid that are related to the transaction.

“The big question here is should the retailers have disclosed the actual commission? Telling a customer of the existence of commission, and the way it is earned, would naturally lead to them asking how much it was. Had the commission been disclosed and evidenced, then it’s unlikely that these customers would have pursued the claim.

“It’s too early to speculate what the outcome of the new FCA investigation will be. What is clear is that most of the rules around commissions have not changed. That means the amounts of commission paid are going to come under deeper scrutiny, especially now that Principle 6 has now been replaced with Principle 12 – The Consumer Principle. Under Consumer Duty, this sets a higher standard and retailers will be well aware of the changes they needed to implement in 2023 to address these requirements.”

5 areas of Consumer Duty for 2024

James has outlined five core areas of Consumer Duty consideration for retailers in handling regulator scrutiny. Appropriate measures should have been in place since July, but now is a good moment to revisit them.

1. Governance

Under Consumer Duty, retailers must have effective governance arrangements in place to ensure they prioritise the interests of their customers. Ultimate responsibility is placed at the highest level. Directors should be aware of the FCA’s expectations, while a ‘Consumer Duty champion’, who promotes and oversees all appropriate measures, should be recognised at board level.

“The best way to approach this is for retailers to establish a Consumer Duty group, with relevant stakeholders from across their organisation, such as legal, compliance, IT, marketing and product, in order to ensure companywide understanding. A board-approved implementation plan should have been in place for some time, describing how your organisation meets the requirements of the regulations, while board reports need to describe what is being done around Consumer Duty, your data outputs, and future direction.”

2. Conflicts of interest

Conflicts of interest must be managed by retailers fairly and effectively to ensure that they do not harm the interests of their customers. This should start with identifying in-scope products, services, customers, channels and processes, as well as the impact of external factors.

The main danger is the influence of commissions driving the wrong behaviour, especially as the used car sector moves more into risk-based pricing. Here, it won’t be possible to fix the interest rate for consumers as they will vary depending on each lender’s risk appetite. Instead, retailers should consider fixing their remuneration, whether as a percentage of the advance, or a fixed case fee.

3. Culture

A culture that supports the delivery of good customer outcomes according to Consumer Duty must be fostered. “Good outcomes must be defined for all customer touchpoints and measures built to ensure they take place. Management information needs to be gathered and reporting compiled to show that this is happening.

“Data collection processes should be continuously improved and regular reviews conducted of data management. This is very much heartland activity for iVendi and likely to be the key area where regulator scrutiny is concentrated.”

4. Communications

Retailers must ensure that communications with customers are clear, fair and in no way misleading, while all customer journeys and key touchpoints should be documented.

“This has been a sizeable task for many retailers and their motor finance providers. Both you and your partners must be working together to meet the Consumer Duty regulations. It’s a question of engaging with all parties in the motor finance chain to clarify their roles and responsibilities, agree data sharing practices and any other relevant details.”

5. Training

All staff who are involved in motor finance within retailers must have the necessary skills, knowledge and expertise to deliver good customer outcomes, with appropriate training carried out and regularly reviewed.

“This is perhaps an area where a degree of drift is likely to occur over time. Staff come and go, and churn within some dealerships is quite high, so it requires rigorous processes to ensure that everyone understands and applies their responsibilities.

“For many retailers, this may be weakest point of their regulatory compliance.”

Following the introduction of Consumer Duty, iVendi is confident that its retailer clients were providing consumers with a more compliant, transparent and fair approach to motor finance than ever before. “We’ve been working on Consumer Duty with our retailers since it was first announced and have both extensively modified existing products and introduced innovative new ones to help them meet the new regulations as exactly as possible.

“Much effort has gone into providing an auditable trail for each consumer which records all of the major touch points. Retailers whose processes and technology deliver here will be able to mount the strongest possible defence against complaints.”