Even since the FCA launched a review into Motor Finance and published their report in Mar 2019, there has been much speculation as to whether the industry is careering towards another PPI type mis-selling scandal.
As we all know, the PPI issue has cost the organisations impacted an estimated GBP48 Billion in penalties, compensation, withheld capital and setting up teams dedicated to dealing with all PPI compensation requests. This doesn’t include the reputational impact, and whilst the remediation of PPI has dominated the risk committees for the past few years , it has resulted in driving forward conduct risk management and consideration of the customer, preventing mis-selling and treating customers fairly and transparently into their daily operations.
Why did PPI cost the banks so much money?
It wasn’t necessarily that the insurance had been mis-sold. It was the fact that the banks couldn’t prove that they hadn’t mis-sold. The PPI had been sold via the bank and third parties, with remuneration linked to the amount off PPI sold. In addition, they had failed to maintain appropriate documentation from the customer so had no ability to defend the compensations claims.
What is the relevance for Motor Finance?
The FCA review into motor finance highlighted several key concerns:
- Unfair commission and remuneration structures for selling motor finance – including interest rates that can be determined by the brokers
- Concerns around the transparency and completeness of information provided to customers – specifically the charges and interest costs, and commissions earned by the broker
- Lack of the internal controls and oversight by the lenders over the brokers
- Lack of adequate affordability assessments
Hence the comparison to PPI. The key question is whether conduct risk management now being considered in banks, as a result of PPI, is now being considered within other areas of Financial Services such as Motor Finance.
Why Motor Finance?
One of the key reasons is the model adopted by many lenders in the motor finance industry of using brokers or other third parties, paid on commission, to sell the products to finance the cars. Whilst being wholly beneficial to the firm as it increases their reach and coverage of the market and manages their cost-base and headcount, however it materially increases the level of conduct risk for the lender.
What are your risks?
As at 15th October 2019, the FCA have announced they intend to ban inappropriate commission structures and interest rates that can be determined by the brokers. They are also requiring greater transparency of the fees, commissions and rates presented to the customers.
By outsourcing the processes of selling to the customer, you have increased your risk, yet you are still fully responsible for compliance to the FCA regulations.
- How do you ensure your brokers are not mis-selling?
- Do you have appropriate commission structures and controls over the interest rates charged?
- How do you demonstrate your oversight of the brokers?
- How do you ensure the customers can afford the products?
- How do you ensure the terms and pricing are clear and transparent to the customer?
The FCA regulations are clear on the obligations of the lender to ensure that the customer is treated fairly and appropriately and not mis-sold products.
What can Motor Finance firms do to protect themselves?
Given the FCA findings and proposed changes, it is clear that lenders need to make significant changes to protect themselves against being involved in any mal practise or non compliance. This will usually involve changing their processes of oversight and monitoring of their 3rd parties, and enhancing their own internal risk and controls to ensure that they comply with their obligations.
The lenders of Motor Finance need to review all areas of the customer journey and all interactions the customer will have with yourselves and your third parties and perform a risk assessment of each of these.
The key to protecting your firm is the ability to demonstrate you have:
- Identified all your risks
- Oversight of the effectiveness of all controls/li>
- Know what rules you are managing/li>
- Appropriate oversight over the third parties operations, and your own internal risks and controls/li>
1RS has the ‘one stop solution’ for the Motor Finance industry with our ERIC software enabling you to link all rules to risks and controls, test, issues, action plans, control and risk assessment by other parties, and reporting. We can help you prevent this next PPI from impacting you.