FLA accreditation: getting ahead of regulation

The FLA’s asset finance broker accreditation scheme forms a key part of a move to ensure lenders and brokers step forward together to address concerns around best practice, minimising the risk of being caught on the back foot. This was the message from the first in a new series of Asset Finance Connect (AFC) webcasts for the UK broker industry providing an opportunity for brokers and lenders to ask their questions direct to the FLA team.

The Finance & Leasing Association’s (FLA) scheme has its genesis in what John Phillipou, FLA chair and Managing Director of the SME Lending division at Paragon Bank, called “the undercurrent of regulatory creep”, which has gained traction since the CBILS support introduced during the pandemic ushered in the first examples of a linkage of responsibility between funders and their intermediaries.

“We need to work with the broker community to reflect to the regulators that non-regulated business works well. The reality is that lenders are being tasked by regulators to show their house is in order in all respects. We need to take the bull by the horns,” Phillipou said.

His view was reinforced by the findings of an on-the-spot poll of the 100-plus webinar participants, which found the overwhelming majority (95%) agreed or strongly agreed with the view that regulators and policy makers fail to understand the benefits brokers provide for SMEs and the UK economy.

Cost and benefits

The FLA’s solution is an accreditation scheme whereby brokers fill in a baseline questionnaire covering the majority of questions that its members typically ask to ensure intermediaries adhere to the regulatory requirements. Brokers will pay a fee for this review handled by a third-party assessment specialist, X VAS, as well as an annual subscription.

David Foster, CEO, Anglo Scottish agreed that regulators had only a limited understanding of how asset finance brokers work, pointing out that lenders may require brokers to visit customers or inspect assets all of which takes time and is likely to be reflected in commission rates. This also means that, given their effort is focused on origination, a key concern for many brokers is the effort and cost involved in the FLA accreditation process.

Simon Goldie (pictured), the FLA’s Director of Business Finance & Advocacy, said that while funders would need to ask additional questions, based for example on their risk appetite or the type of funding, this approach would considerably reduce the time brokers spent on responding to lenders.

Webinar poll results suggested an appetite for this process, with 44% of brokers agreeing that a single broker review which effectively meets most of the needs of all the lenders will save time and money. In addition, a third of lenders polled agreed that an effective broker review process will reduce the cost to serve each broker and will make it easier for lenders to increase the number of brokers they work with.

Goldie also pointed out financing of the scheme was not solely dependent on brokers, as funding for the initiative came from member lenders’ subscriptions and investment by the trade association itself, and said: “This is not just funder-led – we want to make sure there are tangible wins for brokers.”

As part of this accredited brokers will join a ‘broker working review group’ that will help refine the process, and which will also have access to regular updates from the FLA about regulatory matters, which Goldie said “is particularly important for brokers who are not members of any trade body. We want to create a channel to speak to brokers and hear their concerns so we can feed that into our conversations with government and regulators.”

Sanctions

Goldie explained that brokers would be asked to evidence they meet regulatory requirements. In the case of any failure to do so in specific areas – such as privacy notices – the FLA will give brokers time to address the issue and they can then do the questions again.

More serious breaches, and in particular, complaints brought by lenders after brokers have been accredited, will be passed to an adjudication panel made up of independent members with industry experience who will decide if a broker should lose accreditation.

Regulatory creep

With the FCA’s Consumer Duty requirements now in force and reform of the 50-year old Consumer Credit Act in prospect, there are growing concerns that the gap between regulated and unregulated business is narrowing.

AFC’s final poll of the webinar found two-thirds (66%) agreed that if the industry does not deal with the concerns that regulators have about intermediaries then the market will shift away from the channel and towards alternatives which carry less risk.

As FLA board member Mike Randall put it: “Transparency in what we do and how we do it is a critical issue for lenders and for brokers. We need to be able to show that we are aligned and consistent in everything we do. Having a single FLA audit means we can show that to regulators. The biggest worry is that the regulators are drawn into unregulated areas in the SME sector, and we need to close down the risk of them telling us what to do, with poor outcomes for everyone.”

A risk for the FLA in this approach is being cast in the role of ‘policeman’, effectively extending the association’s oversight role so that it becomes in effect a pseudo-regulator. In contrast, panel members emphasised that the push to show how lenders and intermediaries align to best serve SME funding will mean building better communication channels and more collaboration to meet the future challenges.

Edward Peck, AFC CEO, commented: “The focus of the FLA on broker-lender interaction is a welcome opportunity to drive change in the way in which the industry is organised.

“The prevailing feeling AFC got from both brokers and lenders participating in the webcast is that there is a strong need for more constructive interaction between lenders and brokers about the larger challenges the industry faces. There needs to be a genuine marketplace of ideas where both sides views are heard.

“If this initiative achieves more constructive interaction then this alone will be a win for the FLA.

“The current arrangement for broker reviews clearly has its challenges, and the accreditation proposal is a starting point. Judging by the polls, lenders and brokers seem to see value in focussing on it. But there is lots of detail to be worked out. And there are lots of other things to talk about too.

“What also emerged from the webcast, was the potential for mutual suspicion to derail efforts for constructive change. This is perhaps natural in a commercially competitive marketplace, but we worry that there may be too much competition and not enough cooperation. Small quick wins achieved through working together may fix this.

“It would be good also to see more genuine alignment between the various trade associations – who should be leading the way together.”

AFC’s series of webinars for the UK asset finance community focusing on how brokers and lenders can collaborate to protect the broker channel for the benefit of its customers continues with the next session on how technology can support brokers to streamline operations to be held on April 19th.