Former regulator blasts FCA for “lack of clarity”

The Financial Conduct Authority (FCA)’s failure to ensure its own rules are clear is a major factor behind current crisis in the motor finance sector, which has seen a string of lenders pull out of the market following the recent Court of Appeal ruling, according to Sir Howard Davies, the former chair of the Financial Services Authority, the FCA’s predecessor.

“If the regulator says this is what we think the rules mean, then usually the courts back off. The fact they haven’t suggests there isn’t enough clarity in the FCA rulebook,” Davies said.

He explained: “I’m disappointed that there has not been sufficient regulatory clarity on the rulebook that has meant the court has been able to step in with its own interpretation. If a regulator is very clear about the expectations on firms, then the courts are usually reluctant to substitute their judgement for that of the regulatory within a statutory context.”

An FCA spokesman said: “The court decision on motor finance did not relate to our rules, but the longstanding legal principle of fiduciary duty.”

Consumer Duty

Davies was giving evidence to House of Lords financial services regulation committee which is holding an inquiry into the FCA and PRA’s secondary competitiveness and growth objective.

Committee member Baroness Bowles asked Davies whether the presence of the new Consumer Duty “was an opportunity for the rules to be a bit less clear, so the obligation is pushed onto the firms to decide where the line is, and as a consequence of that there is a potential there for litigation.”

Davies replied” “The whole shift to an outcomes-based assessment where the outcomes may be different for different types of customers creates the opening for a lot of different interpretations, and so yes could result in more litigation.”

Davies told peers that Consumer Duty was creating “extreme nervousness” among overseas investors as they did not know what it meant, impacting the UK’s attractiveness.

FCA/FOS tensions

He also highlighted ongoing tensions between the FCA’s regulatory work and the actions of the Financial Ombudsman Service (FOS).

“The record is that the Ombudsman produces judgements that sometimes go well beyond what the FCA rules intend. The combination of uncertainty about what outcomes under Consumer Duty mean, the role of the Ombudsman – and now the Court of Appeal – has caused a lot of anxiety in the motor finance market and significant share price moves,” Davies said.

Earlier in the discussions, Davies touched on two periods during his time as FSA head when the regulator came under Parliamentary and other pressure to outlaw the payment of commission on giving investment advice. Both times the proposal was rejected, on the grounds that it would make business so difficult that firms would withdraw from the market to the detriment of the consumer.

In echoes of the current debates within the motor finance sector, Davies observed: “In 2013 the regulator reached a different conclusion, and as a consequence a number of firms significantly reduced the advice given to customers because of the compliance burden – meeting the requirements added to costs which could not be recovered from the consumer.”

He went on to explain that Singapore, which commonly follows UK practice but does not always implement identical regulations, on this occasion did not follow suit and decided against banning commission payments. Davies said their conclusion was this would reduce the availability of advice, and the net consumer benefit was negative.

Edward Peck, Asset Finance Connect CEO, said: “A highly experienced former regulator has made the point that the FCA needs to do better.

“The motor finance industry is crying out for clarity and certainty around lending regulations, and the longer there is a delay in providing this the more funders will leave the market – which is to the detriment of the consumer.

“At AFC we are determined to support the market through this crisis, starting with a specialist webcast tomorrow which will focus on what lenders and brokers can do to navigate through the current turmoil.”

Register for the AFC webcast Johnson v Firstrand et al: what the auto finance ruling means for ALL broker-introduced business here.

AFC’s UK Autumn Conference on 26^th November opens with a keynote on how the industry can better manage increasing intervention from regulators and policymakers, featuring interviews with Isak Bengtzboe, chief policy adviser and legal adviser at Eurofinas; and Stephen Haddrill, director general of the FLA. To register, go to the AFC Autumn Conference website.