Julian Rose argues that the FCA consumer credit regulation could get a lot worse for asset lenders – unless we do something about it

The majority of asset finance brokers in the UK, of which there are over 500 listed on www.assetfinance500.uk, have started or are about to start completing their FCA application packs. Most ‘landing slots’ (application periods) for brokers end over the next six months.

Many brokers have attended briefings and are being offered free support from FCA compliancy specialist consultants to get themselves FCA authorized. Done properly, preparing an FCA application takes around two to three days for a small broking firm. That’s two to three days less time helping businesses to get the finance they need. On the positive side, it could help to protect the reputation of the industry by keeping out ‘fly-by-nights’.

Early indications are that the FCA is taking a relaxed line with asset finance industry applicants – perhaps asking a question or two but not being too pernickety – provided the application pack is completed accurately and properly describing the broker’s business.

Even with the help, the application process is still difficult for smaller firms in particular. Some are deciding to merge their businesses, which is a big step but brings various potential advantages. Apart from sharing the regulatory burdens there could be tax benefits and better bargaining power with funders. It may be possible for the individual brokers to keep their own customers and even trading names.

However many brokers are asking why this is all necessary when such a small proportion of their business – often well below 10% – comes from regulated customers. 

If the broker is willing to restrict itself to dealing with companies and larger partnerships, it doesn’t need to be authorised by the FCA at all.

So is dealing with all the extra regulation worth the trouble?

Latest Companies House figures show that more and more small businesses are incorporating. There are now over 3.3 million companies in the UK. Over 500,000 new companies are started each year, compared to around 330,000 dissolutions, so the stock of companies is growing. Over two-thirds of small businesses are already incorporated. Those which are unincorporated tend to be very small and therefore far less likely to need equipment finance. The total value of regulated agreements is probably no more than 5% of the UK business asset finance market.

For such a small part of the industry and in light of so much regulation, why don’t brokers just rule out dealing with regulated customers? The majority of lessors in the UK already do exactly that.

There seem to be two main reasons.

The first is that some customers that do have strong equipment finance needs are small partnerships (which are regulated) particularly in the farming industry. The second is that some funders working with brokers (but certainly not all) are still insisting that all their brokers are FCA authorized, whether they need it or not.

If the FCA regime is problematic for brokers, what about the equipment dealers (for dealers also read vendors, resellers, distributors, agents, etc.) who offer finance to their customers? There are probably over 5,000 such firms across the UK. The majority (mostly smaller firms) introduce customers to brokers, often for no commission. The minority – mostly larger firms – introduce direct to finance companies. Most have later landing slots in the second half of 2015, so may not yet appreciate the scale of the regulatory burden that is about to hit them.

It’s bad enough for a broker to have to take several days out of his or her business to prepare their FCA application, but at least they are in the finance business. For an equipment dealer to do this seems a much bigger deal, for what is only a secondary part of its business.

It’s worth addressing two common myths here.

First, the FCA’s “limited permission” regime that applies to many vendors is not very different from the “full permission” regime that applies to brokers. Perhaps it removes half a day from the preparation work, but that’s about it.

Second, there’s very little scope for arguing that any referral of an unincorporated business or small partnership from a vendor to a broker or funder is somehow unregulated. This argument will rarely work.

As we get closer to the crunch period when large numbers of equipment dealers have to apply for FCA authorization, the industry needs to find ways of supporting them.

The simplest approach is for funders to accept that some intermediaries are not dealing with regulated customers (or are happy to stop doing so) and therefore shouldn’t have to apply for FCA authorization. Strict procedures would be needed to ensure that no regulated customers are then dealt with, which could be problematic for dealers. For example, promotional material and agreements would specify that finance is available for only large partnerships or companies.

For larger dealers who are handling regulated customers and are able to cope with the new regulation, finance companies could offer support with the authorization process working with compliance specialist consultants as they have for brokers.

That still leaves large numbers of smaller dealers who handle at least some regulated customers. A potentially useful approach could be to allow them to be Introducer Appointed Representatives (IARs) of other firms that do have FCA authorization.  The dealer isn’t then FCA authorized. Instead another authorized firm takes responsibility for the relevant activities of its IARs.

As the dealer’s activities are restricted to just introductions (i.e. just passing on contact details) it shouldn’t be too onerous in theory, although it is still a serious regulatory and legal commitment for the Principal (the FCA jargon for the firm taking responsibility for IARs).  It might involve, for example, asking customers who have been introduced whether the equipment dealer told them about the different types of asset finance.

In the slightly bizarre regulated world, the answer to that question should actually be no. That’s because all the IAR is allowed to do is to refer customers to the other firm, i.e. the broker or finance company. It’s then for the regulated firm to discuss the products and all other details.

So far it seems very few brokers or funders are planning to become Principals.

For any single broker or funder it seems a lot of extra work for a small amount of business. For the vendor finance industry as a whole, however, it seems vital to the future of the channel that this option is provided.

It should be feasible for a specialist firm to act as a Principal. They could appoint and supervise many dealer IARs. The dealers would then introduce their customers to that firm, and that firm (with its FCA authorization) would then introduce the same business through to one or more brokers or funders. The Principal would charge for its services, both operating a referral system (probably online) and carrying out appropriate checks and inspections.

Setting up such a specialist firm wouldn’t be straightforward. It would require systems expertize, a sound knowledge of the industry, experience in FCA compliance management, and time to obtain FCA authorization. No single firm is likely to have all those skills so an alliance of different experts with the support of the industry is likely to be needed.

These solutions need the industry’s collective attention:

• funders agreeing to deal with non-FCA authorized introducers for non-regulated business;

• offering specialist support for dealers who do proceed with FCA authorization; and

• ensuring that smaller dealers can make simple introductions as IARs without needing to be FCA authorized.

Otherwise there’s a real danger that the FCA regulatory burden – for what is only a very small part of the industry – could spin out of control.  

 

Julian Rose is the founder of Asset Finance Policy Ltd, previously he was Head of Asset Finance at the UK Finance & Leasing Association. www.assetfinancepolicy.co.uk