Making regulation work for everyone

The asset and auto finance sector faces a tsunami of regulatory activity which risks drowning out the industry’s own efforts to ensure best outcomes for consumers, unless all parties join together to build an infrastructure that protects everyone.

That was the key message from AFC CEO Edward Peck at the 28^th Asset Finance Connect Conference. Designed as a “marketplace of ideas”, some 400 delegates attended a range of sessions exploring the potential solutions to the regulatory challenges which have emerged in the first half of the year.

The past six months have seen the fall-out from two Financial Ombudsman Service (FOS) decisions on discretionary commission arrangements (DCAs) in motor finance agreements, followed by the Financial Conduct Authority (FCA) announcing a review into commission arrangements going back to 2007 in a bid to ensure market stability in the face of a flood of further claims.

Peck warned the FOS rulings deliver “the worst possible outcome” given the finance agreements in dispute were signed in the period before DCAs were banned, while the FCA’s intervention has created further uncertainty.

“The material harm to consumers was not by lenders or brokers rewarded through DCA, but instead by FOS. The result has been that any attempt to change best practice may be construed as evidence that what came before had the potential for harm and is therefore ripe for compensation.”

The Finance & Leasing Association (FLA) decision to row back on plans to mandate commission disclosure as expected in its Code is viewed by some as evidence of the impact of the FOS decisions, and marks a “spectacular own goal” for an ombudsman focused on protecting consumer interest, Peck added.

Way ahead

Those decisions are now subject to a judicial review, while the FCA is considering how best to tackle the large number of complaints which have flowed from the FOS rulings. Automatically compensating anyone who signed contracts from intermediaries rewarded using DCA might be pragmatic, but Peck branded such an approach “wrong-headed”.

 As well as those who had not suffered any harm, automatic redress would put further strain on the lender-intermediary relationship as lenders would then seek to defray future liability with indemnities from dealers and brokers.

“What everyone needs is an effectively ordered market where good actors reap the rewards and bad actors are punished. And the regulators do not appear to be able to make this happen.”

The reasons for that include the failure to hold regulators themselves to account, which opens the way for the sort of “groupthink”, focus on short-term results, risk avoidance, and regulatory capture by vested interest groups which has tainted regulatory intervention in the past. 

Looking ahead – and with a general election in prospect – both the main political parties have made clear their concerns that regulators are proving a brake on growth, and suggested greater and technically better-informed oversight is required.

“A single new independent body to act as a supervisor of the financial services regulator is one alternative. It could include parliamentarians but should primarily consist of market experts who would ensure that regulators focus on the longer-term opportunities freed somehow from immediate political pressures.”

Industry role

Emphasising the role of the AFC conference in encouraging all participants in the asset finance ecosystem to exchange ideas and look at issues from different perspectives, delegates heard presentations on regulatory issues from a wide range of speakers, including legal experts from Shoosmiths, representatives from the Federation of Small Businesses, the Consumer Redress Association and brokers. 

Peck concluded by underlining the critical importance for the sector in making its voice heard on regulatory matters, saying:

“It’s up to industry experts to help policymakers find the all-important balance between protecting borrowers from bad outcomes and building a marketplace which can properly deliver good outcomes, not just to stand back and point at the unintended consequences that follow when non-experts try to intervene.”