The impact of an increasingly regulation-led marketplace on the competitiveness of the UK auto and asset finance industry

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Wayne GibbardPartner at Shoosmiths

UK Parliament’s all party parliamentary group for fair business banking called for an extension of the FCA regulatory perimeter to include SMEs last week. They also suggested raising the threshold for the Financial Ombudsman so that larger SMEs can refer disputes to FOS rather than to seek redress through the courts.

This proposed increase in scope into areas which were previously unregulated is just one in a series of indicators that the UK auto and asset finance industry should expect and prepare for more regulation including in areas that were formerly not regulated.

The march of the regulators is a central theme to be considered at the AFC Conference next week. This third plenary session will be with Wayne Gibbard, partner at Shoosmiths to discuss the implications of recent regulatory events on the auto and equipment finance industry. AFC’s content leader, David Betteley will be the moderator.

  • Wayne will brief attendees on the regulatory market’s operation, its impact on legal processes, and the implications of the FOS statutory remit, which prioritises “fair and reasonable” consumer outcomes over strict adherence to the law. He will update delegates on Barclays Bank’s judicial review challenging a FOS decision related to a contract involving discretionary commission payments and discuss the wider effects of FOS’s freedom on lenders’ certainty and appeal processes.
  • Wayne will also examine the proposed regulatory changes’ impact on asset finance, potential effects on the sector, and the likelihood of applying consumer processes to SMEs. He will outline planned changes to regulators and FOS’s Parliamentary oversight, including Labour’s Regulatory Innovation Office and Tory plans for the FCA to meet growth objectives.
  • The session will provide a platform for delegates to discuss the implications of these developments, the potential influence of a new Government and election campaign on the current trajectory, and how the industry can leverage data-backed evidence and PR to make regulation work.

The APPG SME manifesto

The extension of FCA to include more SMEs and the extension of FOS responsibilities to include larger corporates were just two of a set of eleven recommendations published in the all-party parliamentary group’s paper Securing the foundations for growth and trust. The SME manifesto 2024 last week. The manifesto is focused on generating economic growth through stimulating lending for SMEs, but starts with the premise that small business owners need assurance that there are protections in place as well as a reliable and trustworthy ways of to resolving disputes and, if necessary, swift and fair redress when issues arise with lenders. The remedies focus on increasing protections through widening and deepening the scope of regulation.

Labour and Tory policies on competitiveness in financial services

Labour and the Conservatives are putting pressure on the FCA to stop holding back Britain’s financial services sector with allegedly excessive regulation (see FT, May 16 2024). Tulip Siddiq, shadow City minister, has said an incoming Labour Government would push the FCA to “tear down the barriers to competitiveness and growth”. They plan to establish a Regulatory Innovation Office which will hold the regulator more accountable and promote innovation. The Conservative Government will tell the FCA they are failing to meet their new legal requirement to spur growth. Bim Afolami, the Conservative City minister has pledged to improve the country’s regulatory structures as one of three key priorities set when he was appointed in 2023. These changes should be considered in a context of increased focus by politicians of both sides on the need to stimulate growth in the UK economy and the role of investment in building productivity.

The recent interventions

The UK auto and equipment finance industry has been beset by increasing levels of regulatory intervention over the last six months. The FCA intervened to protect the orderly functioning and sustainability of the sector. This intervention became necessary following the banning in 2021 of discretionary commission arrangements (DIC). DIC was then in widespread use by auto finance providers. The ban led to a significant and ultimately unmanageable increase in the number of complaints being made through the FOS relating to agreements signed prior to the ban, when the FCA permitted DIC, but the FOS subsequently judged them to have had the potential for harm and therefore decided that affected consumers should receive compensation. A judicial review of the FOS decision is underway and there have been subsequent court decisions, which are contrary to the view expressed by the Ombudsman.

The FCA’s intention was to ban the use of DIC to reduce costs to consumers, although there are doubts about the effectiveness of those measures, which may have actually led to less choice and fewer opportunities for consumers.

The potential cost of remediation for the sector were initially expected to be large with ranges between £13bn and £30bn, potentially making it several times larger than the PPI scandal. This would lead to the withdrawal of some lenders from the market; a withdrawal and reduced supply of capital from wholesale funders leading to a disproportionate effect on smaller lenders who provide the diversity in lender-types needed to deliver finance to a diverse range of borrowers (and not just the most well off). AFC expect that the intervention will result in higher costs of borrowing for everyone including hard-to-lend to groups who are at risk of becoming unfinanced.

FOS had an estimated 15,000 complaints by April 2024 within their jurisdiction. Where these claims are lodged with FOS, lenders are required to pay £750 fee per claim (regardless of merit). The consumer pays nothing (even when they are simply being encouraged to claim speculatively by a claims management company). A likely blanket compensation to be paid to all borrowers regardless of evidence of harm feels both retributive and unjust. This is another significant cost to the sector.

Asset finance industry

Asset Finance lenders have tried to heed warnings that there are plans to extend the perimeter to include SMEs, and are already focussed on the implications. The asset finance industry widely depends on broker commissions including those using discretionary commission arrangements. They are also considering the implications of the FCA’s response to a super-complaint made by Federation of Small Businesses about excessive use of personal guarantees for company directors seeking corporate loans. The super-complaint, which will be considered in detail at the AFC conference has failed to achieve FSB’s intended objective because the FCA ruled that limited liability companies, where FSB contended most of the harm was occurring were outside their perimeter and therefore they would not collect data there.

A recent plan to mandate the commission disclosure, expected to be imposed through a change in the Finance & Leasing Association (FLA) code of conduct will not now take place. The FCA instead is expected to clarify whether they will mandate disclosure instead.

Asset Finance Connect UK Conference

The Asset Finance Connect Conference takes place on 6th June at County Hall in London. It features an interview with Martin McTague, head of Federation of Small Businesses; with Simon Evans, the chair of the Consumer Redress Association; and this briefing by Wayne Gibbard. The conference regularly attracts audiences in excess of 450 delegates and is Europe’s largest auto and equipment finance event.

See our website for more details and to book your ticket:

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