Challenges of working under the FCA regulations – a legal perspective
Russell Kelsall, partner at Squire Patton Boggs (UK)
Kelsall painted a vivid picture of the rigour with which the Financial Conduct Authority (FCA) investigated one of his client’s compliance procedures during a site visit.
The FCA only notified the dealer of the two-day visit the day before. There were five areas the FCA looked at:
1. The suitability of the dealer’s control function (CF) staff. “One of the dealer’s approved persons was head of sales and the FCA wanted to know if this person, the CF8, was appropriate,” Kelsall said. “There is significant tension between selling and doing the right thing for the business.”
2. The CF8 was interviewed for 90 minutes on the applicable rules, how prepared the individual was and how well they understood the regulatory framework. They were also asked about commissions – when their existence is disclosed and if the amount is revealed – as well as their processes to ensure no one is mis-selling.
3. Did the dealer recognise the potential conflicts between the sales and brokering processes? The FCA found an over-reliance on its two lenders, which provided training and documentation.
Kelsall said: “The dealer said ‘we do broadly what they say we should do’. The FCA said this was unacceptable. You need to ensure you comply with all the rules and there are no holes in your processes.”
4. Complaints. During the two-day visit, the FCA asked each person it interviewed: “what is a complaint?” This was asked not just of approved persons, but salespeople, sales managers and business managers. The correct answer is “an expression of dissatisfaction”.
The FCA then wanted to know how complaints were logged, responded to and dealt with and when a customer is given notice about their rights to go to the Financial Ombudsman Service.
5. Commissions. Staff were asked when commissions were disclosed to customers and how much is paid, as well as whether they reveal that the dealer is an independent broker or tied (and if so, to whom).
“The FCA found the dealer was failing in some areas,” said Kelsall.
“It was told to replace the CF8 immediately and not doing so would lead to very serious action. The firm was also required to undertake a past business review, going back to April 1, 2014, when the FCA took over regulation assessment, to ensure compliance.”
He said it was absolutely vital – and central to the FCA’s assessment of the dealer – to ensure there were systems and controls in place to guarantee appropriate auditing and checking.
■ For more on the legal view of FCA regulation – particularly responsibility to others outlined in the Consumer Credit source book (CONC) and commissions – see the 2016 AMi Franchised Dealer Report, published in December 2015.
Where the FCA’s focus lies in 2016
Adrian Dally, head of motor finance, The Finance and Leasing Association
The automotive retail sector has not taken the full extent of the FCA’s powers into account, Dally told delegates, saying the organisation had “a nuclear option”.
“The FCA has the power to impose consumer redress programmes where it discovers a firm or firms have been non-compliant and will make them go through their entire book since it began to be so and give redress. The extent of this redress is much tougher than PPI, so it can mean 200-300% of a business’s profits can be taken away.
“The FCA is deliberately powerful because its redress measures are designed to be a deterrent against non-compliance.”
The FCA also has the power to impose unlimited fines. Dally said the FCA can also:
■ Withdraw, vary or amend a firm’s authorisation;
■ Determine what products can be sold, can ban them and influence how they are designed and restrict what is offered;
■ Influence competition in the industry, with the test being ‘is it working in the marketplace to the benefit of the consumer?’;
■ Require business to publish complaints figures. The FCA is required to be transparent about what it is doing and requires the same in the marketplace.
Dally also addressed what he believes is a “significant misconception” in the market – the belief that FCA authorisation means FCA approval of everything a firm does.
“This is not true. It means a firm has met the conditions for authorisation.”
There are five issues on the FCA’s agenda:
1. Affordability and creditworthiness.
2. Remuneration.
3. Consumer communications (how well is the industry explaining complex financial products?).
4. The treatment of vulnerable customers and those in arrears.
5. Authorisation processing.
The first two will see the most activity in the next year. The FCA has done research on affordability and creditworthiness, which will lead to a consultation paper by the end of the first quarter of 2016. Any proposed new rules would be in force by the end of the year.
However, it is remuneration that has prompted the most thought at the FCA, said Dally.
“It’s currently looking at internal structures, within a lender, broker and dealer and how staff are remunerated. It will then look at partners. The FCA’s focus is on ‘does remuneration reflect the work done?’ and, most importantly, ‘are the outcomes good for the customer?’,” he said.
The FCA will look favourably on remuneration models that take into account:
■ Customer satisfaction;
■ How a credit agreement has performed in the long term;
■ Levels of arrears;
■ Complaint volumes; and
■ Regulation compliance.
Dally warned: “It would be very unwise not to plan for not only disclosure of the existence of commission, but also the amount of commission and the way it’s been calculated.”
One dealer group’s journey into the FCA era
Emily Leigh-Dugmore, quality and audit manager, Citygate Automotive
Systems, procedures and a constant process of self-auditing are central to satisfy the demands of evolving regulations, Leigh-Dugmore told delegates.
She said keeping strict records and enforcing the FCA compliance of all staff members was key to her own peace of mind.
As part of a strict regime, which helped to successfully contest more than 60% of PPI sales complaints following the 2012 mis-selling scandal, Leigh-Dugmore ensures every deal at the nine dealerships for which she is responsible submits an FCA compliance folder with every sale.
She said the business had a room filled with files – logged for each business and ordered by month and year – that dated back to 2006.
“Every deal in every month is fully audited to ensure full compliance. This includes checking that all documents are signed, that all demands and needs checks match, the profit on the logs and also that any additional consumer credit documents are attached.”
Leigh-Dugmore said any file deemed to be less than 100% correct would result in a loss of commission for the responsible member of staff.
She said all staff are made aware of the FCA regulation upon applying for posts at Citygate’s businesses and that training – including money-
laundering guidelines, treating customers fairly and product training – must be completed before a new member of staff comes into contact with customers.
Despite all the safeguards, Leigh-Dugmore described FCA-related complaints as “gold”.
“I have learned more from FCA complaints than from any other part of the FCA process. Learning where a customer has been aggrieved can support the ongoing learning of any business,” she said.
The challenges dealers face under FCA regulation
Jerry Page, F&I director, Mercedes-Benz Retail Group
Regulation is driving franchised dealers through a period of unprecedented change in their F&I business models, said Page, a former retail banking executive who joined Mercedes-Benz Retail Group 18 months ago in the newly created role of F&I director.
He said motor retailers must now put the customer first, not their own F&I earnings, and must monitor, measure and document the quality of the sales being achieved.
“In this environment, it’s a lot to do with how we sell things as much as what we sell,” he said.
The data, governance, and improved training and support demanded by the FCA regime is key to this, he said. All motor retail managers need to understand who the business has lent money to and on what basis.
Complaints recording is vital, and equally as important is CSI measurement, said Page.
“Supervision of regulated sales locally with site audits and checks and training is something we can’t get away from, we should do it, and it’s also a good barometer of whether the people selling our products know what they’re doing.”
He said product suitability is something the sales executive will have to think a lot more about. PCPs suit many buyers, but dealers must make the customer clear about the balloon payment and whether they will be able to deal with that, and make them clear about the return conditions from the start.
He recommended that for customers on PCPs or leases where there is contracted mileage, dealers could contact the customer half-way through to find out if the mileage is on track, giving them the choice of adjusting the contracted mileage mid-term or being sent a bill at the end if they are massively over. Having the discussion mid-way through may avoid a problem later.
“If you find people mis-selling things, you have to be confident you can switch them off. Ultimately, that’s how you show you’re serious about this.”
Managers also need to decide the balance between basic and commission in pay plans, because commission drives behaviour. They will probably need to stop rewarding sales staff on the sale of individual financial products and consider rewards based on customer satisfaction and feedback about the product presentation.
Two mainstream retailers broadly judged as providing good levels of customer service, John Lewis and Apple, don’t pay significant levels of commission, he said, and have satisfaction scores dealers envy.
What constitutes treating customers fairly?
Andrew Smith, managing director, Consumer Credit Advisory Services
The right blend of customer care for your business is the one brewed by you, Smith told the conference.
Comparing the development of a system that ensures FCA compliance through ‘treating customers fairly’ (TCF) to the creation of tea, coffee or beer from water, he said: “TCF is something you should take ownership of and live and breathe throughout the entire business.
“What’s important is how you, as a company, take the basics and put in your own ingredient, that touch of magic that makes it yours.”
Smith said fair customer outcomes were the key to the FCA’s TCF regulations and meeting the guidelines meant “evidencing” that their journey through the sales process had been well informed throughout.
“The best way to future-proof yourself is to make sure that you know very clearly what your customer needs, what the customer wants and why they want it. More importantly, document the whole process,” said Smith.
He said it was not enough to simply give the customer what he or she wanted: “You are the expert and if you don’t give the customer the right advice with regards to their budget or lifestyle, that won’t wash with the FCA.”
Smith took the FCA’s six key customer outcomes and revealed that staff training should be carried out and documented alongside evidence of any advice offered to customers.
Smith also suggested using customer outcome testing to highlight any shortcomings in the sales process or advice offered. He said: “Only by analysing data can you make changes that might need making.
“Ultimately, anything that you might be able to present to the FCA to demonstrate diligence and a transparent customer journey could pay dividends if they come knocking.”
Understanding and implementing the new GAP rules
Nick Franklin, head of partnership and distribution, Mapfre Abraxas
The challenge of turning what many saw as a threat into an “opportunity for the future” was central to Franklin’s overview of how dealers should approach changes to GAP sales regulations.
Franklin said those dealers who had engaged with their insurance partners to address the FCA’s September 1 GAP changes, setting in place systems and processes to ensure compliance and drive sales, had seen sales increase by 35% year-on-year in September and October 2015.
Others had seen sales of GAP decrease by about 15% to 20% over the same period, however.
Franklin encouraged dealers to re-assess how they approached GAP sales to ensure that a new clued-up breed of customer was aware of products before, during and after the sales process.
He said: “Their favourite phrase is ‘I know’. They know what car they want and what they’ll pay for it and they know what kind of finance product they want to take up.
“What they won’t know is what kind of insurance offer may be spoken about.”
Franklin said follow-up calls to test-drive enquiries was one way to ensure customers knew about GAP products before they entered the showroom, while the FCA regulations had promoted a system of following up a car sale with a GAP sales call.
Another suggestion was an integrated “insurance shop” on dealer websites, offering dealer-branded products online.
Franklin warned that the FCA regulations may drive down the cost of GAP for customers in future, by encouraging competition, but said that the key to dealing with this was to drive penetration from its current 30%.
He added: “We need to change with the times to transform what many of us saw as a threat into an opportunity for the future.”
From dealer to retailer – why we need a different approach to customer interactions
Spencer Halil, director, Alphera Financial Services
Ever faster change in the automotive sales industry means dealers have to be flexible and demand more of their finance suppliers, Halil told delegates.
The BMW Group-owned independent motor finance provider has been gearing its services towards customer fairness and satisfactory customer outcomes since 2013, according to Halil, who said “for us, this was a higher bar, which put us ahead of the regulation”.
Halil acknowledged the change in the dynamic between the customer and dealer and said the focus was now on providing a “retail” experience rather than securing deals face-to-face. He said developing an online presence that was a fully-integrated gateway to purchase was essential, as well as engaging via social media.
In terms of meeting compliance, he reinforced the need to put the customer first, especially when selling financial products.
Transparency and fairness were now key, he said, adding: “When you discuss the focus of your remuneration scheme, ask yourself who your scheme is designed to benefit. If it’s you as a business first and foremost, it isn’t going to cut it with the FCA.
“If it’s to benefit you as a business and keep your sales team motivated, it probably still won’t cut it with the FCA.
“It has to be designed, first and foremost, to provide fair outcomes for the customer and then, on the back of that, your customer should benefit, prosper and grow.”
Halil said the future focus of financial product sales had to be greater sales of lower value.
He also urged dealers not to let finance partners use FCA guidelines as a “stick to beat you with”, stating that both parties had a responsibility to ensure compliance and should work more closely than ever.
How to motivate staff in a regulated landscape
John Sylvester, director, P&MM Motivation
Regulations surrounding the sales of financial products should prompt a new incentives structure for sales staff, including factors such as customer satisfaction, company values and business processes, said Sylvester.
He said the industry had moved away from a “hard sell” to a “consultative sell” following the introduction of FCA regulations and urged manufacturers and dealers to adjust their incentive schemes to reflect that.
“In the age of employee engagement, factors such as customer satisfaction outcomes and compliance with regulatory bodies have become far more high profile,” he said.
“Rewarding sales people for high sales totals alone may even be counter-productive in this new world.”
Sylvester said it was the responsibility of dealerships and manufacturers to effectively communicate what they wanted from their employees and why, as well as prioritising the recognition and reward of FCA-compliant behaviour.
A new system of broader skill recognition should be considered in place of traditional large-scale incentives and rewards for non-management staff should be “achievable” so that corners are no longer cut to achieve targets, he added.
Sylvester also suggested that there was still a place for league tables in order to monitor success and drive productivity, but said they must comply with the new FCA-compliant parameters.
“There’s no reason why you still can’t ‘league table’ people on things other than sales and there are many programmes that we are starting to develop now with a far more ‘balanced scorecard’ approach, where scores are allocated for doing things right, for developing customer service, for recommending the right product. These balanced scorecards can be put into a league table and this is recognised as managing and driving performance.”
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