PLEASE MIND THE GAP
BROKER OVERSIGHT

Addleshaw Goddard

Lenders’ being subject to regulatory obligations for oversighting their credit brokers are nothing new – the OFT “Credit brokers and intermediaries guidance” in 2011 set out the expectation for lenders to take responsibility for the actions or omissions of their brokers and take reasonable steps to satisfy themselves that business associates (including brokers) weren’t engaging in unfair business practices or acting unlawfully. Since the FCA became responsible for regulating consumer credit in April 2014, lenders have had obligations under CONC to oversight their brokers and ensure they have the correct permissions. Broker oversight has therefore been a key regulatory focus for some time, but never has it been a hotter topic or indeed more apparent that there is a gap between what lenders are doing in practice and what the FCA expects of them.

To stretch the public transport theme of this article’s title – we have waited some time for a communication from the FCA on what their expectations are for oversighting credit brokers and where they see issues in the market, and now lots have arrived at once.

FCA LETTERS AND BROKER SURVEY
The FCA’s Dear CEO letter to Third Party Finance Providers and their Credit Broker Portfolio Letter both give an insight into where the FCA sees potential problems for lenders and their brokers. In life monitoring and controls, ongoing training of intermediary staff, broker involvement in the customer journey and clear customer communications are particularly prevalent themes.

In addition, the FCA has recently kicked off their credit broker survey, which it appears will be used to gather information to help the FCA understand to what extent brokers hold the incorrect credit broking permission or in fact hold unnecessary permissions.

REGULATORY CHANGE
Sitting alongside this direct intervention and communication with the market are a number of other regulatory initiatives with implications for credit brokers.

One outcome of the Woolard Review will be the bringing of exempt buy now pay later lending within the regulatory perimeter, which it is anticipated will lead to up to 60,000 new firms carrying out the regulated activity of credit broking. A large proportion of those firms will be retailers, some of whom will have very little historic or sophisticated understanding of what operating in a regulated space entails.

When the FCA finalises its approach to the new Consumer Duty in 2022 we may also see a widening of the broker oversight regulatory “gap” for some firms, as the FCA’s current proposals are broad enough to re-inforce the obligation on lenders to take responsibility for their intermediaries and the way they interact with customers.

COMMISSION DISCLOSURE
Finally, the FCA’s new rules in CONC earlier this year imposed additional commission disclosure requirements on credit brokers. Lenders and brokers alike have been grappling with how best to comply with those requirements. That has been further complicated by the recent Wood & Pengelly Court of Appeal judgment on commission disclosure. That follows a long line of previous commission disclosure cases, but it has really served to focus the industry’s minds on the potential lowering of the bar for borrower claims – on the basis that failure to disclose commission satisfactorily to a borrower may give them the right to either raise a claim for the amount of the commission payment or in certain circumstances argue that the underlying loan itself is rescindable.

WHAT DOES THIS MEAN?
Lenders should review their terms of business agreements to ensure they impose clear obligations on the broker in respect of commission disclosure and indeed its compliance with other applicable regulatory requirements. In addition, lenders should revisit their in-life monitoring of brokers’ adherence to the terms of their broker agreement, for example by carrying out regular sample customer assurance reviews to ensure brokers are satisfying their contractual obligations in practice. A robust oversighting process will help lenders mind the gap and avoid finding themselves positioned too close to the edge of the FCA’s regulatory requirements.

Toby Davis
Managing Associate
Addleshaw Goddard