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Consumer Credit – Perceptions of Regulatory Risk PDF Print E-mail
Tuesday, 15 December 2015

To verify and challenge the findings of the research we carried out in March this year, Compliancy Services has conducted a further study of the Consumer Credit sector using structured telephone interviews with individual firms. Overall, the findings support the conclusion that regulated businesses are far less prepared for what’s involved in managing their on-going compliance obligations than they believe they are.

Context of Research
Our experience has been that the majority of firms who’re new to regulation have been focussing on the short term challenge of achieving authorisation rather than their long term commitment to maintaining compliance. We wanted to find out how Consumer Credit businesses perceived that commitment and how they were getting on in terms of managing their compliance obligations.

Summary of Findings
In general, firms think they are more prepared than they really are. Encouragingly, it does seem that a significant number have taken the action required to comply. Levels of awareness that something needs doing are high, but many firms don’t yet understand how to meet their regulatory obligations even though they know there are some.

Regulatory Status
8% of authorised firms did not know if they had Limited or Full Permission. 15% of firms said they were authorised, but with permissions that, at the time of the survey, the FCA had not begun to issue (such as Peer-to-Peer and Debt Management) and 8% of firms did not even know if they were fully authorised. However, the significant majority were accurately aware of their regulatory status.

Regulatory Risk
61% of firms said they believed FCA regulation posed a low or very low risk to their businesses. It would be easy to overstate the risks, so this is probably a fair appraisal of the situation for many firms. For example, the FCA does not pose a significant risk to small firms that are secondary intermediaries.

Within this high-level statistic, however, there are some interesting anomalies. When we asked what risks firms saw as most significant, reputational damage was thought to be the biggest risk of regulation, followed by having key business providers (such as funders) withdraw support because of poor compliance. The risk of direct action from the FCA and FOS was much lower.

The firms most concerned about direct action from the FCA were those that we would expect to be most knowledgeable – i.e. pure finance firms (as opposed to secondary intermediaries) whose primary business is financial services. The other group of firms who showed concern about direct action were those involved in asset finance, which is not a high-risk sector in our view.

Readiness for Compliance
A key aim of the research was to investigate to what extent firms are ready to meet their on-going regulatory obligations. We’re concerned that firms don’t really know how to do many of the things they say they are already doing.

58% of firms say they implemented the right controls in advance of 1st April 2014. This would imply having a Compliance Monitoring Programme, training all their staff, reviewing sales processes and remuneration policies, etc. This is incredibly impressive if it is accurate.

Less than 6% do not know or have not started and 100% of firms say they will take steps to.

76% of fully authorised firms, and 45% of unauthorised firms, have an up-to-date Compliance Monitoring Programme.

Around 40% of firms developed their own compliance policies and procedures. This is also impressive as this is a specialist job, involving understanding the application of the FCA’s handbook and developing a compliance framework that’s fit for purpose. 10% have done nothing in terms of policies and procedures and 60% either used a third-party review of their own work or instructed professional consultants to source their compliance procedures.

65% of firms said they were doing an internal audit of compliance and 50% said they’d already had an external audit. That implies 15-20,000 audits across the industry already.

Only 40% of firms intend to change their remuneration policies. Is that because they are not concerned about the dangers of mis-selling by sales people under the pressure of incentive-based sales targets or because they do not use such targets?

70% of firms say they have already implemented file checks and 77% have implemented compliance training.

22% said they had specialist staff in place to deal with compliance monitoring, which implies at least 8,000 ‘specialist’ consumer credit compliance roles across the sector. 25% will allocate responsibility to an existing manager. 16% are still deciding how to handle compliance monitoring and 9% said they had, “outsourced responsibility for compliance.” This highlights a fundamental misunderstanding of the FCA regulations.

Encouragingly, 87% of respondents recognised that it’s important to sell compliantly, even if other answers demonstrate that knowledge of how to do so isn't universal.

Only 3% of respondents thought it unimportant or did not know the importance of maintaining management information relating to Treating Customers Fairly (TCF). Five times that number of people did not know the importance of compliant Financial Promotions, or thought it unimportant.

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