Analysing the impact of credit broking remuneration models at point of sale
By total volume, credit broking firms represent the largest population of firms regulated by the FCA. The regulator is keen to understand how inter-firm remuneration, such as commission, is impacting customer outcomes within the consumer credit sector. The FCA’s Thematic Review considered whether such arrangements are leading firms to prioritise remuneration to the detriment of customers.
The FCA’s review involved:
- 1,208 interviews with consumers who had recently applied for credit;
- Details of commission arrangements for 349 firms; and
- Interviews with 32 credit brokers.
The FCA found no evidence that commission arrangements are generally resulting in consumer harm. However, there were a small number of issues identified, which the regulator is taking up with the individual firms.
The regulator also found that harm may be occurring for other reasons and outlined its findings across the different types of broker reviewed.
Most finance brokers did not receive commission on credit products and for interest-free products, lenders typically received a subsidy. The regulator’s sample found the same proportion of firms subsidised their products as received commission.
The majority of finance brokers surveyed used a single lender. Of those that earned commission and offered more than one product, the most frequently sold was not that which offered the most commission. Some firms were also actively seeking to move finance providers to offer greater value for customers.
The FCA’s research into consumers’ experience of buying credit products was generally positive, regardless of whether commission was paid or not. However, those who had a salesperson visit their home were more likely to feel pressurised into a purchase. Firms are reminded of the FCA’s guidance (FG18/2) on staff incentives, remuneration and performance management, which highlights the impact these practices can have on the sale of finance products.
Many of the loan brokers surveyed rely on credit broking for a significant proportion of their income, but client suitability appears to be the main driver of how information is presented to them, rather than commission.
Of the brokers surveyed, many only offered products where they had a commercial relationship with the lender. The regulator found no evidence that this was likely to result in reduced consumer choice, in fact many customers were able to access better value products than if they had approached lenders directly.
Following the review, the FCA will continue to monitor credit brokers as part of its ongoing approach to market supervision, tackling poor practice and consumer harm where it is uncovered.
FCA publishes research update following the Financial Advice Market Review (FAMR)
The FCA has published the latest consumer research following implementation of the Financial Advice Markets Review (FAMR) recommendations to improve access to financial advice and guidance for consumers. These findings follow the baseline measures published in June 2017 and will be used to determine whether consumer behaviour has changed as a result of the FAMR interventions.
This recent temperature check produced a number of findings which help inform and update the initial results of FAMR using a mixture of quantitative and qualitative research through consumer surveys.
Overall, consumers appear satisfied. Over the last 12 months more people obtained regulated financial advice (up by 3.2 million) and were generally satisfied with the level of service they received and the price they paid. However, as with results in 2017, 15% of consumers surveyed mentioned affordability as a barrier to accessing financial advice.
Less than 1% of consumers whose circumstances suggested they would benefit from financial advice found it difficult to access an appropriately-qualified adviser. There is little evidence of consumers shopping around for the best price and service – 89% use the same firm for all their needs, with only 9% having changed firm over the last 12 months.
Whilst there is increasing awareness of automated advice services, the growth in use of such services was limited. The future rise of automated services is hard to predict but, according to the research, it’s likely that automated advice will simply replace traditional advice in the years to come.
Meanwhile, through the Retail Mediation Activities Return (RMAR), the FCA has reported data on advisory firms showing a steady increase in the number of staff – up 3% since 2016 and a growth in earnings for financial advisers by 22%. More information can be found in the FCA’s Data Bulletin No.13, which we reported on in June this year.
The regulator’s next step is to undertake a full review of FAMR measures in 2019, with a post-implementation review expected to be published in 2020.
FCA publishes Decision Notice for brokerage firm
The regulator has published a Decision Notice for a brokerage firm that failed to organise its affairs responsibly and effectively to ensure potential instances of market abuse could be detected and reported between January 2013 and August 2015.
Whilst the firm agreed with the Notice and has accepted liability, it has referred the issue to the Upper Tribunal as it disputes the penalty imposed. The Upper Tribunal will now decide what action, if any, the FCA can take.
Before August 2015, the firm had manual oversight of its trading via its Direct Market Access but as the business and its customer base grew, the manual oversight approach was inadequate. However, the firm claims that post-trade surveillance from brokers could be relied upon to fulfil this obligation.
The FCA states that under Principle 3, a fine of £409,300 should be imposed. Due to the nature of the firm’s brokerage services and ability to access trade under Direct Market Access, it should have considered the risk of its clients committing market abuse. Whilst the firm acknowledged the need for a robust surveillance system as early as November 2014, it wasn’t in place until August 2015.
The FCA has made it clear that tackling market abuse is a priority and this is the first case under a new process where firms/individuals can agree to elements of the case against them to be eligible for a discount up to 30% on any penalty imposed.
Regulator responds to super-complaint made to CMA
On the 28th September the FCA issued a statement regarding a super complaint made by Citizens Advice to the Competition and Markets Authority (CMA).
The regulator expressed particular concern over the treatment of long-term customers in comparison to new customers. The FCA has been aware for some time of incentives and offers not being applied to long-term, often less engaged customers, as reflected in its work on cash savings and mortgages and in its 2018/2019 Business Plan.
To continue this work, the regulator is beginning to look at how the general insurance industry models pricing, with a focus on motor and home insurance customers.
Andrew Bailey, FCA Chief Executive commented:
“We expect firms to look after the interests of all customers and treat them fairly, whether they are new or long-standing. It is important to get the balance right so that existing customers do not miss out on the benefits of competition and innovation, including when they purchase or renew their general insurance products.”