FCA's Portfolio Strategy Letter to Motor Finance Providers

    Locke Lord Publications

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    On 20 January 2020, the FCA sent a Portfolio Strategy Letter (“Letter”) to all motor finance providers which it is responsible for regulating. This forms part of the FCA’s new approach to supervision, first implemented in 2018.

    The Letter confirms to such firms that they have been placed formally into the FCA’s portfolio (category) of a motor finance provider. The FCA confirm that the Motor Finance portfolio includes those who lend and those who provide hire models. The FCA also confirm that it includes providers of all sizes.

    The Letter sets out:

    1. the key risks the FCA considers motor finance providers pose to consumers and the market;
    2. the FCA’s expectation of the motor finance provider going forward to include mitigation of these key risks; and
    3. further information as to the FCA’s supervision strategy and programme of work.

    The FCA references its recent concerns and findings in its Motor Finance Review published in March 2019.

    The FCA confirms that:

    • it requires motor finance providers to maintain proportionate and relevant risk management, governance and oversight frameworks with effective systems and controls;
    • where motor finance providers are operating innovative or alternative services, they should ensure that their business plan submitted to the FCA reflects this accurately or is updated accordingly and re-submitted to the FCAl
    • that motor finance providers are operating within their expertise and the pressure of the market is not compelling them to move into areas of business for which they are not capable of delivering compliantly;
    • that stress testing is being carried out – the FCA mentions in particular motor finance providers ensuring that they have sufficient capital to cover any losses caused for example by a fall in used car prices;
    • that motor finance providers are aware of the proposed provisions of the FCA’s recent Consultation Paper in relation to discretionary commission models and commission disclosure which it published in October 2019 and are aware of the timescales for implementation of these proposals should the rules become finalized in Q2 of 2020;
    • that motor finance providers have implemented effectively the affordability rules that were updated in 2018 and are taking action where any issues are identified, for example where a motor finance provider is experiencing high or growing levels of arrears within its book;
    • that any regulatory permissions which are not being used by the motor finance provider are removed from their authorization by their contacting the FCA to cancel these permissions.

    The FCA have said that its next step will be to engage with motor finance providers proactively to assist them to complete their key priorities as set out in this Letter and that reactively they will be engaging wider with the industry as a whole. The FCA has said that it will be looking in particular at where motor finance providers are not putting the customer at the heart of their business and are instead still motivated by profits or their own interests such that customers are not being treated fairly. The FCA reiterates that senior managers will be held responsible along with the firm itself for any such failures.

    Our comments

    It appears to us that the FCA are expecting motor finance providers to carry out now a proactive exercise to identify any key risks within their business and any current failings to comply with FCA rules (both new and those on the horizon).

    The FCA have also indicated that they would expect to see the motor finance provider having in place some form of plan for any Brexit scenario that may occur this year and to have considered the potential risk to both them and their customers out of any such scenario along with proposals to address these risks.

    It is therefore our view that motor finance providers should be acting now to address the issues set out in the Letter. The Letter has clearly been sent out by the FCA as an advance warning to motor finance providers that the FCA will be looking into the industry further in the near future and that such firms should be acting now to ensure that they are acting in accordance with the FCA’s expectations as it has identified to them in the Letter.

    Need help?

    For further information or if you need support implementing the FCA requirements following the motor finance review, please contact:

    Joanne Davis | +44 (0) 20 7861 9010 | jo.davis@lockelord.com 

    Rachael Browning | +44 (0) 20 7861 9011 | rachael.browning@lockelord.com 


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