By Lesah Munyakazi, Compliance Consulting Analyst
The UK Financial Conduct Authority (FCA) has stepped up its enforcement actions in the car finance sector, resulting in investigations, fines, and increased scrutiny. In this article we consider the lessons that firms in the asset management space can learn from this swathe of regulatory action.
The regulatory action in the car finance sector stems from the FCA’s commitment to protecting consumers and promoting fairness across financial services. The regulator’s priorities around governance, transparency, and customer protection offer valuable insights that can help fund managers strengthen their practices and avoid regulatory consequences. In particular, the findings will be of interest to fund managers that are caught (either on a direct or indirect basis) by the recently introduced Consumer Duty.
Regulatory scrutiny and consumer protection are increasing
The FCA has been taking action to address issues in the car finance market, particularly around mis-selling, hidden charges, and unclear pricing practices. According to the FCA, they’ve received numerous complaints about car finance agreements, with many consumers expressing confusion over costs and commission structures. As a result, the FCA has initiated reforms aimed at increasing transparency and ensuring that consumers are treated fairly.
For fund managers, this heightened scrutiny in car finance should serve as a signal to strengthen their own compliance frameworks, particularly for those firms with direct or indirect obligations under the Consumer Duty. The FCA’s focus on preventing financial harm and ensuring transparency is not limited to one sector. Fund managers should proactively assess their products and communications to ensure they’re providing clear and accurate information to investors. This will help consumer confidence and reduce the risk of regulatory intervention.
Transparency and fair practices are essential
A key issue identified by the FCA in the car finance sector is the lack of transparency, particularly around costs and commission structures. The regulator has focused on practices where consumers were not clearly informed about the financial implications of their agreements, especially in cases where discretionary commissions were involved. These commissions often incentivised higher borrowing costs, which negatively impacted consumers.
Fund managers should follow this warning by ensuring that their own fee structures and product details are communicated transparently to investors, including any fees paid to advisors or distributors. Misleading or incomplete information can lead to consumer harm and ultimately attract regulatory scrutiny. Clear, comprehensive disclosure is essential to ensuring that consumers have a clear understanding of the investments they’re making, reducing the risk of consumer harm.
Governance and accountability must be prioritised
The FCA’s enforcement actions have exposed significant governance failures in the car finance industry. Inadequate oversight, weak internal controls, and conflicts of interest were common issues that led to consumer detriment. These governance lapses are a stark reminder of the importance of strong accountability structures within financial firms.
Fund managers must ensure they’ve robust governance frameworks in place. The FCA’s Senior Managers and Certification Regime (SM&CR) highlights the need for clear responsibility and accountability within firms. Senior managers must be aware of their regulatory obligations and actively work to maintain compliance. A strong governance framework helps mitigate risks, promotes ethical behaviour, and protects the firm’s reputation.
Effective risk management is crucial
Risk management failures have been a recurring theme in the FCA’s enforcement actions in the car finance sector. Many firms failed to responsibly manage credit risk and did not adequately protect consumers from financial exposure.
This is a key lesson for fund managers: effective risk management is critical to preventing regulatory breaches and protecting both the firm and its clients.Fund managers should regularly review and update their risk management frameworks to ensure they’re equipped to identify, assess, and mitigate risks in a constantly changing market environment. This includes performing stress tests, conducting scenario analyses, and monitoring market trends. By taking a proactive approach to risk management, fund managers can better safeguard their investors’ portfolios and avoid regulatory issues.
Technology and data governance require vigilance
As the car finance sector increasingly relied on technology and automated processes, the FCA raised concerns about the potential for consumer harm. Poor data governance and a lack of transparency in automated decision-making led to significant issues in this sector. Fund managers, who also depend heavily on technology for portfolio management, trading, and client engagement, need to ensure that their technology and data practices are well-governed.
This means having strong safeguards in place for data security, ethical use of algorithms, and transparent decision-making processes. As the FCA continues to focus on how technology is used across financial services, fund managers must ensure their systems comply with regulatory requirements and deliver fair outcomes for their clients.
Culture and ethics cannot be overlooked
Many of the FCA’s enforcement actions in the car finance sector were ultimately tied to cultural failings within firms. A business culture that prioritises profit over compliance and consumer welfare is often at the root of regulatory breaches. Fund managers can avoid similar issues by fostering a strong ethical culture within their organisations.
A culture that emphasises compliance and ethical behaviour can prevent regulatory issues from arising. This requires commitment from leadership, regular employee training, and a focus on embedding ethical standards into everyday operations. These practices should also be embedded into firms’ remuneration practices. Firms that prioritise compliance and ethics are more likely to build trust with clients and regulators alike.
Learning from others’ mistakes
The FCA’s enforcement actions in the car finance sector offer valuable lessons for all financial firms. Barclays’ recent legal challenge against a Financial Ombudsman’s decision related to potentially mis-sold car finance highlights the long-term consequences of regulatory failings. Fund managers can learn from these mistakes and take proactive steps to avoid similar drawbacks.
By conducting regular internal audits and compliance monitoring, reviewing compliance procedures, and staying up to date with regulatory changes, fund managers can build more resilient practices. Learning from the experiences of other sectors can help prevent costly mistakes and enhance a firm’s ability to navigate the complexities of the regulatory landscape.
What needs to be done?
Fund managers should look at what the FCA has prioritised in its enforcement in the car finance sector and compare how its practices compare to the FCA’s expectations, especially for firms with consumer duty obligations.
How can IQ-EQ help?
We’ve an experienced and expert team who work with fund managers of all sizes and in all asset classes to meet the FCA’s expectations for their compliance practices. Our compliance consulting team provide compliance health checks to fund managers and associated remediation projects.
To discuss the implications for your firm or find out more about the support available from IQ-EQ’s expert regulatory compliance services team, contact us today.
About the author
Lesah is a Compliance Consulting Analyst for IQ-EQ, based in London. Lesah has experience working in the events, technology, customer service and consultancy sectors and holds an Accounting and Finance BSc from the University of Kent.
