It has now been a few months since the Financial Conduct Authority (“FCA”) began its probe into motor finance practices, specifically the use of discretionary commission arrangements. Whilst that work continues, the FCA’s findings so far prompted the regulator to issue a “Dear CEO” letter on 12 April 2024 (Dear CEO letter: Maintaining adequate financial resources) to firms impacted by the review concerning the need for them to ensure that adequate financial resources are maintained at all times.
As is so often the case with these communications from the FCA, the Dear CEO letter serves as a useful reminder to firms not within the motor finance sector and gives insight into what the regulator is focusing on.
A key take-away is that the term “adequate” needs to take account of the prevailing circumstances of a regulated firm. For example, while each firm should continue to examine its own specific circumstances on an ongoing basis, FCA expects that this will include planning for any additional operational costs arising from, for example, increased complaints and, where applicable, to meet the costs of resolving those complaints.
Here are some of the wider messages from the Dear CEO letter.
1. Adequacy Assessment
FCA expects firms to undertake a periodic adequacy assessment of whether a firm’s financial resources are adequate. The assessment should be proportionate to the scope and intricacy of the firm’s regulated activities. It should also take into account any risks, liabilities and potential redress requirements to which the firm may be subject to. The key here is that the assessment needs to be forward looking in nature. This may involve reducing the dividends a firm would ordinarily pay out to its shareholders.
2. Accuracy of Financial Statements and Regulatory Reporting
Continuing in a similar manner, accounts and reporting must take account of potential liabilities both incoming and unexpected. FCA goes as far as to encourage the use of external auditors where necessary. FCA points out that in some cases, Financial Ombudsman Service (“FOS”) decisions and the costs associated with the FOS, court judgements, legal costs and monies awarded to claimants should be a main consideration here. Finally, attention should be given to the resources needed to remediate any failures and poor practices identified by FCA as a result of the review. Firms should be ready to bolster their compliance practices, and this will take time and financial resources to implement.
3. Disclosures to the FCA and Stakeholders
FCA’s Principle 11 requires firms to deal with the regulator in an open and cooperative way. This extends to disclosing matters the FCA would reasonably expect to be notified of, in some cases negative or detrimental disclosures. This prevents FCA finding out from the market rather than being told by the firm, as per SUP 15 in the FCA Handbook . In compliance with PRIN 11, and in relation to financial resources, firms should notify the FCA where they anticipate that they will not have adequate financial resources. This should be done before any action is taken by the firm that could impact on the consumer or capital positions. Further, firms that find themselves involved in litigation should also notify FCA of this. In addition, disclosures should also be made to group stakeholders where applicable to ensure there is an understanding of the nature of the FCA’s intervention and any impacts on the firm.
4. Dealing with Complaints Appropriately
All authorised firms should have adequate complaints management, handling procedures and policies. Firms must take immediate action to ensure complaints are dealt with swiftly and fairly. FCA will keep a close eye on how firms are dealing with complaints in accordance with the DISP rules of the Handbook. This also extends to data subject access requests a firm could receive from a consumer.
The Dear CEO letter gives advance warning to firms in the motor finance sector and beyond who may be asked to submit additional data to prove they have addressed the need to maintain adequate financial resources and the other matters.
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