All out of proportion?

The cost of compliance has meant many consumer credit firms have spent more time and energy focussing on audits and oversight, rather than growing their businesses. Has proportionality been lost over the impact of soaring expenditure?

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The cost of compliance for consumer credit firms can be most starkly reflected in the case of Motormile Finance (MMF).


MMF, a debt purchase and collections firm, has spent more than £2m on staffing costs, modern systems and legal fees to become compliant since 2013.


Most of this was spent on requirements as part of the section 166 order which prompted a skilled person review of the business in February 2015.


Its chief executive Denise Crossley gave an exclusive interview to Credit Strategy in which she outlined the full compliance costs that the business has had to endure.


Crossley said: “The whole of the section 166 process inclusive of the skilled persons’ fees, their lawyers, our additional lawyers and other professional fees equates to around £900,000.” 


These figures exclude the balances of £414m face value debts that MMF had agreed to write off and the customer redress in cash payments of £154,000.


MMF said during the last two years it has spent around £250,000 in strengthening teams, letting go of staff members who no longer had the required skills and replacing them appropriately. It also estimates to have spent more than £150,000 on a new IT system.


Crossley said it would be true to say the firm had spent more time and energy focussing on audit and compliance rather than growing the business in 2015 and the first quarter of 2016.


She added: “However, we have continued to buy books almost monthly throughout this period from our existing relationships, but under the watchful eye of the regulator and had to spend an average of £10,000 per book for each due diligence sign off, as this was the FCA’s primary focus in terms of debt purchasing.”


Amid a race to gain compliance, MMF said it has been extremely costly and challenging at times because of the FCA intervention.


In its own release about the skilled person review of MMF, the FCA said it had found failures in the debt purchaser’s due diligence and collections process.


The most recent figures from the FCA show there have been a total of 25 redress schemes put in place since 2014 resulting in just over £782m of redress to consumers.


In August 2016, the FCA authorised the firm after being satisfied its poor practices were historical and major changes had been implemented.


Crossley said: “Working so closely with the FCA has provided MMF with a very clear understanding of what is expected under the new regulatory regime, in comparison to how debt purchase was executed previously. I can assure our clients that MMF has embraced this.”



Skilled person reviews

Skilled person reviews appear to be by far the most expensive form of imposed regulatory costs.


If the regulator becomes suspicious or believes there is misconduct happening within a business it can ask a firm to provide a report by a “skilled person” under section 166 of the Financial Services and Markets Act.


These independent reviews are typically carried out by accountancy firms to gather historic information or evidence for determining whether enforcement action may be appropriate.


They can also be used to obtain expert analysis for the purpose of seeking remedial action.


Although the regulator said this is not the only tool it has when responding to an issue with a firm. 


For the first nine months of 2016 there has been only one skilled person review commissioned to a consumer credit firm.


However, there has been a total of 29 skilled person reviews commissioned to these firms between January 2014 and September 2016.


There are no statistics available to highlight the costs consumer credit firms have incurred when carrying out a skilled person review.


However, the Prudential Regulation Authority (PRA) has statistics for these costs incurred by financial services firms as a whole.


From April 2013 to March 2014 33 skilled person reports were commissioned costing financial services firms a total of £11.4m.



Market impact

As at June this year, the last time official figures were published by the FCA, there was a total of 31,000 authorised consumer credit firms.


There are figures that speak volumes about how much the industry has shrunk or contracted in the time taken to authorise these companies.


Nearly 1,750 firms have either had the door closed by the FCA or withdrawn applications - largely among the latter due to the cost of authorisation.


The FCA also estimated during the summer that it will have authorised 35,000 firms by the end of the process in 2017.


John Lamidey, policy advisor at the Consumer Credit Trade Association (CCTA), said: “My own personal view is that the majority of firms that either never even applied for FCA authorisation, or dropped out of the authorisation application process, have done so simply because the regulatory requirements mean they can no longer trade profitably.”


In a speech earlier this year, Jonathan Davidson, director of supervision - retail and authorisations at the FCA, said the authorisation process is used to ensure the market works fairly, drive up standards and keep out the firms that don’t meet these standards.


He explained how a non-executive director at a consumer credit firm told him the authorisation process had been a “nightmare” but added that his firm was now in the best place it had ever been as a result of the process.


In reports for Credit Strategy John Ricketts, vice present of the Credit Services Association (CSA), has often remarked that the authorisation task has been long and arduous. Although in August this year, the CSA reported that 110 of its members had secured full authorisation.




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