FCA rethinks plans to ‘name and shame’ firms under investigation

A contentious plan by the financial services watchdog to name companies it is investigating will be “fundamentally reshaped” following fierce criticism of the proposals from the industry.
Nikhil Rathi, the chief executive of the Financial Conduct Authority, told the House of Lords financial services regulation committee on Wednesday that the watchdog was overhauling its plans since eliciting a backlash with its original scheme.
“We are not going to move forward with proposals as constituted,” he told the peers. “If we move forward they will be fundamentally reshaped proposals.”
• FCA admits errors over plan to ‘name and shame’ firms under investigation
Rathi said the regulator planned to update the market on its plan “within the next week or so” and that the board of the authority will make a decision on the way forward in the first quarter of next year. Both Rathi and Ashley Alder, the FCA’s chairman who also appeared before peers, conceded that the watchdog could have done a better job of explaining the initiative to the City.
Alder said there had been “a degree of miscommunication” about how many companies would be named, while Rathi added: “This is not the case of us opening up the entire book of investigations, that’s never been the intention.”
Rathi said it would involve “two to three [firms], maybe in a busy year a little bit more than that” being identified by the FCA. Companies would also be given at least ten business days’ notice to make representations to the watchdog before they are named publicly, up from the one day originally proposed.
There has been uproar in the industry since February, when the authority revealed it wanted to move away from its longstanding policy of mainly keeping its investigations into specific companies a secret.
It has proposed naming firms that are the subject of its inquiries if it believes there is a public interest to do so, which it believes would act as a deterrent to wrongdoing and would encourage whistleblowers to come forward with information.
A more transparent policy would also align the watchdog with other British regulators, including the Serious Fraud Office and the Competition and Markets Authority, which typically announce when they have begun investigations.
Yet critics of the plan said it would result in the “naming and shaming” of companies and that this would be damaging, not least because the authority closes the majority of its investigations without taking further action. Alder said there had been “a particularly strong reaction” to the proposals, which were subject to a consultation that closed at the end of April.
Bosses at the regulator have since tried to reassure the industry about their plan. Alder admitted on Wednesday that the debacle was “probably not” the authority’s finest hour and said: “It could have been trailed a bit better beforehand”.
The City regulator has warned car loan providers to brace for a possible financial hit as it prepares the industry for a fresh flood of consumer complaints after a landmark Court of Appeal ruling.
The Financial Conduct Authority told motor finance lenders on Wednesday that they were “likely to receive a high volume of complaints” in response to last month’s court judgement, which has significantly broadened the scope of the growing scandal.
The authority said it was planning to give firms more time to answer these new consumer grievances and that lenders were also likely to need this breathing space “to consider whether they should make any financial provisions”.
Most motor finance suppliers have yet to set aside sums to cover possible compensation, despite mounting speculation that the car loans industry could face a multibillion-pound redress bill akin to the £50 billion paid out in the payment protection insurance scandal.
Gary Greenwood, an investment analyst at Shore Capital, a stockbroker, told clients that the FCA’s warning on provision preparations “could put a limitation on the ability of quoted firms with exposure to this matter to make distributions to shareholders in the near term until greater clarity on this matter is provided”.
Scrutiny of commissions that lenders pay car dealers and credit brokers for arranging motor finance has been increasing for years. In early 2021, the authority banned discretionary commissions, which were linked to the interest that consumers paid and therefore gave dealers and brokers an incentive to sell more expensive credit arrangements.
The regulator then shocked the industry in January by announcing a wide-ranging inquiry that is examining discretionary commissions paid as long ago as April 2007, after a jump in consumer complaints about the issue. It subsequently signalled in July that it was leaning towards forcing lenders to pay compensation, saying this outcome was “more likely than when we started our review”.
However, last month’s legal judgment has widened the problem facing lenders. The court found that any motor finance commission, either discretionary or fixed, was unlawful if it was not properly disclosed and consented to by consumers. It ruled that lenders were liable for repaying commissions that were not adequately disclosed. This sent shockwaves through the car loans market, with some firms pausing lending while they ensured their processes met these tougher standards, and pushed up analyst estimates for the compensation that lenders might be forced to pay.
Close Brothers and FirstRand, the companies at the centre of the cases considered by the judges, intend to appeal to the Supreme Court, which will have a final say on the matter. The FCA said on Wednesday that it will “write to the Supreme Court asking it to decide quickly whether it will give permission to appeal and, if it does, to consider it as soon as possible”.
Firms typically have eight weeks to respond to a consumer complaint. In the light of its inquiry the authority has previously introduced a moratorium that gives companies until early December next year to answer complaints about discretionary commissions.
It is now consulting on a plan for an extension for complaints about non-discretionary commissions at least until the Supreme Court decides whether it will hear an appeal.
In February, Lloyds Banking Group, a big supplier of motor finance, set aside £450 million to cover the costs of possible compensation, while in May Investec made a £30 million provision and FirstRand, which is South African and owns British car loans business MotoNovo, disclosed in September that it had earmarked £127.4 million. The motor finance arm of BMW has made a provisio of £70.3 million.