In today’s fast-evolving financial landscape, the recent ruling on car finance commission disclosure has brought chaos to the auto finance sector with some dealers temporarily halting transactions. This is despite Discretionary Commission Arrangements (DCAs) being banned by the FCA since 2021, and the much talked about Consumer Duty which came into force in July 2023. This latest episode serves as a reminder: relying solely on ‘tick the box’ compliance is not enough.
The ruling effectively introduces a fiduciary duty which compels transparency on commissions. This “duty to act in the customer’s best interest” represents a shift in risk emphasis that compliance frameworks alone don’t capture. Whilst traditional regulatory guidelines set a clear baseline for known risks, along with clear compliance requirements, the outcome-oriented Consumer Duty leaves many firms frozen into inaction, lacking the required culture to comply not only with the letter, but the spirt of the law.
Most small and medium FS firms have (with good reason) adopted compliance-focused, ‘bottom-up’ arrangements aligned with the immediate need for FCA authorisation and licencing. Unfortunately, this compliance-centric approach often hinders the ability to foresee emerging risks. As a result, whilst these frameworks establish a basic control structure around known risks, they may miss critical external developments.
Here’s where the importance of a balanced approach to risk management comes into play, especially in a sector and environment where anticipation of the unknown becomes more essential every day.
Foresight in risk management ensures organisations don’t get blindsided by ‘known unknowns’ (or at least knowable unknowns) that sit just outside of their established frameworks. Forward-thinking risk governance therefore, isn’t just a nice to have; it’s fundamental to sustaining both long-term resilience and investor and customer confidence.
FS companies that solely target compliance can find themselves reactive rather than proactive. Enterprise risk management involves more than rolling up compliance elements into an overarching view. It includes using horizon-scanning tools to identify potential industry disruptors – like the recent court ruling – and integrating them into a broader risk strategy. This approach demands an integrated perspective on governance rather than compliance as a standalone and separate activity. Without it, organisations might face gaps in risk visibility, accountability, and preparedness for rapid regulatory shifts.
Many small to mid-sized FS firms find themselves building or retrofitting risk frameworks as they scale – a reactive strategy that can be costly and challenging to implement at speed. The potential impacts of the recent commission ruling likely went unassessed by many firms with compliance-centric risk strategies. Investors are now asking how many saw it coming, and whether organisations are prepared for future shocks. Good risk management is about navigating the unknown, not just controlling the known. The consumer champion Martin Lewis suggests “this has the potential to shake up more than just car finance”, and begs the question, what other sectors should be worried?
Change is challenging, particularly when it involves evolving a company’s risk culture. Firms that haven’t yet built out robust risk frameworks aren’t to be criticised – many have already identified the need for change, and are progressing through this journey. Effective risk management is about encouraging a proactive culture that sees risk as a driver for effective decision making, rather than an operational hurdle.
This latest ruling and example serve as a timely push toward establishing not only compliance arrangements, but a broader, strategically aligned approach to risk governance and management.
Discover how GOAT Risk™ is empowering FS firms to evolve in this direction at www.goatrisksolutions.com.
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