Building a resilient and efficient broker-lender channel
Summary
The asset finance industry is currently negotiating an agreement to establish a commonly agreed basic audit (review) for brokers which lenders can rely on wholly or in part to replace their own checks. This would leave the broker more time to focus on generating business for lenders.
One trigger for establishing a common review process is arguably the increased focus on long complex distribution chains which has occurred because of the introduction of the Consumer Duty for regulated transactions. A common review has already been agreed for motor dealers, for example, which ensures that dealers are compliant with Consumer Duty requirements. A common review process for brokers dealing with non-regulated transactions is an obvious next step.
Attempts to agree a common review process for asset finance brokers have been largely successful, however the trade bodies – Finance & Leasing Association (FLA) and National Association of Commercial Finance Brokers (NACFB) – have not agreed a single organisation to orchestrate the process.
It is possible that the industry will have two potentially conflicting sets of reviews, one run by the FLA and another by the NACFB. It is unclear whether the benefit of having two competing processes will outweigh the inefficiencies of having two organisations carrying out largely the same activities on behalf of brokers and lenders.
The recent Asset Finance Connect asset finance unconference brought together all relevant parties – brokers, lenders and trade associations – to discuss this ‘common focus’ in an open and transparent session.
Align a common purpose
There is a commonality of interest across the industry and a will to find a practical solution across all funders, brokers and trade associations for consistency, efficiency, and managing regulation and oversight.
Monitoring and oversight of these third-party relationships is a key requirement for any lender to ensure it proactively identifies and minimises risks, and demonstrates effective controls are in place. Effective oversight also has commercial benefits from the appropriate management of risk and the engendering of trust with partners and customers.
Lenders understand that standardisation and consistency in execution of the review process is needed with funders and brokers collectively agreeing the way forward.
For brokers, the time and administrative workload is increasing as the large range of funders each require slightly different levels of information and form filling. A lot of it is common information across different funders and therefore streamlining and standardising the information across the industry is a sensible move.
“It is important that we get it right,” according to the FLA and NACFB, who both recognise the significance of providing assurance for lenders and collaborating with one another for the benefit of asset finance brokers and lenders.
Both the NACFB and the FLA have developed broker oversight review processes that are aligned with Consumer Duty. There is close alignment between the NACFB and FLA review documents providing consistency and standardisation.
The FLA has also produced a ‘best practice’ for members which acknowledges the NACFB standards and shows a level of recognition and co-operation.
Along with the collaboration of the industry, the adoption of a single digital platform provides a potential opportunity to manage compliance across the distribution chain as well as standardising the lender-broker audit review. Technology would enable the review process to be a year-round activity and not just an annual review process.
Who will undertake the process?
While there is a close alignment between the NACFB’s and FLA’s review process – with 95% consistency – the more challenging issue is deciding which single organisation will undertake the review’s orchestration process – FLA, NACFB or an independent third party.
The NACFB has helped with the growth of brokers and, accordingly, brokers join the association on the back of regulation for assistance, support and advice. As an inclusive association, the NACFB have been working for 10 years on the review process and they recognise the challenges and see that consistency is needed through a kite-marked broker process. The association feels that their kite-marked assurance status provides sufficient auditing evidence for brokers.
However, the FLA and its members favour outsourcing the orchestration and auditing process to an independent third-party entity to either conduct the audit review process or, alternatively, audit the NACFB-assured kitemark process.
Lenders would also want transparency of data behind the kitemark, which would provide a starting point for lenders who need to complete due diligence. Many lenders’ compliance departments will still check the audit results to ensure that they comply with FCA regulations.
Lenders want an independent review process with collective transparency. They want the same single view of the broker – “a single version of the truth” – not an adapted review depending on which lender it is for, with full accountability and backing from the whole market. All lenders will need to be onboard with what works best for them, otherwise they will not use the review process.
From the unconference session and accompanying poll, it was generally felt that lenders favour the FLA or an independent body to complete the audit review process while brokers have no preference – they just want a common standardised review process to help ease their increasing oversight workload.
Issues to resolve
When assessing the work completed to date, it was felt that more questions need to be asked and more needs to be done before a common review is reached, including: what information is needed, how much detail do you need, how do you collect the data, how do you record it and report it, and who is going to pay for it?
With regards to remuneration costs for the process, the unconference poll found that lenders believe brokers should foot the bill, while brokers do not want to fund the process.
Many participants also feel that it would be good to standardise trading agreements and get rid of onerous clauses. However, at the current time the FLA has not seen an appetite from members to standardise other documentation.
The FLA highlighted possible issues with total industry collaboration citing asset finance brokers who are not members of any trade association or businesses who are happy to use their own systems and do not need or want an overseeing body.
Concluding remarks
There is a combined spirit and will within the asset finance industry to find a way forward to align broker oversight documents and processes, creating an efficient and standardised audit review.
The asset finance industry must keep communications open and continue to work together to streamline the audit review process and find a single entity to orchestrate the whole process rather than having two competing reviews running side by side.
One unconference participant concluded: “If we don’t look at regulation and standardisation ourselves in a coherent manner, then we will have unwanted regulation enforced on us.”
