On 27th June 2022, the Financial Conduct Authority (“FCA” or the “Regulator”) published a portfolio letter setting out its regulatory strategy for Mainstream Consumer Credit Lenders (‘MCCLs’). The MCCL portfolio consists of firms providing regulated unsecured overdrafts, loans or credit cards.
The letter builds upon the theme of a ‘Dear CEO’ letter published earlier in the month, which called for lenders to support those consumers affected by rising costs, by drawing attention to the potential harm which may be caused to consumers by MCCLs.
In its portfolio letter, the FCA sets out those key risks of harm which it has assessed are most likely to arise out of MCCL’s activities. The Regulator details not only its views in relation to these risks, which it has grouped into four priority areas of focus, but also the expectations it places on firms and the actions which it intends to take.
The letter for MCCLs picks up along the pathway envisioned by the Regulator’s December 2020 letter of the same focus. In that letter, the FCA set four priority areas over which the June letter provides an update, and which are addressed below.
Treatment of borrowers who fall into financial difficulty
Against a backdrop of higher inflation and increasing interest rates, the FCA is committed to ensuring that customers in financial difficulty receive fair and appropriate support. That the number of customers facing difficult circumstances is projected to increase was a key driver behind the regulator’s Borrowers in Financial Difficulty (“BiFd”) project. As part of this work, the FCA has been monitoring, gathering insight, and acting where it has identified concerns at individual firms.
At the centre of this initiative is the Tailored Support Guidance (“TSG”) for mortgages, consumer credit and overdrafts. The TSG sets out the regulator’s expectations with regards to how firms treat borrowers which fall into financial difficulty and is intended to support firms to treat consumers fairly and to help them get back to a more stable financial position.
The TSG requires firms to deliver specific outcomes which include providing appropriate forbearance, developing and supporting a proper understanding of customer’s finances, recognising and responding to vulnerability, and ensuring an appropriate level of training and guidance is available across the firm to ensure that customers are provided with the help they need.
Consumers may be at greater risk of harm if they have characteristics of vulnerability, which may limit their ability or willingness to make decisions or choices or to represent their own interests. Firms must be able to demonstrate that they have a framework in place, which is proportionate to their business, and which promotes the interests of vulnerable customers and supports staff in recognising and responding to such customers appropriately.
More broadly, a core tenet of the incoming Consumer Duty is that higher standards for firms mean better outcomes for consumers. Therefore, firms need to be able to demonstrate how they are implementing the systems and controls required to deliver these outcomes for customers in financial difficulty.
The FCA has undertaken surveys of approximately 500 firms, and has acted to address its concerns where it is assessed that firms have not adequately demonstrated proper implementation of the TSG, or appropriate support for borrowers in financial difficulty.
Inadequate assessment of affordability
Highlighted in the FCA’s December 2020 letter, a priority for the Regulator is ensuring that MCCLs are undertaking comprehensive and compliant creditworthiness and relending assessments. Targeted at preventing customers from entering into unmanageable levels of debt, the FCA expects firms to demonstrate the systems and controls which they have in place to ensure that customers from undertaking credit that they cannot afford.
In its work, the FCA has highlighted a number of key considerations for firms reviewing their systems and controls. Specifically, this includes assessing whether the firm is conducting reasonable and proportionate checks which include both an assessment of the customer’s income and their non-discretionary expenditure. Firms should then be able to demonstrate how this information is used in the affordability calculation and how the results of these calculations are recorded, monitored, communicated through Management Information, and used to inform subsequent policy changes. As the FCA strives towards becoming a more data driven regulator, it will seek to better understand and utilise this information.
Persistent debt strategies
Introduced in 2018, the FCA’s persistent debt strategies represent a package of measures designed to support customers in persistent credit card debt. The FCA recognised that, as of their inception, firms have been engaging with a significant number of customers in persistent debt to discuss their options and support with paying down their debt within a reasonable period.
This remains a priority for the Regulator which will continue to review the effectiveness of these remedies.
Handling claims and complaints
The impact of the pandemic has contributed significantly to the evolving economic environment which has, in turn, resulted in an increase of s.75 Consumer Credit Act 1974 (“£CCA”) claims.
A growing number of s.75 CCA are leading to customer complaints, with some being upheld by the Financial Ombudsman Service (“FOS”). The FCA is in the process of obtaining data from firms regarding the handling of these complaints, and has emphasised that firms are still expected to uphold their obligations in relation to these complaints. Where firms are found not to have adequate processes in place for the handling of complaints, the FCA will take action.
The Regulator’s broader focus
The elements addressed in these letters build upon the commitments made by the FCA in its Business Plan and Strategy which centre around:
- reducing and preventing serious harm;
- setting and testing higher standards; and,
- promoting competition and positive change.
While the FCA will prioritise those risk groups outlined above, it will continue to monitor for other consumer risks of harm, and, where appropriate act to address these.
When MCCLs assess the potential for harm which their business activities may pose, there are a number of additional areas which should be taken into consideration.
- review proposed changes in the ways of working, which should be assessed for any unintended negative consequences that they may have on customers.
- review their ability to demonstrate that they retain proper oversight of third parties and that outsourced providers continue to comply with the standards of customer service and compliance which is expected of the regulated firm.
Lastly, the FCA has expressed its expectation that MCCLs play their part in helping the economy adapt to a more sustainable long-term future. The Regulator highlighted that a firm’s own governance and culture will be critical drivers of its performance on environmental and climate matters, and reminded firms to confirm their climate-related disclosure requirements.
How fscom can help
The FCA expects firms to reflect on the issues highlighted in the letter and to use these to challenge how they operate. Firms must be able to demonstrate, in light of these key risks, that their systems and controls continue to ensure consumers are treated, communicated with, and have their complaints handled fairly.
Our experts can help you to assess your compliance with these requirements in a way that is proportionate to your business.
Our consumer credit service offering includes:
- Gap analysis: We can support you with the provision of a gap analysis which covers not only the four priority areas outlined above, but the firm’s broader compliance and regulatory readiness. Our work includes review and analysis of governance and oversight arrangement, risk managements and core business functions.
- Remediation: We can support you through the remediation process by helping you to understand any opportunities for development, your obligations with regards to your regulated activities and regulatory risk profile, and supporting the implementation of new policies, systems, or controls.
- Workshops and Training: Under the new Consumer Duty and in-line with the priority areas identified, the FCA expects firms and their staff to be able to demonstrate how they are working towards securing the best possible outcomes for their clients.
We can support with the provision of training and workshops covering the following areas: Consumer disclosures, Fair treatment of customers, Treating vulnerable consumers fairly, financial promotions, and complaints handling.
Get in touch today to find out how we can be of service to your business.