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What has happened?

In June 2022, the FCA issued a Dear CEO letter in which it explained that it had reviewed the key risks of harm for mainstream consumer credit lending (MCCL) firms, their consumers, and the markets in which they operate as part of its approach to supervision. This follows on from a previous FCA review, and a letter issued to firms in December 2020 (this letter is available here.) Please continue reading to discover more about this consumer credit compliance update.

In the June 2022 letter, the FCA:

• Provides an updated view of the key risks that MCCL firms pose to their consumers and the markets in which they operate
• Outlines its expectations of MCCL firms, including how firms should be mitigating these key risks, and
• Provides an overview of its supervisory strategy and programme of work to ensure that firms are meeting expectations and harms are being appropriately mitigated.

What are the key points of the letter?

Firms’ boards should carefully consider the extent to which their firms present the highlighted risks and the strategies that could be used to mitigate them. The FCA expects firms to be able to demonstrate the steps they have taken to address and mitigate the risks covered in the letter.

The FCA sets out as follows the key risks of harm to customers, and its expectations and strategy.

Treatment of borrowers who fall into financial difficulty

Ensuring that customers in financial difficulty receive fair and appropriate support remains a key priority for the FCA, which undertook a review of coronavirus-linked forbearance and how mortgage and consumer credit firms had implemented its tailored support guidance and published a report on this in March 2021. Following these initial interventions, it launched the Borrowers in Financial Difficulty project, which is a comprehensive programme covering a range of retail lending products. The work comprises a number of workstreams including a series of short surveys of c500 firms, deeper dives into specific areas of harm with a smaller selection of firms, and consumer research.

Inadequate assessment of affordability

In the December 2020 letter to firms with MCCL activities, the FCA highlighted that it wanted to see that firms offering credit cards and loans have compliant approaches to creditworthiness and relending. It also wants lenders to help deliver outcomes that ensure that consumers do not become over-indebted by being given credit they cannot afford, and that affordable credit is available to smooth consumption.

Firms should not be seeking to increase business by lowering the stringency of affordability checks. Previous FCA work undertaken has highlighted some areas of potential concern around how firms carry out affordability assessments and firms should consider the following points as they review their strategies for assessing affordability:

• Application of reasonable and proportionate checks – firms should be carrying out reasonable and proportionate checks on customers applying for credit and considering the level of risk posed to their customers. This means not using a standardised assessment of affordability applied generically across a broad customer base without regard to individual circumstances.

• Assessing customer income – where required, firms should be taking reasonable steps to determine or make a reasonable estimate to establish a customer’s income. This is particularly important as an assessment of income is a necessary component in an affordability assessment. For example, the FCA asks firms to consider the limitations of any income verification tools they use.

• Assessing non-discretionary expenditure – firms should take reasonable steps to comply with the requirements to determine the amount, or make a reasonable estimate, of the customer’s non-discretionary expenditure.

• Performing the affordability calculation – customers who are required to operate under extremely tight budgets or with an inconsistent income stream may not be resilient to income shocks; Firms need to be aware of their obligations that repayments should not “have a significant adverse impact on the customer’s financial situation”.

• Management information – firms should monitor the effectiveness of their creditworthiness assessment policy and procedures and consider what MI and metrics they could use to help inform this. Affordability MI is lacking if it monitors only whether a customer can maintain the minimum payments on credit card debts. The customer should not only be able to maintain obligations they have a contractual or statutory duty to make, but also repayment of the credit should not have a significant adverse impact on the customer’s financial situation.

Persistent debt strategies adopted are insufficient to enable customers to pay down their persistent debt within a reasonable time

In 2018, the FCA introduced a package of measures to help customers with persistent credit card debt. Since the introduction of the rules, firms have been engaging with a significant number of customers in persistent debt to discuss the options available to them to pay down their debt within a reasonable period. This remains a priority risk for the FCA, which will continue to review the effectiveness of these remedies.

Firms do not deal with their s75 Consumer Credit Act 1974 responsibilities appropriately

The impact of Covid-19 led to a changing economic environment which in turn led to a growth in s75 CCA claims. (This section allows customers who have made a full or part purchase of a product or service to recover the payment from their credit card provider and it applies to purchases between £100 and £30,000). A growing number of these claims lead to customer complaints, some of which are being upheld by the Financial Ombudsman. The FCA has requested data from firms on this matter to review how these claims/complaints have been handled and it will review this data for evidence that firms have met and continue to meet their responsibilities.

The following areas are of interest to the FCA, but it is not currently proposing specific pieces of work focused solely on these. It will continue to monitor for indicators of concern that point to possible customer harm, including where these impact on the risks identified above and will act where appropriate.

Changing ways of working and changes to business models potentially leading to poor customer outcomes

The FCA is seeing firms explore different ways of working and changes to business models, some of which it recognises as presenting opportunities for firms and may bring benefits to customers. Equally, it is aware of the potential for customer harm, Firms are increasingly moving towards more automated processes, which can be helpful to customers, although further enhancements to some of the new digital processes would be beneficial.

Governance and oversight – third-party oversight arrangements

Where firms use third-party arrangements/administrators, they should ensure appropriate oversight is in place to comply with the rules and guidance on outsourcing in Senior Management Arrangements, Systems and Controls (SYSC) and the Consumer Credit sourcebook (CONC).

Data-led regulation

As the FCA transitions towards becoming a more data-led regulator, it will increase its focus on data generally, including regulatory returns. The data received from firms helps inform the FCA on the potential for harm and identifies areas where the supervisory resources should be allocated. The transition towards automated data collection should enable firms to meet their reporting requirements and submit returns more easily

Raising standards

The FCA is proposing to introduce a new Consumer Duty that will set a higher standard of care that firms should provide to consumers in retail financial markets. Consumer Duty would require firms to act to deliver good outcomes for customers, including those in vulnerable circumstances. A second consultation with specific rules and guidance on the Consumer Duty is now closed and pending the outcome of this consultation, any new rules and guidance will be published by the end of July 2022.

Fair treatment of consumers with vulnerable characteristics

As set out in the FCA’s Guidance for firms on the fair treatment of vulnerable consumers, firms should pay particular attention to the needs of these consumers. All firms in the portfolio should achieve good outcomes for consumers with vulnerable characteristics by understanding their target market/customer base, having staff with appropriate skills and capability to recognise and respond to the needs of these consumers, and responding to consumer needs throughout product design and monitoring and assessing whether they are meeting the needs of consumers with vulnerable characteristics.

Environmental, Social, and Governance (ESG) strategy

The FCA has developed a refreshed ESG strategy, which sets out its target outcomes and the actions it expects firms to take to deliver these. Firms in the portfolio should play their part in helping the economy adapt to a more sustainable long-term future. Ultimately, a firm’s own governance and culture will be critical drivers and enablers of its performance on environmental and climate matters.

Diversity and inclusion is a key component of ESG in its own right and as an enabler of creative solutions to other environmental and social challenges. As set out in DP21/2, having staff and Board members from diverse backgrounds and experiences contribute to this. Diversity and inclusion in regulated firms is a priority for the FCA, and DP21/2 (which closed on 30 September 2021) and the accompanying Literature Review started the conversation on what more can be done to improve diversity and inclusion in financial services and set out the links between D&I and conduct risks. The FCA will be consulting on rules and guidance to promote diversity and inclusion in the financial services sector in 2022.

How can we help you?

If you’d like to know more about how we can help you with your consumer credit compliance or ESG arrangements, or any other regulatory compliance issues, our specialist team is here to help.

Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.