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What has happened?

In October 2022, the FCA issued a Dear CEO letter that sets out the regulator’s updated view on the key risks of harm that high-cost lending firms pose to their customers and to the markets in which they operate.

Firms are being asked to consider the degree to which they present such risks and to take the necessary steps to mitigate them. The FCA has also set out its strategy for this portfolio of firms, to ensure that firms understand the FCA’s focus, its expectations of them and the related actions needed in order to manage their risks and reduce harm to consumers.

What are key points of the letter?

It is considered by the FCA to be particularly important, given the rising cost of living, the increasing risk of financial hardship for consumers, and their difficulties in repaying debt, that firms proactively take steps to manage and mitigate the risk of poor consumer outcomes and provide the appropriate assistance to customers.

High-cost lender firms need to start preparing for the implementation of the FCA’s Consumer Duty, which becomes effective from 31 July 2023. See our blog post on this here.

The FCA expects firms in the portfolio to consider how the cost of living crisis is likely to impact consumers and to take the necessary steps to support consumers and mitigate harm. The expectations of firms and how they should support consumers were set out in the Dear CEO letter dated 16 June 2022 and the FCA expects firms’ management to be able to demonstrate the steps taken to address the risks covered in the current letter and in the letter of 16 June 2022.

The FCA wrote to credit brokers and high-cost lending firms in May 2022 about action that needs to be taken to ensure that their financial promotions are clear, fair, and not misleading. This is available at https://www.fca.org.uk/publication/correspondence/dear-ceo-ensure-your-financial-promotions-clear-fair-not-misleading.pdf.

The period since the last FCA portfolio letter has seen a change in this market, with a number of firms facing significant challenges as a result of poor historical lending practices. New lending in the high-cost credit market has halved since 2018-19, with significant contraction in high-cost-short-term credit, rent-to-own, guarantor, and home-collected credit lending. While supply has reduced in this portfolio, the FCA expects consumer demand for credit to continue at a time when individual consumers’ financial circumstances may be changing. In this environment, it is important that firms offering credit, do so responsibly. Consumers should be able to understand and afford their credit products. Some firms have completed reviews of their creditworthiness assessment policies and have resumed lending with higher standards, and the FCA expects firms to maintain these higher standards and to lend responsibly and provide appropriate forbearance to consumers who are in financial difficulty.

The FCA’s aim is that there should be a sustainable and effective high-cost lending market that serves customers well. To achieve this, the FCA will continue to seek to raise standards across the market, including through the implementation and supervision of firms under the Consumer Duty. It will look to increase its industry-level engagement to make sure expectations are clear and to be available to hear from the firms in this portfolio.

In addition, the regulator will continue to focus on responsible lending, particularly on how firms promote and describe their products and the information they give customers, firms’ approach to affordability including creditworthiness assessments, and sustainable borrowing for consumers. It will also continue to focus on the treatment of borrowers in financial difficulty, will look for improvement in root cause analysis on upheld complaints by firms to improve their processes, and, where necessary, address the drivers of those complaints and bring more focus to the supervision of firms on how Senior Managers execute their roles and the oversight of firms’ activities by their Boards.

The FCA’s views of the key drivers of harm in this field and its expectations of firms are set out below. Where the regulator identifies harms caused by a poor firm conduct, it will likely expect a comprehensive past business review to determine the remediation action required.

Sludge practices – consumers should be able to clearly understand the product they are applying for and have a clear expectation of what happens throughout the life of the product. Relevant, consistent, and accurate information should be easily accessible and should not be unnecessarily set out in multiple documents or clicks/links to access.

Affordability and relending – high-cost credit consumers are more likely to display characteristics of vulnerability, low financial resilience and poor credit histories. They often hold multiple credit products and juggle repayments, sometimes having to decide which priority debts to pay when they do not have enough for all. The FCA has significant concerns that firms do not consider when repeat borrowing behaviour may be indicative of underlying financial difficulties, and that a more rigorous creditworthiness assessment is required. The FCA’s experience in supervision work shows that firms’ assessments of creditworthiness are frequently inadequate, especially when relending

Forbearance – in March 2021 the FCA commenced a review of how lending firms, including firms in this portfolio, treat borrowers who are in financial difficulty. In its letter of 16 June 2022, it shared the emerging findings from an extensive programme of work looking at this. It expects firms to have already considered the content of the letter, taking early action where necessary, and to do the same again when the detailed findings are published later this year.

Complaint handling – the FCA remains concerned about the quality of firms’ complaint handling, especially complaints about affordability and relending. It has seen evidence to suggest that firms are failing to fully consider the DISP rules when dealing with complaints. Firms should be targeting an overall reduction in complaints and reducing the number of complaints referred to and upheld by the Financial Ombudsman Service. When firms undertake their own root cause analysis and where they find systemic issues, they should inform the FCA of their intention to undertake a review of their historic lending.

Innovation – the FCA recognises that firms may make changes to their business models which are innovative and that new firms with new business models may enter the market. It will monitor and review these to understand the potential drivers of harm within each.

Fair treatment of consumers with vulnerable characteristics

On 23 February 2021, the FCA published the findings from its work with retail banks on how they have implemented the Vulnerable Customer Guidance. Firms should consider and act on the guidance for firms on the fair treatment of vulnerable consumers and should also consider if the findings from the retail bank implementation review are relevant to them.

Environmental, Social and Governance (ESG) strategy

The FCA has developed a refreshed ESG strategy setting out target outcomes and the actions it expects to take to deliver these in the coming months. This is available at https://www.fca.org.uk/publications/corporate-documents/strategy-positive-change-our-esg-priorities.

Firms should regularly assess their activities to ensure they remain appropriate and consistent with the regulator’s principles and relevant FOS decisions and reflect the changes in economic factors such as the cost of living. This should result in fewer upheld complaints by both the firm or FOS and potentially fewer accounts requiring forbearance

How can we help you?

If you’d like to know more about how we can help you with your high-cost lending 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.