A recent speech by the FCA gave an indication of their approach to consumer credit. Below we have summarised the main areas that applicants for permissions should consider as they are likely to be relevant to future dealings with the regulator.
The FCA’s strategic objective for consumer credit is to ensure that the market functions well for consumers. The three operational objectives applied are to:
- secure an appropriate degree of protection for consumers
- protect and enhance market integrity
- promote effective competition in the interests of consumers
Having dealt with volume of administrative work associated with the hand over from the OFT the FCA are now more focused on the big issues that matter, and are getting better at identifying the risks to consumers in this market.
The FCA is now focused on good conduct. As such they are asking what a firm’s actions mean for consumers on the ground and challenging business models to ensure consumer outcomes are at the heart of all strategic decision making. This needs to be reflected, assuming it to be true, in business plans.
The previous regime for consumer credit was based on a requirement for licensed credit firms to comply with the requirements of the Consumer Credit Act and not to engage in unfair or improper conduct identified in OFT guidance. The OFT regulatory regime was largely reactive. This was the mandate it had. The FCA however has a bigger regulatory toolkit, and can measure firms against its principles, as well as the rulebook and the retained parts of the Consumer Credit Act. More resources are also available to carry out work and adapt to changing market practices. This can be seen in some of the recent highly publicised cases.
The FCA’s threshold conditions and high level principles for businesses such as ‘treating customers fairly’ seek to put the interests of customers at the heart of every firm’s business. Having good consumer outcomes at every stage of the credit journey is key.
- in advertising and financial promotions
- in product terms and conditions
- at the application stage
- in customer service during the life of the product
- post-sale problems, including debt recovery, debt management and complaints handling
The authorisation process is an on-going journey for firms. It is an important opportunity to demonstrate that they are exhibiting attitudes and actions that benefit customers and that they are central to a firm’s systems, business model and culture.
Four areas of consumer credit activity have generated the most alerts are: credit broking, debt management, debt collection and payday lending. Unsecured lending and credit cards come fifth and sixth. Firms operating in these areas in particular, will need to ensure they understand the culture of the new regime.
Since April the FCA have issued final notices against two firms who have had their applications refused. Seven firms’ bank accounts have been frozen to protect client money, fourteen firms have agreed to stop taking on new business and we have directed seven firms to appoint a “skilled person” to report on the firm’s compliance with FCA rules. The FCA are investigating a number of other debt management firms and individuals.
Issues of suitability cut across many financial services products. The FCA are interested in how firms assess not just a customer’s ability to repay, but also whether the credit they are offered is truly affordable.
Firms will need to demonstrate robust and measureable processes. An area of focus for the FCA includes its Principle 7 which states that firms should communicate with consumers ‘in a way which is clear, fair and not misleading’. Promotions that fail to do so can pose real risks and are therefore likely to come under scrutiny.
The FCA has reviewed consumer complaints relating to debt collection practices received since April 2014. While harassment made up the largest proportion, including the pursuit of disputed debts, the next largest group related to misleading practices, including the use of debt collection letters in a different name from that of the lender.
The FCA is clamping down on unaffordable lending and unfair treatment of consumers. They want to raise standards in the credit industry by making sure that there is a culture among firms of ‘doing the right thing’ for customers at every stage in the customer credit journey.
For all credit firms, good conduct means:
- transparent communication
- responsible lending based on proper affordability requirements
- treating customers in difficulty with forbearance
- providing suitable debt advice in the way the consumer wants to access it