FCA supervisory strategy for mainstream consumer credit lenders: Preparing for difficult times ahead

Hogan Lovells

Hogan Lovells

The FCA has published a portfolio letter on its supervisory strategy that it has sent to Mainstream Consumer Credit Lenders (MCCLs). This follows on from its previous review of the MCCL portfolio, and its letter to MCCLs in December 2020. The FCA appears to be taking stock of its supervisory strategy for MCCLs after the last two years which, as it points out, have been dominated by the impact of the COVID-19 pandemic. Its updated view of the key risks that MCCLs pose to their consumers and markets contains some familiar themes, but viewed through the lens of the current cost of living crisis and ongoing uncertainty about the longer term macroeconomic picture. Published against the backdrop of pending wider consumer credit reforms, the portfolio letter will give MCCLs more immediate food for thought as the FCA expects them to reflect on the highlighted issues with a view to challenging how their firms operate.

Rising cost of living

In an echo of its Dear CEO letter to lenders on 16 June (to which it cross-refers for more detail), the FCA’s latest letter reiterates its concerns about the likelihood of a growing number of consumers with low financial resilience, and the juxtaposition of this with a higher demand for credit. There is another reminder of the need for firms to follow the FCA's Principles, Rules and Guidance, including its Tailored Support Guidance and its Vulnerable Customer Guidance. Like other firms, MCCLs should also ensure they have robust governance arrangements that can effectively identify, manage, monitor and report the risks they may be exposed to such as sudden increases in the volume of consumer contacts and data protection and cyber resilience risks.

FCA believes its new strategic approach will help it respond more quickly to changing market needs

The FCA refers to its recently published three-year Strategy and latest Business Plan and explains how, by focusing more on end outcomes, and working across sectors and markets, it is better able to respond to new issues and macroeconomic challenges. According to the letter, its new, more adaptive approach to allocating resources and monitoring its performance will make it more agile and help it respond more quickly to market needs. For more on the FCA's Strategy 2022-25 and Business Pan 2022/23, take a look at this Engage article.

What key risks of harm to customers has the FCA identified in the MCCL portfolio?

  • 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. It refers to its Borrowers in Financial Difficulty project and reminds MCCLs of its commitment to publish its overall findings in the second half of 2022.
  • Inadequate assessment of affordability: In its December 2020 letter, the FCA highlighted that it wanted to see that those who offer credit cards and loans have compliant approaches to creditworthiness and relending. Its expectations have not changed. Firms are reminded that they should not be seeking to increase business by lowering the stringency of affordability checks, especially given the context of the wider economic background that currently prevails. Some areas of potential concern around how firms carry out affordability assessments are:
    • The need to carry out reasonable and proportionate checks in accordance with the rules and guidance in CONC and not use a standardised assessment of affordability applied generically across a broad customer base without regard to individual circumstances.
    • Where required, firms should be taking reasonable steps to determine or make a reasonable estimate to establish a customer’s income, as per CONC. For example, the FCA asks firms to consider the limitations of any income verification tools they use. Likewise for non-discretionary expenditure. 
    • Firms are reminded of their obligations under CONC 5.2A.12(5) that repayments should not "have a significant adverse impact on the customer’s financial situation".
    • Firms should monitor the effectiveness of their creditworthiness assessment policy and procedures and consider what management information and metrics they could use to help inform this. 

In line with the FCA’s objective to become a more data driven regulator, lenders’ approach to assessing affordability is a key area where additional data may be sought. The FCA will be monitoring the market for signs of inadequate affordability assessments. 

  • Insufficient persistent debt strategies: Since the introduction of the rules on persistent credit card debt in 2018, 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 and it will continue to review the effectiveness of these remedies.
  • Firms not dealing with their section 75 CCA responsibilities appropriately: The impact of COVID-19 has led to a changing economic environment which in turn has led to a growth in section 75 CCA claims. A growing number of these lead to customer complaints, some of which are being upheld by the FOS. The FCA has requested data from firms to review how these claims/complaints have been handled. Where it has concerns, it will act.

Additional areas of interest

The following areas are of interest to the FCA, but it is not currently proposing specific pieces of work focused solely on these:

  • Changing ways of working and changes to business models potentially leading to poor customer outcomes, eg in relation to automated processes, use of Open Banking to assess affordability, BNPL.
  • Where firms use third party arrangements\administrators (TPA), they should ensure appropriate oversight is in place to comply with the applicable rules and guidance on outsourcing in SYSC and CONC. This should include ensuring appropriate outcomes for customers arising from the actions of TPAs. These outcomes remain the responsibility of the lender.
  • Regarding the FCA's transition to becoming a more data-led regulator, it reminds MCCLs that Principle 11 includes a requirement for firms to deal with their regulators in an open and co-operative way. This includes co-operating wherever possible with respect to ad hoc information requests, such as surveys. The FCA also expects all firms in this portfolio to be aware of the requirements and guidance in SUP 15, and to submit notifications as required. This should be when an issue or event is identified, and firms should not wait until resolution to notify the FCA. The FCA flags that its new data strategy will be published in the coming months, which aims to make it more effective by harnessing data, converting it into actionable intelligence and improving its real time understanding of what’s currently happening and, crucially, of emerging risks.

The letter also reminds firms of the upcoming new Consumer Duty, and there is another reference to its Vulnerable Customer Guidance. In addition, on its ESG strategy the FCA states that firms in the portfolio should play their part in helping the economy adapt to a more sustainable long-term future. In relation to this, the letter mentions a consultation on rules and guidance to promote diversity and inclusion in the financial services sector which the FCA is planning to publish in 2022.

Next steps

The FCA expects firms to be able to demonstrate the steps being taken to address and mitigate the risks it covers in the letter. 

Please get in touch with any of the listed contacts if you would like to discuss the potential impact for your business.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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