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FCA strategy for consumer lending

Philip Salter
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The Financial Conduct Authority (FCA) recently published a letter for the Consumer Lending Market. This effectively sets the strategy that Roma Pearson, the FCA Director of Consumer Finance has set herself for the next 2 years. This letter combines, for the first time, the three portfolios: High Cost Lending, Mainstream Consumer Credit Lending and Credit Unions. This is a vast spectrum of firms but as the letter makes clear the FCA sees sufficient similarity in products, consumer base and potential harms posed to set out a market strategy. The context is obviously the cost-of-living crisis for the consumers in this market, many of whom are already struggling with debt. There is little praise for how the market has been operating and many challenges for how firms need to step up.

The focus remains firmly on:

  • lending responsibly and sustainably,
  • price and fair value,
  • supporting consumers in financial difficulty,
  • more effective complaint handling including to identify learnings,
  • controls to mitigate the risks of crime, and
  • the need for robust governance and effective risk management.

While many of the issues raised will sound familiar, this is a serious read. The strategy remains to ensure firms lend responsibly and deal fairly with those in financial difficulty but this is now underpinned by the Consumer Duty with particular emphasis on fair value. The letter also talks about the really tricky issue of access to credit, emphasising that unaffordable credit is harmful so for some consumers more credit is the wrong answer. As well as asking firms to think about how they could support declined customers there is clearly a desire to transform how this market works for those excluded from it.

The letter reminds firms of the importance of affordability and credit worthiness assessments, and that the FCA has taken action against firms who have poor assessments in place or rely on relending to sustain their business model.

On price, there is an acknowledgement that consumers with a higher credit risk may pay a higher price but with a warning that this must still provide fair value when compared to the benefits. There is also an emphasis that price caps are a maximum rate and firms must be able to demonstrate fair value, which may mean lower rates than the cap are required.

The letter sets out explicitly the FCA’s expectations on firms identifying and reporting financial crime, particularly, in relation to illegal money lending. There is also a reference to the role firms have in combating domestic financial abuse. Firms may not have done sufficient work in this area.

The letter concludes with a useful summary of the significant policy changes heading for this market and a repeat that the Consumer Duty is aimed at delivering higher standards than in the past. You should be able to demonstrate ongoing monitoring of customer outcomes through your governance structure and MI. There is an opportunity to refine your approach in the lead up to your first Consumer Duty annual report by the end of July 2024. Work on this should already be well underway and while not all will be the finished article they must be fit for purpose and don’t be surprised if the FCA asks to see it.

Actions firms should be taking/next steps

This letter gives a strong sense of the FCA’s priorities. They are broad and challenging in the current financial environment. Firms should ensure that they have a strong handle on the issues highlighted and they should be reflected in firms’ compliance monitoring and internal audit planning and commissioning of external reviews. We stand ready to support you if you are unsure of meeting the regulatory expectations in any area or want an external health check.