The FCA has published a “Dear CEO” letter on its strategy for Consumer Lending. The letter focuses on three of the lending portfolios within the market – high-cost lending, mainstream consumer credit and credit unions. It finds many of the same challenges and priorities for all these firms.
The FCA has, over the past two years, found many instances of:
- failings in creditworthiness assessments
- relending, when firms rely on this to sustain business models;
- firms providing products designed to promote persistent use;
- poor support for customers in financial difficulty;
- ineffective complaints management; and
- failures to meet redress liabilities.
The letter sets the FCA’s supervisory priorities for the next two years, which are:
- ensuring access to affordable credit – with the emphasis on ensuring it is affordable, which includes how firms can help customers for whom credit it not the appropriate option;
- responsible and sustainable lending – firms must take account of characteristics of vulnerability. The FCA is still concerned about use of sludge practices and other tactics that put barriers in the way of customers getting the support they need. It encourages firms to use AI, but stresses they must test their models and ensure that responsible lending is at the forefront of any changes to customer journeys and support. Relending must also be affordable, carried out responsibly and be sustainable over time;
- reasonable pricing – firms must work to ensure that a price paid for a product or service is reasonable compared to the overall benefits. This is a particular focus because of rising interest rates in the credit card and personal loan markets;
- support for customers in financial difficulties – firms need to provide tailored and appropriate forbearance for customers, even when the firm itself is under pressure;
- effective handling of complaints and redress – the FCA is keen to see firms do more to look at trends and root causes, and consider whether they need to undertake remedial action of historic business;
- mitigating financial crime – the FCA wants firms to be alert to consumers who may tell them they have loans from unregulated lenders, and be sensitive to victims of domestic financial abuse;
- robust governance – poor governance and inadequate senior manager oversight has been a root cause behind several drivers of harm, and the FCA reminds firms that effective monitoring is key;
- setting and testing higher standards – with the Consumer Duty at the forefront. The letter reminds firms of the upcoming annual assessment and notes that the FCA may ask to see the Board report. It also warns firms to expect further communications on closed books in the run up to the 31 July implementation date for the Consumer Duty in relation to them;
- policy changes – the FCA expects consultation on moving further parts of the Consumer Credit Act into its rules later this year, and is also working on reviews of HCSTC and embedding the changes that allow credit unions to carry out a wider range of regulate activities.
The FCA says a significant part of its supervision will be on testing firms against its expectations, and it will particularly be looking for outliers. It reminds firms to ensure their entries on the Register are accurate and up to date.