The FCA has published the results of a multi-firm review of consumer credit and non-bank lenders in which it looked to assess their approach to financial resilience. It chose firms with a wide range of business models, including some with several ARs, and looked to assess their financial resilience and approach to risk management, and the potential that any weaknesses had to cause customer harm.
Key conclusions include:
- while, generally, firms understood their business models well, some could not adequately identify risks that might affect the business, including failing to consider external risks – and, where this was the case, there was inevitable failure to have adequate systems in place to monitor and measure the risks;
- most firms had an underdeveloped approach to risk identification, assessment, monitoring and management, and had not built in early warning and other trigger mechanisms;
- many firms did not apply proper stress testing and most lacked adequate wind down planning;
- firms that had no financial resource requirement other than to have adequate resources had sometimes not considered what “adequate” should mean;
- some firms with several ARs had no quantitative assessments of the risks their networks posed – these firms also did not tend to have well articulated views of what levels of capital resource would be adequate;
- some firms relied too heavily on group monitoring processes;
- firms that had seen increases in arrears in loan repayments had rarely made appropriate increases in loan loss provision or had considered ring-fencing capital;
- small firms that were reliant on a single source of external funding had often not identified that this could be a risk; and
- while some boards had set clear risk appetites, many others had decided that the MIPRU requirement was lower than their risk appetite but had not articulated what they felt their requirement should be.
The FCA now expects all relevant firms to review their arrangements against its findings and make any improvements based on their assessments.