Consumer credit: Putting the customer first
17 October 2016
By Frank Brown
The Financial Conduct Authority (FCA) has been responsible for regulating consumer credit since April 2014. Over that time the regulator has moved from information gathering, through assessment and authorisation, to supervision and enforcement in some cases.
As Tracey McDermott, Acting Chief Executive of the FCA, said in April: “The industry won’t win public affection or, more importantly, public trust and respect, by engaging teams of lawyers to rake over dubious business propositions to see if they’re ‘doable’ or will ‘get by the regulator’”. The question you should be asking is: “are they right for the customer?”
The FCA have backed up their words with actions: 23 redress schemes already put in place, over £334m repaid to customers, and more to come. It is true to say that the transition to FCA regulation has brought a significant shift in the way consumer credit firms do business; for example, the number of loans originated by payday firms fell from 6.3m in the first half of 2013, to 1.8m for the same period in 2015.
But it isn’t just about the impact on niche areas of the lending business – all firms have had to consider their conduct risk management and approaches to the market. We’re talking, essentially, about a market-wide culture change. As Tracey McDermott put it: “Unless ‘doing the right thing’ becomes part of the DNA of all firms, unless the business frontline owns this change and buys into it, it won’t happen, no matter how many laudable mission statements we hear from those at the top.”
Change, though, brings opportunity. The firms that can successfully adapt to the new world will thrive; those that cannot will risk the cost and disruption of regulator attention.
So how are firms doing? From our experience, and from our insights into the FCA and its feedback, there are a number of areas where firms may still be ‘on a journey’ towards fully aligning to FCA rules and principles:
Governance and controls. The FCA has highlighted failures in governance as being at the heart of many poor customer outcomes. The Senior Managers Regime in the banking and insurance sectors was put in place to drive up standards and will be rolled out to the rest of financial services by 2018. But in the run-up to this, the FCA still expects all firms to be currently able to evidence and demonstrate that their senior management are taking action to properly manage conduct risk.
Effective affordability assessment. In a number of firms, current and historic affordability procedures may not always show evidence of sufficient scrutiny and challenge across all the relevant areas of creditworthiness, affordability and sustainability. There are signs that things are improving, but firms should bear in mind that there may be pockets of historic customer detriment within their back books which may need investigation.
Arrears handling. Firms' processes for handling arrears haven’t always been in line with the FCA's expectations, particularly when it comes to the application of forbearance and adequate income and expenditure assessment. Again, if policies and procedures have evolved over time, firms should be mindful of potential problems lurking in the back book.
We have prepared a summary of the key issues so please to contact me for a copy. I would be delighted to hear from you, so please do reach out with your comments and questions.
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