In a Dear CEO letter issued on 20 March 2024[1], the Financial Conduct Authority set out its agenda for the next two years for three portfolios in the consumer lending market: high-cost lending; mainstream consumer lending; and credit unions. The FCA says that A significant part of our supervisory activity over the next two years will be to test firms against our expectations [set out in the letter]. It’s therefore important for firms operating in these portfolios to consider how the points set out in the letter affect them, their customers and how they do business. This note sets out some observations on the letter.
1 Boards need to discuss the letter and be able to demonstrate the steps taken to address the risks covered in it. The FCA makes this point twice: once at the beginning of the letter and once at the end. Firms – and their boards and senior managers – should be prepared for the FCA to ask:
- How they approached discussing the letter;
- What evidence they relied on – e.g. a gap analysis – and how that fitted with the results of Consumer Duty and other monitoring work;
- What conclusions they reached and why;
- What action was taken in response and why;
- How the board reviewed action taken; and
- How the board continued to consider the points set out in the letter (which isn’t a once-and-done exercise).
2 The letter isn’t about embedding the Consumer Duty, and boards and senior management can’t put the letter to one side on the basis that they already have a programme of work under the Duty. The letter sets out the FCA’s updated view on the key risks of harm [it believes] Consumer Lending firms may pose to their consumers and the markets in which they operate. There’s overlap with the Duty but the letter is concerned with a wider range of points.
3 Firms are expected to provide consumers with greater access to affordable credit and this raises a number of points.
- Affordability – there’s considerable emphasis in the letter on credit needing to be affordable for consumers; there are eighteen references to ‘affordability’ and variants. On one analysis, there’s nothing new about that: affordability has been an area of focus for the FCA for many years. But there are some aspects of the letter to highlight here.
- Access to credit for consumers – accessibility to credit is a key theme of the first part of the letter. The FCA notes that a well-functioning market provides products and services that meet consumers’ needs, including products in the consumer lending market. Note that this is about consumers in general, rather than a firm’s customers. My reading is that the FCA wants to see greater access to consumer lending products for all consumers who need them, supporting consumers with their financial objectives as outlined in the Consumer Duty cross-cutting rules.
- The harms attached to unaffordable lending – although the FCA wants to see access to consumer lending products, access to unaffordable lending is harmful to consumers’ financial and personal wellbeing. In the letter, this leads to two points:
- Support to those declined credit – this is a form of consumer support, consistent with the Consumer Duty, but the FCA is also concerned that those declined will resort to illegal money lenders if they aren’t aware of other options. Firms are expected to consider ways they can support declined consumers.
- What alternative products can you offer and how can you offer more affordable pricing? – my reading of the letter is that the FCA is giving firms a clear steer that they should be developing more affordable products: We encourage you to think about what you can do to innovate and provide greater access to affordable credit. This goes beyond the usual points about providing financial education and tools to borrowers, along with flexible repayment options. There’s reference to leveraging technology to improve consumer journeys, streamline processes and reduce costs through efficiency and other savings, not with a view to increasing profits but to offer more competitive pricing.
- Pricing – although fair value and pricing appears as a separate risk of consumer harm in the letter it’s closely connected to the previous points. The FCA hasn’t given clear guidance on whether it considers the differential, risk-based pricing, common in the consumer lending market, is consistent with the Consumer Duty. Most of the FCA’s statements have been of the ‘Yes, but’ variety and the letter continues that approach. However, there are some indications that this is an area coming under review, probably linked to affordability, focusing on specific (more vulnerable) cohorts of consumers and linked to concerns about the cost of living and the impact of higher interest rates.
4 The cost of living and higher interest rates raise some specific points for consumers. In spite of media stories about inflation easing and expectations that interest rates will come down, the FCA is concerned about interest rates being higher than they were during the period of very low rates and the cost of living remaining high. There’s a link to affordability and the need for borrowing to be sustainable but there’s a focus on the impact on vulnerable customers and those with lower financial resilience. Also bear in mind that some consumers have drawn on savings to manage increased outgoings so far but those savings are being depleted. Firms will need to identify consumers who slip into vulnerability or have lower financial resilience at the time of application and during the term of the credit and support them sensitively and appropriately.
5 Firms are expected to support customers in financial difficulty. This isn’t a new message but it’s one the FCA is keen to repeat, referring lenders to the report on key findings from the Borrowers in Financial Difficulty project and emphasising the need for tailored support for customers.
6 The FCA remains concerned about complaints-handling and redress. These are topics the FCA has raised with portfolio consumer lending firms over the last few years but there are some points to note in the letter.
- Regular monitoring of consumer outcomes – the FCA says that it expects to see firms regularly monitoring outcomes in relation to complaints. Firms will need to consider how this monitoring work fits with outcome monitoring under the Consumer Duty.
- Notifying the FCA of systemic issues – another expectation is that firms will notify the FCA where systemic issues are identified, which requires:
- Systems and controls to be in place to identify issues;
- Root cause and wider analysis to establish whether issues are ‘systemic’; and
- Reporting to senior management and the board to allow them to understand what is happening and what needs to be done in response.
The FCA should almost certainly be notified when a systemic issue is identified, rather than waiting until a remedial action or similar programme has been settled.
- Establish whether remedial action is needed – this is something a firm should decide, rather than waiting to see if the FCA directs that remedial action should be taken. It could include a review of historic lending and review of other areas of the business that might be affected.
- Alignment with the Consumer Duty and the consumer support outcome – the FCA draws a clear line between these and how firms handle complaints and provide redress.
7 The FCA is concerned about illegal money lending and wants firms to help it tackle that. The FCA says that limited access to affordable lending has resulted in more people turning to unlicensed money lenders and other informal lenders. It wants portfolio consumer lending firms to be in a position to spot signs of illegal money lending and is offering training materials and support for firms through the UK Illegal Money Lending Teams. Firms are encouraged, in the letter, to explore these and that should be read as a direction to do so.
8 Domestic financial abuse is receiving FCA attention as a result of the increased risks of consumer harm due to cost of living pressures. Firms are asked to do the following:
- Be alert to the possibility of coercion to reduce foreseeable harm.
- Treat victim-survivors appropriately so they don’t experience further harm. There’s a steer from the FCA that this ‘may’ include how firms treat repayment of any debts and how they’re recorded (presumably, that there won’t be adverse entries on the victim-survivor’s credit file).
Implementing these will involve: staff training; updating processes, procedures and guidance; QA and other monitoring work; and adjustments to other aspects of systems and controls within the business and its governance.
9 Governance, effective oversight and risk management protocols are, of course, mentioned in the letter and they’re important points. One of the ten pages of the letter deals with these points, along with operational resilience, culture, SMCR, diversity and inclusion and non-financial misconduct. It might be tempting to see this as a sweeper section, mopping up a cocktail of governance topics and allowing the FCA to tick boxes. But these are points the FCA intends to review. Expect supervisory attention across these areas and how they intersect with other risks of harm discussed in the letter and with the Consumer Duty.
This article is intended to provide general information about recent and expected items that might be of interest. It does not provide or constitute, or purport to provide or constitute, advice relevant to any particular circumstances. Legal or other professional advice relevant to any particular circumstances should always be sought.
[1] See https://www.fca.org.uk/publication/correspondence/portfolio-letter-fca-strategy-for-consumer-lending.pdf