In a speech this week, the Financial Conduct Authority gave an update on the consumer credit sector.
Jonathan Davidson, Director of Supervision – retail and authorisations, looked at how things have changed since the FCA took over regulation of the sector in 2014.
How has the consumer credit sector changed since FCA regulation?
Davidson explored the way the industry has evolved, ‘from the new rules under which firms operate to cultural changes that have fundamentally altered the way that great parts of the sector work’.
He made it clear that positive change demand input not just from the regulator, but the industry itself, saying that ‘It has to be part of the culture of our sector that we all – regulator and regulated – take responsibility’.
He covered the history of lending as a business going back thousands of years – a market that has had to change over time to meet the needs of the society it serves.
The changing nature of credit
Today, ‘consumer credit is a highly developed and innovative market’, where consumers’ options – from peer-to-peer lending, through to cards and payday loans – are greater than ever.
In the UK, borrowing is particularly prevalent compared to similar European countries. Partly, this is due to the expectation of owning our own home. Partly, because debt is seen as more socially acceptable – and borrowing therefore more accessible – than in other cultures.
A lack of saving – the speech cites data showing that 16 million people in the UK have savings of less than £100 – exacerbates this, with loans and other finance used to cover emergency purchases.
How does regulation fit into this?
While the prevalence of credit is not a bad thing, the speech recognises that it drives a need for regulation. The risks created by an active borrowing market need to be managed.
The regulator’s three themes since taking over have been:
- Treatment of customers in financial difficulties, and
- The risks to consumers inherent in business models
Affordability covers not only a borrower’s ability on paper to repay a loan, but the potential levels of financial distress or discomfort they may experience in trying to do so.
Firms have few commercial incentives to create an environment that minimises this potential. Culture is therefore particularly important here.
Rules on affordability have been introduced, and the FCA has produced ‘common misunderstandings’ documents that help firms to understand its rules.
A review of affordability assessments has also taken place, with the results due to be published in the coming months.
Customers in arrears - fair treatment
A Thematic Review on the treatment of customers in arrears was carried out last year, showing that while there are some encouraging signs of change, a number of areas still show a real need for improvement.
Davidson made the point that culture is central to all of these issues, saying:
‘The basic principle is this: when firms make fair treatment of customers a core part of their business philosophy, fair consumer outcomes will follow. We expect to see firms acting on this principle.’
This is something we have looked at before; the Authority stresses the need for cultural, rather than tick-box, compliance in all the areas it regulates. Our blog on What is a culture of compliance and how can you achieve it, has lots of tips on how you can deliver this.
Business model risk
A firm’s business models are central to the risks it generates. This has also been a central theme of the regulator’s work since taking responsibility for the sector. High-cost, short-term loans were a particular focus, and a review of high-cost credit is planned.
The need for quality advice, focused on suitability, was highlighted. The Authority recently carried out its Suitability Review – you can read more here about the rationale behind the review and some of its findings.
This is particularly important when it comes to vulnerable consumers, another issue covered in the speech. The FCA’s Future Mission document, released last year, identifies the treatment of vulnerable customers as a core area of focus.
These consumers may be particularly drawn to high-cost borrowing, due to a lack of avenues open to them. Firms have a responsibility to treat these customers fairly and give them the information they need to make the best decisions.
This will help to avoid unsuitable use of debt.
With debt markets increasingly interrelated, and consumers likely to have debt that covers a variety of sources – loans, cards, pay-day borrowing and others – questions of affordability and ability to repay become more complex.
Significant progress has been made...
Davidson believes that the industry and the Authority ‘should all be proud of the significant progress we’ve made, collectively, in driving up standards in the sector’. 35,000 firms have been authorised since the FCA took over regulation in 2014, a process which saw that ‘many firms fundamentally improved their models, leading to better outcomes for consumers as a result’. Firms ‘are now much more aware of our expectations and act on them accordingly’.
...but there is no room for complacency
As the constantly-evolving nature of the sector shows, though, neither regulator nor regulated can afford to be smug. Consumer credit gripes still make up a large proportion of the latest FCA complaints data.
Davidson concluded by saying that ‘both industry and regulator face a number of important issues that we need to address together’.
The Authority aims to be ‘forward-looking and pre-emptive’, and expects ‘industry culture to follow suit, with consumers always at the heart of decision-making’.
Consumer outcomes – rather than minor breaches – are the Authority’s focus. As Davidson explained:
‘Firms who show that principles like TCF are integral to their business will generate far less regulatory concern with us than firms who focus on doing the bare minimum to see what they can get away with.’
Firm culture drives behaviours and conduct. Davidson mentioned the need for firms to comply with the Senior Managers and Certification Regime, which will hold individuals to account if things go wrong for consumers.
Working together to achieve better outcomes
Davidson closed by saying that continuing to deliver the improvements the sector needs will need the co-operation of the regulator and the industry.
In an ever-evolving market, keeping on top of consumer needs, good practice and compliant cultures will be vital in driving an industry where consumer outcomes are at the heart of business decisions.
You can read more about how to ensure you are treating customers fairly in our TCF FAQs. They cover all the key issues you need to be aware of when designing processes, communications and behaviours, and are free to download here.