Martin Kisby, Director of Compliance, EQ Credit Services reviews the key areas of focus for the consumer credit sector following the speech by Nisha Arora, Director of Consumer and Retail Policy at the Financial Conduct Authority (FCA).
The pandemic has highlighted the importance of the consumer credit sector to the wider economy as well as those in financially vulnerable circumstances. The past 18 months have also imposed considerable change on the sector, with their standard products having to flex and adapt to rapidly introduced government legislation to protect consumers.
As we head into a winter of increased inflation, surging energy prices, COVID booster shots and rising cases, it is expected that even more will require budgeting and debt advice, and additional financial support from consumer credit providers.
Teamwork and leading from the front
In their speech, the FCA recognised the vital role that consumer credit companies play, and is keen for all industry stakeholders - firms, consumers, debt advice agencies, and the regulators - to be involved in developing the sector to deliver the right outcomes for consumers.
The FCA is also making several changes of its own with a three-step plan to change the way they regulate the market:
- To increase innovation – by using data and technology to enable faster and more decisive decision making
- To become more assertive – by maximising use of their powers and developing partnerships with other bodies
- To adapt more quickly – by changing their approach to become more agile and responsive to changing circumstances
What hasn’t changed is the determination by the FCA to put the right customer outcomes at the heart of their plans and the key objectives the FCA has set out for consumer credit providers are:
- That all borrowers should have access to affordable products that meet their needs and don’t lead them to become over-indebted
- That everyone should be able to make informed decisions, and firms need to treat borrowers fairly – especially when they fall into difficulty
- That firms are encouraged to compete vigorously and innovate to serve their customers better
These objectives are of increased importance as we emerge from the pandemic with more customers than ever in vulnerable circumstances, who may be at greater risk of harm and need more help to make decisions and manage debts.
An outcome driven Consumer Duty to set new standards
While encouraged by the many examples of good practices, there is still enough evidence of poor practices for the FCA to introduce their new Consumer Duty for all financial services firms, designed to “set higher expectations for the standard of care that firms provide to consumers.”
As market offerings become more complex and digitalisation increases, the speed of transactions, consumer decision-making becomes even harder. The consumer duty, with its outcomes focused approach, aims to eradicate any products that are poor value or not fit for purpose, the provision of unacceptable customer service, and communication failures with consumers that prevent them truly understanding what they’re signing up to.
To meet the new criteria for regulatory approval, firms will have to have a greater focus on consumer outcomes in product development and service provision. They will need to test what happens when consumers use their products and services – if credit products are causing financial harm or aren’t delivering the right outcomes, firms will need to fix this.
Buy-now-pay-later firms under the microscope
The FCA agree with Chris Woolard that buy-now-pay-later is a product that can have important benefits for consumers as it develops and becomes more widespread. However, the products also carry risks and the potential for harm to the most vulnerable consumers.
Following the Government’s review, the FCA plan to follow up with their own consultation on the relevant FCA rules, to set clear standards for firms to protect consumers relying on these products.
The FCA are keen to stress that they are using their existing powers to protect buy-now-pay-later users – for example, scrutinising marketing materials and the way these products are promoted - but accept that more can be done in this area. When necessary they also call on consumer protection powers outside of the Financial Services and Markets Act regime, which can be applied to unauthorised firms where poor practice is identified.
Proactive support for those in financial difficulty
The FCA is keen to keep continued focus on outcomes for credit borrowers in financial difficulty and have set out several objectives for firms in this area. They want to make sure that lenders provide borrowers with the support they need in the following ways:
- Early engagement between consumers and firms when problems arise
- Appropriate help for consumers that meets complex needs and takes account of vulnerable circumstances
- Consistent and appropriate reporting to credit reference agencies
- Good quality debt advice and debt solutions where borrowers need them
The importance of these initiatives and the guidance issued at the start of the pandemic remains, and the FCA is encouraged by the tailored approach firms are taking to customer vulnerabilities.
Whether this is through flexibility on forbearance, increasing customer facing capacity, and the adoption of automated and digital approaches.
In line with their more collaborative approach, the FCA is encouraging firms to continue to engage with them constructively and is also seeking the input of consumers and other stakeholders about their experiences.
High-cost short-term credit still facing challenges
Complaints to the Financial Ombudsman Service about unaffordable high-cost loans have grown markedly in recent years and are being upheld at a rate above 60%. This indicates that firms have been giving expensive loans to people that they shouldn’t have on a significant scale, with potential for real harm. The FCA are also looking closely at outcomes for consumers in this area, recognising the need to balance consumers’ access to credit, with the need to make sure it is affordable and sustainable for them.
This sector has undergone considerable change even before the pandemic, with some high-profile firms leaving the market or getting into difficulty, in large part because they have built up significant liabilities for redress to consumers. This has meant reduced levels of lending to some consumers, because a fair, responsible and sustainable market shouldn’t see credit being offered to people who can’t afford to repay it.
The FCA make no apology for setting and maintaining high standards of lending and conduct to protect consumers, especially where those consumers are at considerable risk of harm; and they want to ensure the conditions are right for firms to innovate and compete to serve these consumers – and consider what may be standing in the way of firms lending or entering the market.
There is also a need to understand how regulation affects firms in those markets and the supply of credit to customers, such as an understanding of borrowers’ needs, what products they use and the alternatives, and the impact that borrowing has on them over time. This could include alternative provisions by the commercial sector, and policy initiatives such as the Government-backed pilot programme for no-interest loan schemes.
Working together to deliver for consumers
Consumer credit is a huge and diverse market, populated by firms of all sizes, one that is changing rapidly through innovation, technology and evolving consumer needs.
All firms, consumer and debt advice organisations, government and the FCA - need to continue to respond quickly and work together to make sure it works well for consumers as they continue to face economic uncertainty and financial pressures.
The FCA want to regulate to encourage innovation, competition and high standards of conduct and consumer protection, especially for those most at risk and will maintain their close focus on consumer outcomes and bring to bear a more innovative, more assertive and more adaptive approach. The FCA will continue to prioritise credit work, to help build a responsible, sustainable market that delivers the best possible outcomes for the millions of borrowers who use it every day.