Consumer Duty implementation: key actions for mainstream consumer credit lenders

The FCA has published eight sector-specific Consumer Duty implementation Dear CEO/Director letters signposting areas for particular attention and reiterating messages around the regulator's expectations of firms under the Consumer Duty previously set out in its multi-firm review of sample implementation plans (which we discussed here).

One the of the eight sectors receiving a letter is the mainstream consumer credit sector. Firms in this sector should be:

• considering and discussing the Dear CEO/Director letter for their sector at board level to ensure that by end-July they are properly implementing the Consumer Duty and delivering good consumer outcomes.

• considering the Consumer Duty alongside key messages in the FCA's June 2022 Supervisory Strategy letter for mainstream consumer credit lenders. That supervisory strategy letter highlighted several key risks of harm to customers of firms in this sector, including treatment of customers who fall into financial difficulty, inadequate assessment of affordability and approaches to Section 75 CCA responsibilities.
• Firms should be viewing those issues and how they tackle them through the Consumer Duty lens. Under the Consumer Duty firms are expected to deliver good customer outcomes and take all reasonable steps to avoid foreseeable harm so it is no surprise that themes in the supervisory strategy letter are reflected in this month's Dear CEO/Director letter.

Key takeaways from the FCA's Dear CEO/Director letter for mainstream consumer credit firms engaging in credit card and personal loan lending activities are that, to ensure they are delivering each of the four Consumer Duty outcomes, these firms should:

Products and services

• ensure that for each of their products the target market is identified in sufficient detail. All lending products and services must be fit for purpose and meet the needs, characteristics and objectives of the target market. To be able to deliver good customer outcomes and evidence that they are meeting the Consumer Duty requirements firms need to define the target market with granularity.
• carry out regular reviews to make sure that products continue to meet the needs, characteristics and objectives of the clearly defined target market.
• take extra care if lending products are sold outside the original target market – eg to customers with poorer credit scores – as the products may not be suitable for those customers' needs and this could lead to poor customer outcomes. Consumers facing financial stress may be more susceptible to purchasing unsuitable credit products.

Price and value

• make sure that customers' characteristics are not being exploited. For example, where customers are effectively 'locked in' to a firm because they would have difficulty getting credit elsewhere – possibly due to poor credit history – the firm should ensure that it is not charging unjustifiably or unreasonably high fees or rates of interest.
• ensure that affordability assessments for both initial and increased credit are adequate and accurate so as to avoid customer harm. Firms should be delivering outcomes which ensure that customers do not become over-indebted by being given credit they cannot afford.
• where different prices are being charged to different consumer groups, ensure that there is for each group a reasonable relationship between the price they are paying and the benefit they receive over time. Each group must receive fair value.

Consumer understanding

• ensure that communications from the point of sale and throughout the life of the lending product enable customer understanding and facilitate informed decision making.
• ensure customers are supported in their understanding of the options available to them and in their decision-making, particularly at key decision points and/or where customers are more exposed to foreseeable harm, such as where they are:
• experiencing or anticipating repayment difficulties
• coming to the end of an incentivised rate
• repeat borrowing or looking to consolidate debt
• consider compliance with the existing prescriptive rules on information provision to customers in payment difficulties in the wider Consumer Duty requirement to deliver good customer outcomes. Communications need to support consumer understanding and good outcomes. If testing and monitoring indicate that communications are falling short on this, firms should adapt communications.
• consider carefully the characteristics of the customers who are receiving the communications, and what information those customers need to make informed decisions. Test to see how that information is likely to work and monitor how well it is working in practice. In drafting their communications firms should bear in mind that customers experiencing financial difficulty may be more susceptible to purchasing unsuitable credit products.

Consumer support

• review their Section 75 CCA claims processes, where applicable, to ensure that valid claims are being met and that there are no unreasonable claims process barriers which could lead to customer harm.
• Consider whether different channels – for example telephony rather than chatbots - or adapted practices may better support customers in financial difficulty.

Comment

The FCA expects sector firms to carefully consider the contents of the Dear CEO/Director letter and take any necessary steps to ensure that they will be Consumer Duty-compliant on 31 July 2023 for new and existing products or services.

Increasing pressures on household finances in the current climate of the rising cost of living and higher interest rates mean getting delivery of the Consumer Duty right is particularly important for mainstream consumer credit lenders. Customers' needs and characteristics could change as they experience financial stress; firms need to be ready to support customers struggling with personal debt or showing signs of financial difficulty.

While the FCA has placed some initial key risk areas of potential customer harms for the sector under the spotlight in the Dear CEO/Director letter firms in this sector should consider in detail all elements of the Consumer Duty in readiness for the July deadline.