The FCA's letter of 20 March 2024 to the high-cost lending, mainstream consumer credit lending and credit unions portfolios (the Portfolio Letter) signposts priority areas of potential harm in the consumer lending markets that will be in the regulator's supervisory spotlight over the next two years. A strong Consumer Duty thread runs through the Portfolio Letter, as do the linked themes of affordable and sustainable lending and consumer vulnerability.

The FCA has identified these priority areas of supervisory focus from failings it has found in recent supervisory action, changes in the consumer lending markets over the last couple of years (including increased demand for credit and borrowing, and higher annual interest rates on credit cards and personal loans), and the expectation that going forward the credit demand will grow at a time when consumers are impacted by other financial pressures.

In this blog we distil the key points in the Portfolio Letter for consumer lending firms in the addressee portfolios.

The priority areas and what firms should focus on


The FCA will focus closely on the following harms:

  • 1. Access to affordable credit

    Firms should adopt good practices around declining credit for affordability reasons.

    The Consumer Duty guidance encourages firms to signpost useful sources of reliable and relevant information (such as MoneyHelper) to declined customers, using their knowledge of the financial objectives of the customer and the reasons why the customers are declined.

    The FCA also encourages firms to be innovative to widen access to affordable credit. Firms might consider signing up to the Government's No Interest Loan Scheme initiative so loans under the scheme can be an option for eligible customers who have been declined for interest-bearing loans but can nevertheless repay small sums.

    Good practice includes firms:

    • offering transparent and competitive interest rates.
    • providing financial education and tools to borrowers.
    • implementing flexible repayment options.
    • using technology to improve customer journeys, streamline processes and reduce costs.
  • 2. Responsible and sustainable lending

    At a time of increasing consumer vulnerability and decreasing financial resilience due to continued cost of living pressures, firms, more so than ever, need to make sound affordability and credit-worthiness assessments.

    Firms should:

    • have adequate creditworthiness assessments in place.
    • not rely on re-lending to support their business models.
    • not provide products designed to promote persistent credit use.
    • only agree refinances where they believe it is not contrary to the consumer's best interests.
    • eliminate any sludge practices (unreasonable barriers).
    • test the effectiveness of any AI and open banking for lending decisions.

    Firms' Consumer Duty obligations should be front of mind and all lending must support good customer outcomes. Firms need to act in good faith, prevent foreseeable harm and support consumers with their financial objectives.

  • 3. Fair value products and services

    Firms must focus sharply on their Consumer Duty obligations to ensure that their products and services provide fair value. This is a key area of focus for the FCA in an environment of increasing interest rates in credit card and personal loan markets.

    Other fair value priority areas for the FCA are higher interest loans not subject to the high-cost short-term price cap as well as loans where the rates cap does apply. Firms providing the latter should challenge the fair value of those loans and not assume that setting the rates at the rate cap is the end of the matter. There must be a reasonable relationship between the price customers pay and the benefits of the loan and that could mean rates below the rate cap. Firms should regularly review pricing and fees as part of a wider fair value assessment.

  • 4. Support customers in financial difficulty

    Firms should review the FCA's post-pandemic Key Findings Report to ensure they are providing effective support for their customers in financial difficulty, taking account of consumers' individual needs and providing appropriate tailored forbearance.

    Firms should ensure that:

    • staff are properly trained to manage calls.
    • appropriate forbearance options are available to support consumer needs.
    • communications are clear.
    • account is taken of the Tailored Support Guidance.
  • 5. Effective handling of complaints and redress

    Firms should regularly monitor outcomes and notify the FCA where systemic issues are identified. The regulator expects firms to take reasonable steps to resolve issues and consider whether remedial action is required.

  • 6. Systems and controls to mitigate financial crime risks

    Firms should educate staff and/or update processes to cover situations of illegal money lending and domestic financial abuse.

  • 7. Robust governance practice to ensure effective oversight and risk management

    The Portfolio Letter highlights various oversight and risk management issues including senior leaders' role in driving up standards under the Consumer Duty, effective monitoring and oversight of third-party providers, strong cyber resilience, the importance of an ESG strategy and a D&I agenda that does not tolerate non-financial misconduct.

Comment

While some of the identified priority areas concern governance, systems and controls and risk management, much of the Portfolio Letter distils to an articulation of various aspects of the Consumer Duty and the delivery of good consumer outcomes throughout the consumer journey. A number of the priority areas for the FCA coincide with those consumer journey touchpoints where firms have to define and deliver good outcomes, including the point of applying for credit, dealing with financial difficulties and complaints.

Consumer lending firms should unpack the Portfolio Letter at board level and document the steps they have taken to address the risks highlighted. Some actions may already be documented in firms' Consumer Duty compliance records in which case they might benefit from a review in the light of the Portfolio Letter. Any gaps or areas for further work should be identified and actioned and steps documented.

Contributors

Lindsay Lee

Senior Associate

Bruce Stephen

Head of Banking and Financial Services & Partner