Charles Randell, Chairman of the FCA, spoke at the Gleneagles Pensions & Savings Symposium in late September. The title of his speech was ‘stress testing for human beings’ and the theme of the speech was looking at how different sectors of the financial services industry might respond to an economic downturn.

Action has been taken to make the UK’s banks more resilient in a period of economic difficulty, but the FCA is concerned about whether consumers will be fairly treated by firms when the next recession occurs. Here Mr Randell said:

“The Bank of England’s stress tests have demonstrated that the financial system is now strong enough to support the real economy through a severe recession. But while the system is financially secure, many people are not. So as a financial conduct regulator, we need to think about what an economic downturn means for the human beings which the system is there to serve.”

Using the rule of thumb of a 10-year economic cycle, a recession is already overdue. Statistically, a recession has only just been avoided so far this year, with economic growth in the UK falling by 0.2% between April and June and remaining level between May and July.

No one needs any reminder of the problems in the credit sector in the latter part of the last decade. Debt-related issues formed a large part of Mr Randell’s speech, and here his observations include:

  • The FCA must continue to supervise the credit sector to limit the impact of a downturn
  • Although the FCA has taken steps to improve the affordability assessments for some credit products, and has imposed price caps on other products, all affordability assessments are carried out on the basis that the applicant will keep their job. Mr Randell admitted that there was no other realistic option than for firms to make this assumption
  • An increase in unemployment would lead to an increase in debt arrears, so we can also expect the FCA to closely scrutinise firms’ procedures for dealing with customers in arrears
  • If there was a severe downturn then the Government and other authorities would need to look at how debt advice providers would meet the increased demand – here the FCA chairman welcomed the Government’s proposals to give borrowers 60 days breathing space where their lenders would not take action to recover the debt but would instead allow the customer to seek debt advice and maybe put in place an appropriate debt management arrangement. At this moment, 8.3 million UK adults are said to be ‘over-indebted’, one in eight has no cash savings and one in three has savings of less than £2,000. These figures would undoubtedly increase in a downturn
  • The FCA has already taken enforcement action against firms whose affordability assessments and/or arrears handling practices resulted in harm to their customers. Mr Randell said that the imminent introduction of the Senior Managers Regime in the credit sector would make it even easier for the regulator to identify who within a firm was responsible for failures in these areas

Ways in which other financial sectors could be affected include:

  • An increase in re-possessions
  • People who were planning to sell their homes to pay off interest only mortgages or to fund their retirement might be affected by falling house prices
  • Scammers could use people’s need for short-term cash to persuade them to access their pension when it is not appropriate to do so

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article