FCA writes Dear CEO letter to payday loan firms
On January 21 2015, the Financial Conduct Authority (FCA) wrote a ‘Dear CEO’ letter to the chief executive, or equivalent, of each high cost short-term lender. The regulator’s definition of high cost short-term lending encompasses standard payday lending activities.
A Dear CEO letter is usually written when the FCA has concerns over compliance standards in a particular market sector. This Dear CEO letter has also been published on the FCA website.
This letter begins by highlighting to each firm when their allocated application period is. Any lender who has not applied to upgrade their existing interim permission to full permission by the end of this period will lose their authorisation to carry out consumer credit activities. Firms cannot get around this expiry date by simply ceasing to lend money, as the activity of maintaining a loan book is also a regulated activity.
The FCA also highlights that the firm’s level of compliance with the issues covered in the letter will be important considerations when an application for full permission is considered.
The first such issue is that of lead generation. If a firm accepts customer information from a credit broker or other third party, it must be satisfied that the broker firm has collected this information in an appropriate manner. Firms are also reminded of the requirement under Data Protection legislation to ensure that customer data is not passed to other parties unless it is absolutely necessary – one example of when it is appropriate might be passing the data to a credit reference agency. Firms should draw up an initial agreement with each customer, which should explain when data might need to be passed to third parties, and why this might be necessary.
Next, firms are asked to ensure they have robust systems in place for ensuring that all loans granted are affordable. The letter says that some lenders are apparently more concerned about considering the risks to the firm of non-payment, rather than the risks to the customer of payment difficulties and becoming over-indebted.
The issue of governance and controls is also covered in depth later in the letter. Firms are asked to ensure they have sufficiently robust systems & controls arrangements regarding:
- Compliance with applicable regulations
- The need to treat customers fairly
- Information technology
- Monitoring of any third parties to whom activities are outsourced
- Recruitment – ensuring staff have the necessary skills, knowledge and experience
- Risk identification and management
The letter identifies a number of issues around the topic of customers in financial difficulty. Firms are asked to ensure that:
- They have systems in place that will allow them to identify these customers’ difficulties at an early stage
- Conversations with these customers are geared towards exploring forbearance options rather than obtaining payments
- Documented policies are in place regarding how the firm will deal with customers in difficulties
- Customers in this situation are directed to sources of free debt advice as appropriate
- They do not limit customers’ access to certain types of forbearance
- All communications regarding this issue are ‘clear, fair and not misleading’ – the example given is of some firms failing to comply with this requirement by stating or implying that legal action to recover the debt may follow when this is not the case
Lastly, firms considering purchasing loan portfolios from other firms are asked to ensure that they comply with applicable legislation, such as the Consumer Credit Act 1974 and the Unfair Terms in Consumer Contracts Regulations 1999.
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.