When the Financial Conduct Authority (FCA) took over regulation of consumer credit around three years ago, the number of firms it was responsible for almost trebled overnight. The regulator appears to acknowledge that regulating the sector is something of a challenge, as the latest speech by one of its directors, on the subject of credit regulation, is entitled ‘Keeping up with the credit sector’.
Jonathan Davidson, the FCA’s Director of Supervision – retail and authorisations, addressed the Credit Summit in London at the end of March, began by commenting that the stigma previously associated with being in debt had now largely disappeared in today’s society. He said that 60% of UK adults now had credit cards, and that 40% had used overdrafts.
Mr Davidson added that UK consumers seemed to be much more willing to borrow money than people in other European countries. There have been several recent media stories about the rise in household debt, and in his speech the FCA director revealed that during 2016, borrowing for the purpose of purchasing a car rose by 12%.
He also cited an estimate from debt counselling service StepChange that more than 2.5 million people are using credit cards to meet everyday living costs and emergency expenses, and added that as many as 16 million people now have savings of less than £100.
Mr Davidson said there were three main themes to the FCA’s supervision of credit firms: affordability, treatment of customers in financial difficulty and the risks posed by firms’ business models.
Regarding affordability, he stressed that firms must not only consider whether an applicant can afford to repay a loan, but also whether they would experience financial distress through meeting their obligations – will they for example have to prioritise repaying the debt over paying their essential bills?
Next, he mentioned the findings of the FCA’s recent review on the treatment of customers in arrears, and suggested that here there were two different types of firm, by saying:
“We have found that firms who make consumer wellbeing a priority are able to agree sustainable repayment solutions with their customers. For those firms that don’t, the focus is on getting payment as quickly as possible instead, causing distress and even greater debt problems.”
Regarding the risks of firms’ business models, he cited several examples of where firms had been able to generate profit by treating customers poorly. Mr Davidson commented:
“We expect firms to give appropriate advice and recommend the best solution for the consumer, not the option that generates the most profit for the firm. This is particularly important when you consider that these firms are often dealing with vulnerable customers.”
Mr Davidson acknowledged the challenges his organisation had faced in regulating consumer credit by saying:
“From a rigorous authorisations process which has seen over 35,000 firms demonstrate that they meet our standards, to the cap on payday lending charges, it’s fair to say we’ve been busy over the last three years.”
However, he added some words of praise for the way firms have adapted to the new regulatory environment, by saying:
“I am pleased to say that the industry has also played its part. We should all be proud of the significant progress we’ve made, collectively, in driving up standards in the sector. Firms are now much more aware of our expectations and act on them accordingly.”
Mr Davidson told the summit that the FCA expects to publish the results of its review on the effectiveness of the payday loan charge cap this summer.
Towards the end of his speech, he turned to the subject of the culture within credit firms, and the effect this culture has on the firm’s customers.
Mr Davidson commented:
“We aim to be forward-looking and pre-emptive, and expect industry culture to follow suit, with consumers always at the heart of decision-making. Indeed, we are far more interested in ensuring that consumers get good outcomes from their encounters with credit firms than we are in looking for technical breaches or minor errors to punish.”
The FCA director then mentioned the Senior Managers and Certification Regime, which will come into effect in the credit sector in March 2018. He stressed the responsibilities of senior management under this Regime by saying:
“Senior managers will be expected to take reasonable steps to ensure that the areas under their remit are conducted appropriately and that people whose conduct has a major impact on consumer outcomes are fit and proper.”
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