Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the Financial Conduct Authority (FCA) addressed the recent Credit Summit in London and the title of his speech was ‘What can the consumer credit sector expect from the FCA?’
Mr Davidson’s central message was that firms should expect the regulator to continue to focus on key areas such as affordability checks, business models and corporate culture.
Regarding business models he said that the inappropriate business models of some firms was a motivation for the FCA’s decision to impose a price cap in the rent-to-own sector, and for its investigation into commission arrangements between motor finance lenders and brokers.
He added that while the rate of growth in the sector has slowed, consumer credit still grew by 6.5% over the last 12 months, according to the Bank of England. The number of credit firms supervised by the FCA also continues to grow and has now topped 40,000. Inevitably, his speech also mentioned Brexit, but regardless of if and when the UK does eventually leave the EU, he said “the one thing that is certain is that the day after Brexit will not change the way we regulate your sector.”
The FCA director described the way his organisation supervises credit firms as:
- Credit firms are supervised within a portfolio of firms, each of which share a similar business model
- With each portfolio, the FCA determines how firms’ actions could result in harms and agrees a strategy to take pre-emptive action with firms posing the greatest risk of harm
- The FCA communicates the risks and its supervision strategy to firms within that portfolio in a letter which is published on its website – the recently published Portfolio Strategy Letter to high-cost lenders was the first of these
- The FCA explains to firms what it believes are the key risks they pose to their consumers and the markets they operate in. It encourages firms to look at how they can reduce those risks
Mr Davidson commented that many high cost credit borrowers have poor credit histories and low financial resilience and are much more likely to be vulnerable than the average consumer. In a warning to firms in this sector he commented that “nowhere is getting affordability right more important”.
Next, he suggested that examining re-lending practices was another FCA priority and said that home credit firms and other high-cost lenders could expect to hear from the regulator as it seeks to understand both the motivation for, and the impact of, relending on both consumers and firms. Home credit firms are already required under FCA rules to explain to customers who are looking to borrow more money, the comparative costs of refinancing an existing loan versus taking out a new loan. Mr Davidson also made reference to section 49 of the Consumer Credit Act 1974, which prevents home credit firms from initiating discussions about new loans or refinancing during home visits unless they have previously obtained a specific written and signed request from the customer.
Turning directly to the subject of guarantor lending, he commented that total balances on guarantor loans are fast approaching £1 billion and these have more than doubled since 2016. He added that the proportion of loans on which guarantors need to make at least one payment is increasing, and that the FCA is focusing not just on affordability checks of guarantors’ ability to pay, but also on whether they understand how likely it is that they will be called upon to make a payment. Mr Davidson also echoed recent press comments made by his colleague Christopher Woolard, who said he did not understand why guarantor loans were so expensive if guarantors were meant to have good credit records – comments which have been interpreted in some quarters as suggesting guarantor loans will be next in line for a price cap.
The final section of the speech focused on the Senior Managers and Certification Regime (SM&CR). Mr Davidson began this section by saying that “culture is a root cause driver of behaviours and outcomes in firms.” Echoing comments made in other FCA speeches, he said that it was vitally important that management encouraged a culture that led to favourable customer outcomes, and that “a tick box cultural approach to compliance … will likely not be enough to ensure that customers receive the right outcomes.”
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