The Financial Conduct Authority (FCA) has sent what it describes as a Portfolio Strategy Letter to firms that provide high cost lending products. The letter sets out the FCA’s view of the key risks that high cost lenders pose to their consumers or the markets they operate in. It adds that recipients of the letter should consider the degree to which these risks exist within their firms and should review their strategies for mitigating them.

The regulator says it believes that the key risks faced by the sector include:

  • Firms that offer large financial incentives and/or those with a high-pressure sales environment, especially when these are accompanied by inadequate or ineffective systems and controls
  • A high volume of relending, which may indicate unsustainable lending patterns
  • Inadequate affordability checks
  • A significant rise in the proportion of loan repayments being made by guarantors

The letter goes on to explain the areas in which the FCA will focus its supervisory activities:

  • Understanding the motivation for, and impact of, re-lending on firms and their customers
  • Ensuring firms are conducting adequate affordability statements before deciding whether to lend
  • Looking at whether firms are handling complaints appropriately, whether they are analysing the root causes of complaints and whether they are taking into account relevant decisions made by the Financial Ombudsman Service
  • Examining whether firms who are considering buying or selling an existing loan portfolio ensure that customers are treated fairly, and whether these firms are notifying the FCA of their intentions at an early stage
  • Checking that firms who are expanding their business model have applied for the required FCA permissions
  • Ensuring that firms adapt to new regulatory rules and guidance
  • Understanding the root causes of the increase in the number of payments being made by guarantors and considering whether this indicates that firms are conducting adequate affordability assessments. The FCA is also concerned that guarantors may not fully understand how likely it is that they will be called upon to make a payment

According to the letter, the FCA classes all of the following as being high cost lending products:

  • guarantor loans
  • payday loans and other high-cost short-term credit
  • high-cost unsecured loans aimed at sub-prime customers
  • home-collected credit
  • income smoothing products
  • logbook loans
  • pawnbroking
  • rent-to-own

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