Consumer credit and FCA supervision – what actions should firms be taking?

Consumer Credit is a fundamental part of the UK consumer market and of vital importance to consumers and retailers. Credit helps consumers smooth finances but in a challenging economic environment it can be easy for consumers to cross a line between credit as a help and credit as a burden.

The FCA estimates that 81% of UK adults hold some form of regulated credit product. In the most recent FCA Financial Lives Survey results (January 2024), results show consumers with significant challenges:

7.4m (14%) felt heavily burdened by their domestic bills and credit commitments
5.5m (11%) had missed any of these bills in the previous 6 months
14.6m (28%) were not coping financially or finding it difficult to cope
5.9m (11%) had no disposable income

This article summarises our perspective of the regulatory challenges for this market and actions firms can take.

How does the FCA supervise Consumer Credit?

Around half of the firms the FCA authorises have a credit permission, such as credit brokers, limited permission credit brokers, high-cost lenders, credit card providers, or pawn brokers. The FCA divides this large population of thousands of firms into a number of portfolios – groups of firms with similar business models. Many firms may not have received much, if any, interaction with the FCA previously and can find the regulator’s scrutiny challenging to deal with.

The FCA has completed a substantial thematic review about forbearance measures for consumers in financial difficulty which finally reported in 2022. Consumer Duty implementation and Vulnerable Customer Guidance have also increased regulatory expectations of the credit sector and we are seeing increased scrutiny through skilled person reviews with a focus on creditworthiness, affordability, handling consumers in financial difficulty, complaints management and treatment of vulnerable consumers.

The FCA’s most recent credit sector supervisory portfolio letter – the first one in 2024 – explains FCA’s view of risks and where it will focus attention. This most recent letter is aimed at High-Cost Lenders, Credit Unions and mainstream consumer credit lending providers.

Affordability

The FCA continues to emphasise that lending must be affordable. The new Consumer Duty cross cutting rule requires firms to avoid foreseeable harm to consumers, unaffordable lending is a foreseeable harm. Processes and monitoring should be in place to check lending practices remain affordable. The recent portfolio letter also sets out expectations that consumers declined credit should be supported with sources of guidance and help.

Collections and recoveries

This area remains under considerable regulatory scrutiny. Consumers in financial difficulty may be feeling vulnerable and FCA found that 12.9 million consumers have low financial resilience and 27 million may show one or more characteristics of vulnerability. The regulatory expectation is that consumers are treated with empathy, their circumstances probed, and suitable support provided.

Appropriate training, quality assurance and support for staff to manage consumer calls is vital. Call handling units need to be appropriately resourced to allow staff the time needed to handle calls well.

Price and value

High-cost lending, not subject to the High-Cost Short Term Price Cap, will be an area of focus for the FCA. The Consumer Duty imposes new requirements for products to meet fair value criteria. In other sectors, the FCA has placed considerable pressure on firms to change pricing, such as in the Wealth and General Insurance sectors. The lesson from these sectors is to ensure a robust methodology that follows the requirements set out in the Consumer Duty is applied to fair value assessments and if required, action is taken.

Complaints and redress

The FCA says it is currently reviewing complaints handling in a small number of High-Cost lenders and we can expect to see a report of their findings in due course. We are aware that some CMCs are actively probing with complaints about affordability in the credit sector. Poor complaints handling exposes firms to a range of issues including regulatory action or pressure from CMCs. The FCA requires firms to monitor complaints processes and outcomes to check whether any systemic issues should result in changes to processes.

Financial Abuse

The FCA calls out the prevalence of financial abuse where individuals may be coerced into taking out loans or credit. FCA is working with HM Treasury on this issue. However, firms need to think about how they identify and treat consumers who are victims of financial abuse including approaches to debt repayment and recording entries on credit files.

Role of Governance, Risk, Compliance, and Internal Audit.

Underpinning all the above is the essential role of the three lines of defence in assessing and monitoring risks, tracking management actions, and providing challenge where practices fall below regulatory expectations and risk tolerances. For our work, common areas for improvements include a robust and clear governance framework, documented risks and compliance arrangements, and regular reporting to the firms’ Board.

Actions firms can take

Look at the issues raised in the Portfolio letter and check they areas covered in first line controls and second line monitoring.
Check whether current outcomes MI has sufficient scope, depth and breadth or whether there are gaps in reporting.
Check whether the information you have identifies any systemic issues that require management attention.
If there are gaps in your MI or controls, look at fix these in a timely way.
Check governance, risk and compliance arrangements are robust. For example, documented terms of reference for committees, a robust and comprehensive monitoring plan, documented compliance and risk policies and procedures.
Check monitoring is completed to schedule and sufficiently resourced.
Check risk and compliance reports and actions are tracked and closed appropriately.
Where actions are outstanding understand why and plan to resolve.

How can we help?

If you would like to discuss any of these issues, please contact Richard Barnwell or Zahra Ellahi

BDO UK LLP is the 5th largest tax, audit, and advisory firm in the UK. The BDO financial services advisory practice is a team of over 180 specialists, including ex-regulators and people who have held senior positions in regulated firms. This experience helps financial services clients to understand the impact of regulation and mitigate risk.