Credit Strategy: It’s a sea of uncertainty for SME’s and consumer credit firms

Commentary | 09/08/19

Written for, and published by Credit Strategy – JULY 2019

Just when we thought the uncertain environment within which we operate could get no more opaque, we’re met with further changes from FOS and indeed, a question on the competence of the FCA.

When the FCA’s Chief Executive Andrew Bailey and Chair, Charles Randell appeared in front of the Treasury Select Committee to present a biannual report on the work of the FCA they were greeted with a question from its’ Chair, Nicky Morgan asking if “anyone at the FCA read the papers?”

If that didn’t make Bailey wince, he was then questioned on why the City regulator didn’t act sooner after a press article reported on Neil Woodford’s use of Guernsey’s stock exchange to avoid breaching fund rules on unquoted stocks.

Also last month, more than a dozen MP’s called for Mr Bailey to resign following the collapse of mini-bond holder London Capital & Finance, which went into administration in January owing more than £230m.

Despite this, Mr Bailey went on to tell the TSC that the FCA were “taking seriously” the option of extending their perimeter to help mortgage prisoners by regulating unauthorised and inactive lenders. Mortgage lending is generally regulated but borrowers can find themselves stuck with an unregulated lender if their loan becomes sold on as part of a loan book sale.

His remarks come hot on the heels of the FCA’s first annual report on the perimeter which was published last week and sets out:
· what the FCA does and doesn’t regulate
· what challenges the perimeter presents and the actions the FCA is taking to overcome them
· what this means for consumers
· whether there are any issues with the perimeter which might require legislative or other changes.

The report resulted from a recognition that the current perimeter boundary is continuously tested by firms and activities who do or don’t require regulation and that some such firms have caused serious consumer harm and reduced trust in regulated financial services markets.

One such example is the claims industry with some claims management companies looking to be regulated by the Solicitors Regulation Authority (SRA), instead of by the FCA. Consequently the two regulators are working together to “keep a level playing field and prevent CMCs arbitraging regulatory requirements” and have agreed a specific Memorandum of Understanding on supervising CMCs.

This will be welcome news to the many consumer credit firms blighted by spurious claims from CMC’s looking for new opportunities as the PPI deadline looms. The CCTA has repeatedly warned about claims companies who have corralled consumers into pursuing compensation and excessive and vexatious demands since August last year following the collapse of Wonga and the effect it has on market exit within the industry. Just last month, This is Money revealed the latest affected lender – The Money Shop – reported to have ceased trading due to the ‘unprecedented number of customer complaints”.

So,it is with some optimism that the FCA’s regulation of the CMC’s, including the fit and proper test, will curtail some of the worst excesses of the claims industry. The first authorisation window has now closed and firms who have not applied for full authorisation should currently be mid-way through the winding down period which lasts for one month.

The recent criticisms regarding the FCA register and the importance of providing updated information will hopefully have been taken on board by the regulator. They are continuing to investigate those CMC’s who were under investigation by the Claims Management Regulator before the transfer.

Added to this, the FOS has recently launched a consultation proposing changes to its funding model that could see some firms pay more for its services.

The changes will be a further blow to the SME sector as the FOS seeks to cut the number of free cases it handles to 10 for smaller firms, down from 25 in order to replace the case fee income that it will lose when the PPI window closes later this year.

This could be devastating for alternative lenders who have seen a massive increase in complaints driven by CMCs over the last 12 months.

Time will tell what the full effect of FCA regulation – and increased FOS charges – will be on the consumer credit industry. What I think we can be certain of today, is that the lifeblood of these companies will continue to be sucked dry by the vexatious and unfounded complaints from CMCs and an uncertain regulatory structure.

Greg Stevens