What will the FCA’s ‘Consumer Duty’ mean for access to credit?

Commentary | 24/11/21

I spoke last week at an event exploring the FCA’s proposed ‘Consumer Duty’. The Duty is positioned as asking firms to put themselves in the shoes of the customer and consider if they would like to be treated how their firm treats customers. We are concerned that it is a much more radical change in the relationship between consumer and lender and that was my warning.

The FCA says the purpose of the proposed Duty is to set clearer and higher expectations for firms’ standards of care towards consumers. These are principles that no one can really disagree with-better product design, value for money, improved communication. They are what we should all strive to do, what we want to deliver.

But as an industry, we are concerned about the responsibility the Duty will place on firms that are already struggling. With the next consultation paper, which will include the draft rules, due from the FCA before the end of this year, it’s time to think about the possible unintended consequences for consumers.

We have already seen a drop in the supply of credit to many customers. Big companies have left the alternative lending market in recent months, but more worryingly – existing lenders will need to consider what the Duty means for their future.

They may want to move away from areas of lending that are at the greatest risk of being challenged under the Duty. Not because they are doing anything wrong, but because future interpretation of their current actions are uncertain.

History shows that interpretations of FCA principles shift. And a shift in future interpretation may lay lenders open to possible challenge, back-book review, and retrospective compensation. We worry this will mean access to credit and financial inclusion, will drop further as lenders consider these risks.

The principles and indeed the regulation haven’t really altered for years across areas like affordability. However, the supervisors or adjudicators’ interpretation has shifted over the years. We know from our work with our members, that there are decisions taken on a daily basis about what should be included in affordability assessments, levels of verification, permissible data types, definitions of sustainability, the use of third-party tools and many other unwritten rules.

Now there is an argument that this is what principles-based regulation is all about. Regulation can adapt to new risks and threats without having to be redrafted. However, this brings new risks of policy being created in isolation behind closed doors; not utilising the best version of the arguments and without reference to other policy objectives (e.g. competition).

It is also the retrospective application that seems so unfair. Lenders are happy to adapt, to listen to the regulator and to their customers. Then being asked to apply today’s interpretation on lending that dates back a decade brings additional risks.

We all want to see greater protection for consumers, but in creating a duty on the lender it marks a radical shift in responsibility. It lands the risk almost completely on the lender and for many it might not be a risk worth taking.