In its 2022 – 2025 strategy paper, the FCA stated that “by acting earlier and more assertively we will prevent harm and intervene before problems become systemic”. Consumer protection is at the heart of this and the FCA’s increasingly assertive supervisory approach is likely to put significant pressure on retail lenders and other firms operating in the consumer credit sector.

Indeed, with inflation predicated to reach or even exceed 14%, many consumers will see a reduction in disposable income and some may experience financial vulnerability for the first time. In this context, the FCA is concerned about the potential for an increase in reliance on credit, and is likely to take a strong stance against firms which seek to take unfair advantage of these difficult economic conditions.

In this regard, the FCA has at least been transparent about its expectations. On 16 June 2022 it issued a Dear CEO letter to around 3,500 retail lenders reiterating the importance of treating borrowers fairly. In particular, the FCA emphasised the need for lenders to ensure that their approach to new borrowers takes account of their financial pressures, to consider their treatment of vulnerable consumers, to ensure that fees charged are fair and to direct consumers to money guidance or free debt advice services as necessary.

The FCA followed this up with a further Dear CEO letter, on 27 June 2022, aimed specifically at mainstream consumer credit lenders. In this, the FCA reiterated its concerns about the potential growth in demand for credit and confirmed that ensuring consumers in financial difficulty receive fair and appropriate support remains a key priority. The FCA indicated that firms should not seek to increase business, or otherwise benefit from increased demand, by reducing the stringency of affordability checks and should continue to apply reasonable and proportionate checks on applicants, including taking steps to determine or reasonably estimate their income, as required under the existing Consumer Credit Sourcebook rules. Firms will also need to consider and review their affordability and creditworthiness policies, and to assess what management information they will require to monitor this effectively.

In assessing the industry generally, the FCA has previously expressed concerns about levels of engagement with customers, in particular that firms may not always take sufficient steps to understand individual customer circumstances and may not consider an appropriate range of forbearance options. To alleviate the regulator’s concerns about this, firms should ensure that staff – particularly those in customer facing roles – are sufficiently experienced, and have appropriate training and support, to cope with a potential increase in customers who may be in financial difficulty.

Perhaps most significantly, on 27 July 2022, the FCA confirmed plans to bring in a new Consumer Duty requiring firms to deliver “good outcomes for retail customers”. As part of the new Duty, firms will need to focus on supporting and empowering customers to make good financial decisions, and there will be specific requirements to make it easier for consumers to switch or cancel products.

As part of this Duty, firms will need to pay particular attention to the real and diverse needs of their customers, including those who may be vulnerable, which is likely to require adjustments and training at all levels of the business. The new rules come into force on 31 July 2023 and firms should use this interim period to undertake appropriate gap analysis, and to review pricing models, policies, procedures and customer documentation to ensure that they are all well placed to deliver on these new higher standards.

In addition, on 5 July 2022, the FCA published guidance on its approach to compromise arrangements where regulated firms use mechanisms, such as Schemes of Arrangement, to reduce redress liabilities. In this guidance, the FCA confirmed that it expects to be notified immediately of any such proposal and sets out the information it will require in advance from firms, such as the anticipated pence in the pound return to creditors and details of the action being taken by the firm to remedy the underlying cause.
This guidance is likely to have a significant impact on lenders with large potential or contingent redress liabilities and who may be considering a Scheme of Arrangement or other compromise mechanisms as a means of recovering from this financial distress and planning ahead.

Clearly, there is a lot of work for compliance departments to do to meet these ever-evolving standards, with potentially serious consequences for those who fail to respond adequately, which can have a significant impact on their business and customers. In the most serious cases, a failure to satisfy the FCA’s expectations or comply with rules can lead to the stress, uncertainty and the cost of an enforcement investigation.