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FCA Speech: Regulation of consumer credit – during the pandemic and beyond

Oct 15, 2020 | Consumer credit, FCA

Link(s): https://www.fca.org.uk/news/speeches/fca-regulation-consumer-credit-during-pandemic-and-beyond

Context

The FCA has published a speech given by Nisha Arora, Director of Consumer and Retail Policy, about regulation of consumer credit, during the pandemic and beyond.

The speech discussed the key outcomes for consumers which the FCA wants credit markets to achieve and explained how the pandemic has highlighted the need for the FCA, Government, industry and consumer and debt advice organisations to continue to work together to ensure that the consumer credit markets work well for consumers.

Key points to note

  • Credit is the largest sector which the FCA supervises in terms of number of firms, with around 40,000 firms which vary in size and complexity and which offer a wide range of products to consumers for different purposes.
  • Ensuring consumer credit markets work well is one of the FCA’s business priorities as set out in their Business Plan in April 2020 and as such a review is to be conducted, led by Chris Woolard, which will consider how regulation can support a healthy unsecured lending market.
  • The FCA business plan sets out the desired four key outcomes as follows:
    1. Consumers can find products that meet their needs and are able to make informed decisions in their own best interests.
    2. Consumers do not become over-indebted by being given credit they cannot afford. 
    3. Affordable credit to be available so that people can manage their day-to-day spend, meet unexpected costs and make essential purchases they could not otherwise afford but without becoming dependent on credit in the long-term, and entering a spiral of debt.
    4. Consumers can take control of their debt at an early stage when they fall into financial difficulty, with firms identifying and providing early support and consumers engaging with debt advice if necessary, before their financial problems become too severe. 
  • The FCA expects firms to take extra care in their treatment of vulnerable consumers to ensure the outcomes they receive are as good as the outcomes for other consumers. 
  • Firms should make a reasonable assessment, not just of whether a customer will repay, but also of their ability to repay affordably without this having a significant impact on their financial situation and their ability to afford essential expenses, therefore ensuring that people can maintain a basic quality of life. 

Coronavirus support

  • The recently published guidance for mortgage and consumer credit firms, on providing consumers impacted by Coronavirus with the necessary support and good outcomes, has some key messages that the FCA has highlighted as having particular importance, as follows:
    • – Firms should contact customers at an early stage to provide appropriate support to avoid them getting into difficulty. 
    • – Support should be tailored to meet customers’ needs and should be flexible in consideration of the uncertainty driven by public health restrictions and changing economic circumstances. For example, some customers may find themselves in temporary difficulties and will just need short-term support, which might include a further period of no – or reduced – payments to be able to get back on track. Others will face longer-term difficulties and will need different types of support, such as a repayment plan.
    • – There are 1.5 million more adults showing characteristics of vulnerability since the start of the pandemic, so it is important that firms ensure they are able to recognise signs of vulnerability and respond to the individual needs of vulnerable customers.
    • – Lenders should assist in supporting customers through money guidance, and to signpost or refer customers to debt advice if needed.
    • – Whilst the ban on repossessions will end on 31 October, firms are being reminded that repossessions should be a last resort and of the need to treat customers fairly. This means that if someone is self-isolating for example, or otherwise affected by a lockdown, and can’t access alternative accommodation or essential goods, lenders should not repossess.
    • – The support customers receive may be reflected on their credit files in accordance with normal reporting processes. This will help to ensure that lenders have an accurate picture of consumers’ financial circumstances and reduce the risk of unaffordable lending.
  • With the complexities and vulnerabilities in the credit market, the FCA has set out additional expectations, based on current industry good practice, to help people get back on track where possible, and to avoid creating significant hardship or a worse debt situation as follows:
    • – Once firms have agreed a repayment arrangement with a customer, they should waive or reduce interest, fees and charges to the extent necessary to prevent the balance from escalating, thereby helping to avoid the debt becoming unmanageable and making it easier for the customer to get back on track. 
    • – Firms should put in place sustainable repayment arrangements so that consumers can meet their essential expenses and priority debts, for those with multiple debts, firms should take only a fair share of what the consumer can afford, ensuring that customers are given a reasonable time and opportunity to pay their debts in a way that doesn’t create wider detriment and hardship.
  • The FCA will continue to support firms with the application of the guidance which it will review regularly to ensure that it has the intended impact. Within 6 months a further review will be conducted to consider whether it remains relevant to the crisis situation and provides the necessary support, or whether changes or different measures are needed. 
  • The FCA expects that the current climate will mean that the coming months will be tough and uncertain for consumers and for firms, for the FCA, this means that its priorities in the short to medium term will be:
    • – Supporting and engaging with firms to ensure the guidance is put into practice to deliver the intended outcomes
    • – Ensuring that the guidance and the rules and approach to the market are kept under review in the light of the pandemic and its impact on the economy, firms and consumers
    • – Working with the debt advice sector to help to ensure that, for those people who can’t get back on track without additional debt advice and support, their needs are met

In the longer term, the FCA’s priority will be ensuring that, as circumstances change and as the developments in the market occur, regulation continues to work well and achieve the outcomes which are set out in the FCA Business Priority.