Financial Conduct Authority speech on Consumer Credit sourcebook
On 21 October 2014, Linda Woodhall (Financial Conduct Authority's (FCA) Director of Mortgage and Consumer Lending) gave a speech on the changing regulatory landscape in respect of consumer credit (CC) as a result of the FCA's new role as regulator of all CC activities.
Ms Woodhall provided a practical breakdown of the FCA's movements particularly in respect of the FCA's main areas of identified focus/concern, the results of investigative/review work undertaken by it and the FCA's plan of action for CC regulation over the next 6 months.
Ms Woodhall's speech gave the message that the FCA is still trying to understand how best to regulate the CC sector. Underlying this is her allusion to CC regulation being significantly different from the other areas within financial services currently overseen. The FCA are keen to review and scrutinise business models to ensure the highest level of consumer protection, it intends to do this through a non-tick box approach which suggests a significant change in the way the Office of Fair Trading regulated CC.
We aim, in this blog, to provide you with the most pertinent issues/developments identified by Ms Woodhall that may affect your sector.
The starting point for the FCA in regulating the CC market is in keeping with its strategic/ statutory objectives;
- ensuring protection of consumers;
- enhancing market integrity; and
- promoting effective competition in the market.
This often "non-prescriptive" approach to supervision allows the FCA to deploy flexible techniques that suit different business models. The versatility of the approach has served the FCA well in conducting investigations and issuing guidance to CC firms. Accordingly, the FCA have devised and continue to implement a "non-tick box" approach to oversight. Instead, keeping in mind the "customers best interests" when assessing the conduct and systems of CC firms. The focus on "treating customers fairly" (TCF) should be a starting point for all CC firms and will permeate every aspect of its CC offering.
Ms Woodhall identified the authorisation process as one of the key area CC firms should be paying attention to in complying with CC regulations. She remarks "it is important that firms are aware of when the deadline for their application for full permission is. Those that have not applied by the time their interim permission lapses will need to cease trading." Therefore, it is key that applications are submitted on time and that firms ensure they are complying with CC regulation and have been doing so since 1 April 2014.
In practice the FCA's vision of supervision falls broadly under 3 Pillars:
Pillar 1 – firm systematic framework – risks posed to CC consumers and managing systems and controls of CC firms;
Pillar 2 – "event driven work" – issues emerging within the various sectors (biggest focus of the FCA and will be for the next 6 months); and
Pillar 3 – thematic work – focusing on any cross-firm or product issues.
The FCA have conducted firm specific investigations in larger firms, including a review of firms in the home collected credit and debt management sector. The FCA intend to further focus on the following firms:
- debt collection;
- payday lending;
- credit broker;
- unsecured lender; and
- credit card.
In addition the FCA intend to conduct a number of thematic reviews which includes the on-going review of forbearance practices within high-cost short-term credit providers, suitability of advice given by debt management companies and unauthorised transactions in respect of credit firms.
Sanctions and developments
Since April 2014 the FCA have:
- issued final notices against two firms who have had their applications refused;
- frozen seven firms’ bank accounts to protect client money;
- requested fourteen firms to stop taking on new business;
- directed seven firms to appoint a “skilled person” to report on the firm’s compliance with FCA rules; and
- investigated a number of other debt management firms and individuals.
Some areas of development that the FCA have identified for CC firms are in respect of:
- financial promotions;
- debt collection letters; and
- FCA principles.
The FCA are keen to work with the various industries caught by CC regulation and have devised a number of initiatives/ projects to this end. They include:
- Project Innovate – to promote innovation within the CC arena whilst remaining code compliant with CC regulation;
- A collaborative market study into consumer trends regarding credit cards results of which will be released in November;
- Review of processes for vulnerable customers; feedback from the industry.
The year ahead and beyond
The FCA intends to continue "proactive engagement" with CC firms. Out of this there will be a dynamic process of reviewing the credit rulebook and guidance "CONC" to ensure it reflects the market and addresses emerging issues.
Lastly, the FCA will be looking to firms to ensure good outcomes through good conduct are reached. Good conduct is evidenced by:
- transparent communication with consumers;
- responsible lending based on proper affordability requirements;
- treating customers in difficulty with forbearance; and
- providing suitable debt advice in a way that is accessible for its customers.
Whether you are already regulated by the FCA, have been regulated by the OFT, or are considering entering this market, Blake Morgan can provide you with the assistance necessary to ensure your firm complies with the relevant regulatory requirements. Contact Jamie Ng on firstname.lastname@example.org or via telephone on 020 7814 6908.