King’s Speech makes no mention of consumer credit reform

Earlier today, on 17 July 2024, King Charles III delivered his King’s Speech setting out the areas of reform for the new Labour Government.

But any consumer credit firms or advisers looking for some mention of reform of the Consumer Credit Act 1974 will be disappointed. There was no mention of such reform either in the King’s Speech, or in the background briefing notes.

It therefore remains to be seen whether there will be any further consultation issued by HM Treasury. The Government’s website simply says that the “consultation has concluded“. No further updates have been added since 11 July 2023. But there is surely a long overdue need for reform: the current system is notoriously complex and often works in a way which does not promote innovation.

Financial Conduct Authority publishes principles for developing credit information industry-led remedies

On 20 May 2024, the UK Financial Conduct Authority published principles for developing credit information industry-led remedies.

In December 2023, the FCA published its final report on the credit information market study. The FCA proposed that various remedies should be introduced by industry-led work (including input, where necessary, from the FCA).

The FCA’s final report expects the Credit Reporting Governance Board (the CRGB) will seek input to progress and implement industry-led remedies. The FCA has therefore published the following principles pending the CRGB’s formation:

1 Seek and consider input from all relevant stakeholder cohorts (including, but not limited to, stakeholder cohorts represented on the Interim Working Group (the IWG)).

2 Proactively consider how any steps or decisions might negatively affect the CRGB’s ability to decide longer-term policy or implementation options.

3 Consider how potential approaches or solutions align with the CIMS proposals, the emerging CRGB objectives being developed by the IWG and the Consumer Duty.

4 Specifically consider the impact on different firms (including small businesses) and consumers, including by taking into account effects on:

4.2 customers with characteristics of vulnerability, and

4.1 financial inclusion

FCA publishes a portfolio letter to consumer lenders

On 20 March 2024, the UK Financial Conduct Authority published a portfolio letter to three portfolios in the consumer lending market: high-cost lending, ‘mainstream’ consumer credit lending and credit unions.

The FCA says it priorities to ensure markets function well are:

– reducing and stopping serious harm;

– setting and testing higher standards; and

– promoting competition and positive change.

For its promoting competition and positive change priority, the FCA has a focus on providing access to affordable credit. The FCA says firms should consider ways they can support customers (for example, using effective signposting) but not compromising standards. The FCA encourages firms to think about innovating and providing greater access to affordable credit.

For its reducing and preventing harm priority, the FCA says:

firms must lend responsibility and sustainably: The FCA says it’s “more important than ever to ensure your firm makes sound affordability and credit-worthiness assessments”. Whilst the FCA has “seen some improvements, we remain concerned about sludge practices” (ie unreasonable barriers). Firms using artificial intelligence need to test its effectiveness. Re-lending most be done affordability, responsibility and sustainably.

firms must ensure the price paid for a product or service is reasonable compared to the overall benefits: The FCA’s price and fair value requirements in consumer duty is a key development. The FCA acknowledges lending to certain cohorts can be greater and may lead to increased prices but firms should not “capitalise by increasing prices unfairly and offering products that do not provide fair value”. The fact that there is a price cap for high-cost short-term credit does not mean the cap provides fair value: it is a maximum rate.

firms must support customers in financial difficulty: The FCA says “many firms were not considering or taking sufficient account of consumers’ individual needs or circumstances or providing appropriate tailored forbearance”. The FCA encourages firms to ensure it is acting in compliance with its rules and the Tailored Support Guidance (and new changes are likely to happen by the end of June 2024).

firms must handle complaints and redress requirements effectively: The FCA says it remains “concerned” and expects “to see more widespread improvements in how firms handle complaints”. The FCA is currently processing a complaints multi-firm review involving a small number of high-cost lenders.

firms must have appropriate systems and controls in place to mitigate risks of financial crime: The FCA acknowledges that the current market conditions increase the risk of illegal money lending and domestic financial abuse. Firms should improve their processes, procedures and practices.

firms must have robust governance practices, ensuring effective oversight and risk management: The FCA says firms must have “robust governance practices guaranteeing effective oversight and rigorous risk management protocols to identify, monitor and manage operational risks”. The FCA says there are issues across the consumer lending market but failures are “particularly acute” in parts of the credit union and high-cost portfolios.

For the setting and testing high standards priority, the FCA reminds firms about the effect of the introduction of the consumer duty. The FCA says it is not “a once and done exercise”. The FCA also reminds firms of policy changes including the proposed reform of the Consumer Credit Act 1974, the introduction of product sales data returns and changes allowing credit unions to offer hire purchase, conditional sale and insurance distribution services.

FCA joins with other regulators to warn firms about debt collection

On 18 March 2024, the UK Financial Conduct Authority published a news story calling on firms to improve debt collection practices. All of the regulators feel that this is particularly important given many consumers continue to feel cost of living pressures.

The news story also includes links to:

– a joint press release; and

– a copy of the joint letter dated 18 March 2024.

This joint letter follows on from a letter published on 28 June 2023 (see the press release and the joint letter dated 28 June 2023).

The latest joint letter makes the following points for financial services firms:

– firms should start from the position that customers in collections are highly likely to have characteristics of vulnerability and should follow FCA’s expectations under the consumer duty (including its finalised guidance) and its vulnerable customer guidance;

– the consumer duty strengthens existing requirements;

– there is foreseeable harm if a debt collection communication sent the customers are perceived to be intimidating or unsupportive (and communications should be tested)

– firms may want to encourage ‘warm’ handovers between frontline and specialist teams; and

– the FCA aims to publish its policy statement before June 2024 on its response to Consultation Paper 23/13.

The FCA reminds financial services firms (and this point should not come as any surprise) that debt collection rules and guidance apply to both debt collectors and to lenders taking steps to recover payments due under credit agreements or consumer hire agreements.

FCA decides to investigate the use of personal guarantees given for certain small business lending

On 5 March 2024, the UK Financial Conduct Authority published a press release announcing it is investigating the use of personal guarantees given to lenders to support loans made to certain small businesses. The follows the Federation of Small Businesses making a ‘super-complaint’ to the FCA.

The FCA’s perimeter is, in fact, fairly limited for business lending. It only applies to such lending where (in broad terms):

– the borrower is an individual or a relevant recipient of credit (being a partnership of two or three persons not all of whom are incorporated, or an unincorporated body of persons which does not consist entirely of bodies corporate and is not a partnership); and

– the amount of credit is no more than £25,000.00.

The FCA will:

– collect data between April 2024 and June 2024 to understand when lenders entering into a regulated credit agreement are asking for guarantees;

– review samples of firms’ policies and procedures;

– work with the Financial Ombudsman Service to monitor the level of complaints; and

– consider whether lenders need further guidance in CONC.

The FCA has also published its response to the super complaint.

New EU Consumer Credit Directive published

On 30 October 2023, the new EU Consumer Credit Directive (CCD2) was published in the Official Journal of the European Union.

The timeline is:

– CCD2 will come into force on 19 November 2023.

– EU member states must adopt, and publish, the regulatory framework to implement CCD2 by 20 November 2025.

– CCD2 will come into force on 20 November 2026 (and it will repeal the EU Consumer Credit Directive from 2008).

Because the United Kingdom is no longer an EU member state, it will not need to implement it. However, it remains to be seen to what extent any of CCD2 is implemented into UK law to ensure parity with EU law.

Financial Services and Markets Act 2023 receives Royal Assent: impact for consumer credit firms

On 29 June 2023, the Financial Services and Markets Act 2023 received Royal Assent. It is often referred to as being part of the EU ‘bonfire’ legislation. From the date it comes into force, Section 1(1) of the Financial Services and Markets Act 2023 revokes the legislation listed in Schedule 1. This includes a number of provisions which make up the consumer credit regulatory framework.

We’ve been busy at Walker Morris Towers looking into the impact of Section 1(1) of the Financial Services and Markets Act 2023 on consumer credit firms. Here’s our one page summary. If you click on it, you’ll get a bigger version of it.

If anyone needs a PDF copy with the embedded links (shown in the image as underlining), please contact meJeanette Burgess, Leanna Bradshaw or Hasan Siddique.

FCA publishes policy statement and finalised guidance on its Consumer Duty for retail firms

On 27 July 2022, the UK Financial Conduct Authority published a press release, a webpage, a policy statement and finalised guidance on its consumer duty for retail firms. The FCA is clear that it will “set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first“.

Together with my fellow partners, Noline Matemera and Robin Penfold, we’ve prepared a one page infographic on six key takeaways:

There is no doubt that there is a lot of work for firms to do between now and implementation.

FCA tells firms to improve their treatment of struggling small business borrowers

On 12 July 2022, the UK Financial Conduct Authority published a press release telling firms to improve their treatment of struggling small business borrowers together with (a) its review into small and medium enterprise collections and recoveries and (b) a ‘Dear Chair’ letter to firms.

The FCA reviewed the practices of eleven banks. It found a number of issues including:

– lenders not treating small businesses fairly when trying to agree sustainable payment plans (for example, arranging clearly unaffordable payment plans);

– staff not having the right training to provide effective support to consumers and to make fair decisions;

– lenders not having clear policies to help staff identify and support vulnerable customers; and

– not having quality assurance and testing for their processes to ensure that they deliver fair results for consumers.

The FCA has given feedback to individual firms. It has also written to the chairs of all retail banks with small business customers. The FCA makes it clear that their ’Dear Chair’ letter is based on the existing principles, rules and guidance. It reminds firms that it will not wait for the introduction of the consumer duty in 2023 to take action where it finds evidence of customer detriment.

The ‘Dear Chair’ letter makes it clear that “all regulated firms offering lending to individuals and relevant recipients of credit (“RRCs”) should consider the findings and recommendations and where necessary, act on them“. The FCA expects “accountable Senior Manager(s) to proactively engage to achieve good practice when overseeing SME collections and recoveries“.

The FCA has set out some of its expectations in the ‘Dear Chair’ letter. These include:

– Where borrowers are treated as if they have a regulated credit agreement, either by requirement or voluntarily, firms should be able to demonstrate they are meeting these standards.

– Policies and procedures are clear with adequate information to support staff to make judgements when required.

– Systems and controls should be arranged to help with the delivery of fair customer outcomes.

– Firms should be able to accurately maintain records and be able to use such records to test whether they have delivered fair outcomes. Firms should also be able to produce customer records without gaps in a timely manner;

– Firms should be able to demonstrate forbearance and due consideration are being offered in accordance with CONC 7.3.4R (where it applies).

– Where CONC 7.2.1R applies, the firm must establish and implement clear, effective and appropriate policies and procedures for the fair and appropriate treatment of customers, who the firm understands, or reasonably suspects, to be vulnerable.

– The management of third parties should be subject to a suitable risk framework that helps ensure fair treatment of SMEs

– The FCA encourages all firms to carry out both quality assurance and customer outcomes testing for customer processes. This assurance should follow a holistic approach so that the customer’s overall outcomes are understood and these are assessed for fairness. There should be clear evidence that root cause analysis is effectively identifying opportunities to improve customer outcomes.

– Staff should receive suitable training that equips them to effectively support SME customers to receive fair outcomes during collections and recoveries.

– Senior management should receive effective MI that allows holistic oversight of SME customer treatment during collections and recoveries

– Senior managers responsible for collections and recoveries should have suitable levels of awareness and oversight of SME customer matters including treatment during collections and recoveries.

The FCA is expected to publish its review of its final findings into firms’ provision of appropriate support to borrowers in financial difficulty both during and after the COVID-19 pandemic, and next steps. This publication is currently expected on Q3 2022.

European Parliament publishes press release on proposed new Consumer Credit Directive

On 12 July 2022, the European Parliament published a press release on a proposed new Consumer Credit Directive. These proposals are for a new Directive which will replace the EU’s Consumer Credit Directive from 2008.

The key points from the press release on the proposals are:

– it will aim to protect consumers online from credit card debt, overdrafts and loans that are unsuitable for them;

– it should cover credit agreements up to €150,000 (but Member states can implement a higher limit);

– a lighter touch regime for small value loans (up to €200), interest-free and without charge loans, or loans to be repaid within three months with minor charges;

– a creditworthiness assessment which requires information on a consumer’s current obligations or cost of living expenses. For those with thin credit files, other information can be considered (for example, non-bank lending, telecommunications and utilities bills);

– the European Banking Authority will be encouraged to published guidelines on how a creditworthiness assessment can be undertaken;

– consumers will be given clear information to allow them to make informed choices (including having all essential information in one place);

– consumers should be reminded of their right to withdraw within 14 days;

– credit advertisements should contain a clear and prominent warning that borrowing money costs money, and they should not encourage consumers who are over-indebted to apply for more credit; and

– overdrafts and credit overrunning products should be regulated.

Parliament negotiators will now talk with both the European Council and Commission on the final shape of the rules.

Whilst the United Kingdom is no longer a Member state, and already has in place many of these protections, it is likely that HM Treasury’s commitment to review the consumer credit regulatory regime will include looking at what is happening in the European Union (but, of course, the United Kingdom does not have to follow those proposals).