Category: Portfolio Letter

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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.

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FCA sends portfolio letter to mortgage third party administrators

On 10 August 2021, the UK Financial Conduct Authority published a portfolio letter it had sent to mortgage third party administrators.

This letter sets out that the FCA considers there are three areas of potential harm:

– customer treatment: firms need to particularly focus on vulnerable customers, ensuring appropriate forbearance and giving customers clear information on their complaints and why they are being pursued for debt.

– operational resilience: firms need to have adequate systems and controls, processes and policies in place, and the appropriate governance and oversight, to mitigate the risk of operational events.

– prudential resources: liquid resources are critical for a firm’s survival.

The FCA’s areas of focus for supervision will therefore be on:

– fair treatment of customers;

– vulnerable customers;

– operational resilience;

– financial resilience;

– forbearance and due consideration;

– senior managers and certificate regime;

– the FCA’s supervisory strategy; and

– regulatory reporting.

Whilst the focus of this letter is on mortgage third party administrators, other third party administrators (particularly those involved in consumer credit) read this portfolio letter and consider whether any further steps should be taken.

The FCA also wrote to firms outsourcing their mortgage activities reminding them of their obligations.

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FCA publishes portfolio letter to debt purchasers, debt collectors and debt administrators

On 18 January 2021, the FCA published a ‘portfolio letter’ to debt purchasers, debt collectors and debt administrators.

The FCA identified seven key ways in which consumers may be harmed:

– firms failing to recognise and address the needs and challenges facing vulnerable consumers and failing to ensure they obtain the same fair outcomes as other consumers;

– consumers’ needs not being adequately assessed meaning consumers may not receive appropriate forbearance;

– consumers not receiving clear information about, or resolution to, their dispute or complaint and being incorrectly pursued for debts;

– firms taking disproportionate action when seeking to pursue a judgment (for example, seeking judgment where a consumer is vulnerable);

– firms continuing to seek or accept payments on extinguished debts; and

– firms exhausting all available resources, failing to meet its obligations and existing the market in a disorderly fashion.

The FCA said it will focus its work on:

– firms’ treatment of customers (particularly on vulnerable customers, forbearance and due consideration and disputed debts);

– firms pursuing litigation and unenforceable debts; and

– firms’ prudential resources.

The FCA has also reminded firms that when making a notification under Principle 11, firms should be aware of the requirements and guidance in SUP 15. These are important provisions which say, for example, that a notification should be made where there is a “significant” breach of the Consumer Credit Act 1974 and its regulations. The FCA also usefully gives some guidance on the types of situations where it expects to receive a notification.