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.

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.

FCA publishes final report on strategic review of retail banking business models 

On 20 January 2022, the UK Financial Conduct Authority published its final report following its strategic review of retail banking business models, together with a webpage and press release.

This report follows the FCA’s progress report from June 2018.

The key points from the final report are:

– large banks have a strong position but are facing challenge from others;

– low levels of consumer engagement have historically contributed to high barriers to entry and expansion;

– digital challenges have rapidly gained a share of the personal current account and business current account markets

– competition in the mortgage market has increased (causing yields to come down)

– yields for consumer credit firms have fallen too (particularly on unarranged overdrafts);

– large banks did proportionately more micro-business lending under the government schemes than most other banks; and

– increased competition and innovation have improved outcomes for many consumers and some small businesses.

The FCA says it will be “discussing the points raised in our 2022 Final Report with firms and consumer organisations but are keen to hear from other stakeholders”. The FCA has invited written submissions by 31 March 2022.

Financial Conduct Authority publishes terms of reference for mortgage prisoner review

Earlier today, on 20 July 2021, the UK Financial Conduct Authority published its terms of reference setting out the steps it proposes to take in its mortgage prisoner review.

The FCA estimates there are around 250,000 borrowers who have mortgages with ‘inactive firms’ (ie firms which are either not lending to new customers, or are not lenders). The FCA accepts that “[n]ot all of these borrowers are mortgage prisoners”. The FCA says mortgage prisoners are “borrowers who are unable to switch to a new mortgage deal despite being up to date with their mortgage payments and, depending on their loan and borrower risk characteristics, could potentially benefit from switching”.

The FCA intends to review two areas:

a data review: this will review and update the FCA’s data to consider the demographic and loan characteristics of mortgage prisoners; and

an interventions review: this will review the effectiveness of the FCA’s recent interventions to remove regulatory barriers to switching (focussing on the modified affordability assessments and the intra-group switching rule change).

The FCA expects to undertake its data review and analysis between July and October 2021. It also expects to engage with interested stakeholders between July and August 2021. The FCA expects to report to HM Treasury by the end of November 2021.

FCA publishes call for input for its review into change and innovation in the unsecured credit market

Earlier today, on 2 November 2020, the UK Financial Conduct Authority published a call for input asking for views on change and innovation in the unsecured credit market as part of its review on how regulation can better support a healthy unsecured lending market (called the ‘Woolard Review’).

The FCA has also published a dedicated webpage. The deadline for responses is 1 December 2020.

FCA publishes webpage setting out terms of reference for review into change and innovation in the unsecured credit market

On 26 October 2020, the UK Financial Conduct Authority updated its webpage on its review into change and innovation in the unsecured credit market. This review will be led by Christopher Woolard.

The review will look at:

– how regulation can better support a healthy unsecured lending market; and

– the impact of COVID-19 on employment security and credit scores, changes in business models and new developments in the unsecured lending (including the growth in point of sale unregulated products).

The webpage sets out the review’s terms of reference. These are:

– To examine the current state of the unsecured credit market in the UK including the component parts, recent changes in size and scale, whether in regulated or in adjacent unregulated products.

– To examine changes in regulation, noting those areas that have been subject to regulatory oversight in recent years from a variety of bodies including the FCA (for example overdrafts or high cost credit), and comparing likely harms or dynamic effects seen in those areas.

– To examine the immediate effect of coronavirus on demand for unsecured credit and on the role of credit information.

– To report on possible trends and potential future pressures.

– To identify areas of growth in demand from consumers for credit including from non-traditional providers of credit.

– To present an assessment of the benefits and harms evident in the market and those that may be expected as the market develops.

– To compare international approaches to these issues where relevant.

– To make conclusions and recommendations to the FCA Board on management of harms in this sector; gaps in understanding or data; potential changes in regulation for the FCA to consider; advice on potential changes to the overall system the FCA may wish to consider with other authorities or the Government; and possible innovations to support a sustainable market.