A well-functioning credit market
Consumers, firms, the wider economy and society all gain from a well-functioning credit market. One that focuses closely on delivering appropriate outcomes for the consumers it serves.
Our Financial Lives survey estimates that 81% of UK adults hold some form of regulated credit product and the Bank of England statistics for February 2023 report outstanding credit balances of just under £211 billion.
Credit matters greatly for consumers – allowing them to manage their money and helping them to cope in tough times, like those being experienced now. So I will talk about how important it is that you help those consumers struggling or likely to struggle with repayments, particularly those exhibiting characteristics of vulnerability. And how you should help consumers to consider at the earliest opportunity access to money advice and good quality debt advice where needed.
I will also talk about how firms should be focusing on what they need to do to ensure they are ready to meet the higher standards of the Consumer Duty and to embrace the opportunities to innovate that these upcoming regulatory changes present. Putting customers at the heart of your planning and engaging with them in a way that showcases how your products and services are beneficial and offer fair value.
Understanding changing pressures
It will come as no surprise that I begin with the rising cost-of-living, with many consumers across the country affected and all of you needing to remain alert to the changing situations of your customers and the need to target your efforts in response.
We want to work with you to understand these changing pressures as we must ensure that customers are served well. Our increasingly data-led approach is enabling us to focus on the impacts of the rising cost of living. We will also work with industry through an agile and collaborative, service design approach, to build out new and improved regulatory returns. Our aim is to identify improvements to both the data and the process that will minimise the burden on firms while improving our ability to supervise the sector.
Offering appropriate support
It is even more important with a rising cost of living that customers are lent to affordably taking account of their financial pressures, receive appropriate tailored forbearance when in financial difficulty, and receive help to avoid falling victim to scams or illegal money lending.
We expect lenders to work constructively with those who fall behind on payments, or are at risk of doing so, ensuring tailored support can be put in place. When you communicate with customers in financial difficulties, consideration should be given to whether it’s appropriate to reduce, waive or cancel fees and charges.
It is clear from our supervisory work that many firms have responded positively across these areas. However, we also know that many others must do more, as set out in our Dear CEO letter on 16 June and in our published report on 3 November last year. The report followed our work looking at how lenders were treating borrowers in financial difficulty during and after the pandemic and highlighted that firms need to focus on improving key outcomes for borrowers. Specifically:
encouraging customers to engage, particularly when payment issues start to arise
the effectiveness of conversations with customers
helping customers to consider and access money advice and not-for-profit debt advice
the fair application of fees and charges
These points remain important, and we expect all lenders to focus across these areas. We know from our work that people often find it hard to talk about money and take the first step in seeking help. You can play a crucial role by encouraging customers to engage earlier when facing financial difficulties and by helping people get money guidance and debt advice, in what remains challenging times.
We continue to test whether forbearance practice standards are being met, with a focus on outlier firms, identified from a range of data sources. Where we identify poor practice, we will take action, in line with our priorities, to test and raise standards in putting consumers’ needs first. Redress secured from our forbearance project work currently amounts to £29 million.
Good quality debt advice can make a difference
For those experiencing more severe financial difficulty, good quality debt advice at the right time can make a real difference. We know from talking to debt advice firms that overall customer numbers seeking debt advice are rising, with increasingly complex needs or facing these circumstances for the first time. There are signs of significant priority debts and reduced, or negative, disposable income.
It is vital that consumers obtain good quality debt advice that has regard to their best interests and is based on a sufficiently full understanding of their circumstances.
Unsuitable or poor advice can really harm the financial lives of people. For example, consumers who are advised to enter a debt solution which is not right for them can face extra costs and take longer to become debt free.
We recently reconsulted on our proposals to ban debt packager firms from receiving referral fees from debt solution providers, following further analysis of the market. We also sought views on proposed perimeter guidance to clarify the boundary of the regulated activity of debt counselling in relation to activities commonly carried out by unauthorised lead generators.
The consultation covering these proposals is now closed and we are reviewing responses and will set out our next steps as soon as possible.
We want a well-functioning credit market where customers are treated fairly, supported if they get into financial difficulty and are equipped with the information they need to make good decisions.
Outcome-focused approach
These aims also align with our more outcome-focused approach to consumer protection under the Consumer Duty.
The Consumer Duty sets higher expectations for the standard of care that firms give customers. The Duty will require firms to focus on delivering good consumer outcomes at every stage of their business and interaction with their customers. It is a cornerstone of our 3-year strategy and sits at the heart of the our ‘putting consumer needs first’ public commitment.
Importantly, while our work on the Consumer Duty predates the cost-of-living squeeze, the current economic climate perfectly highlights the need for these high standards and protections.
Our published final rules and guidance for firms on the Consumer Duty set out the implementation timeline.
by the end of October 2022, firms’ boards or management bodies should have agreed their plans for implementing the Duty
by the end of April 2023, manufacturers of financial products and services should have completed all reviews necessary to meet the outcome rules and shared necessary information with their distributors
the Duty comes into force on 31 July 2023 for new and existing products or services that are open to sale or renewal
aon 31 July 2024 the Duty will be in force for closed products or services
Getting ready for the Consumer Duty
Having considered firms’ readiness for the Duty by undertaking a deep dive into the implementation plans of around 60 of the largest firms it is evident that some firms are further forward than others.
Some have extensive programmes of work underway to implement the Duty, while many others are further behind in their planning and applying the necessary changes.
Our review of the plans highlighted 3 key areas where firms should particularly focus their attention during the second half of the implementation period. These are:
Effective prioritisation: Being clear on the basis for prioritising some implementation work ahead of others.
Embedding the substantive requirements: Ensure your plans meet the new standards and reflect the work, which should be well underway, needed to meet with the requirements of the Duty.
Working with other firms to share information across the distribution chain. Our review found some plans which gave little focus to this area.
As you oversee the implementation of the Duty, boards and management bodies should focus and provide challenge on these 3 areas.
In terms of specific priorities for action:
You should share the relevant information necessary to comply with the Duty with commercial partners and make sure they are on board. This will likely include distribution networks and wholesalers as well as retailers and relevant third parties.
You should focus on the areas that will have the biggest impact on outcomes for customers. Ask yourself the obvious question: is the product or service designed to deliver good outcomes for consumers?
You can make sure you have clearly identified your target market and consumers understand your communications.
You can ensure that any lingering sludge practices are addressed – practices that deter customers from taking action in their interests, such as making a complaint or switching to another product or provider; or any unreasonable additional costs such as punitive exit fees are removed.
How we are supporting firms
We are keen to continue to support firms through the remaining period to July 2023. We have issued Duty-specific communications to all firms setting out how we think the Duty will be important to them. We are surveying around 600 small and medium-sized firms to understand their progress and checking with Consumer Finance firms that the actions noted in their implementation plans are being taken forward.
We recognise that the Consumer Duty is significant, and for some firms it requires a significant amount of implementation to get it right. We welcome the continued efforts being made by many firms to embed the policy across their organisations. Firms getting this right is vital for consumers.
Firms will benefit too. We have heard that when implementing the Duty some firms are uncovering customers they had not engaged with for some time; some are rolling out plans for new products and services more quickly than anticipated; and some are starting to look at potential problems earlier – and importantly, some are identifying new opportunities earlier too. In doing so, some firms are thinking differently, which may in turn, spark innovation.
Regulating new products
There are other changes on the horizon too. Regulatory changes will be important in ensuring that consumers of newly regulated products receive an appropriate degree of protection and that the broader regulatory framework for credit remains fit for purpose. It also provides an opportunity for newly regulated firms to consider their products and services and whether consumers are at the heart of their proposition.
The last few years has seen the significant growth of Deferred Payment Credit, commonly referred to as unregulated Buy Now Pay Later products, predominantly supporting digital retail sales. These products often take the form of either deferred payment or short-term instalment loans.
When used appropriately, the product provides valuable benefits. But as the product is increasingly used as an alternative to more traditional credit, we want to ensure that consumers have adequate protections and are given sufficient information when it comes to making payment choices. That is why we support regulating the sector.
We welcome the launch of the Treasury’s latest consultation on bringing these products into regulation and once the proposed scope and regulatory framework of legislation is determined, we will consult as soon as we can on the rules these firms will need to follow.
When we see harm, we will act
In the meantime, where we see harm, we will act and have already done so, using our existing powers and our non-FSMA consumer protection powers.
For example, we have already acted on concerns over financial promotions which has resulted in the withdrawal of certain marketing material. We have reminded firms involved in the communication or approval of financial promotions relating to exempt credit agreements of their obligations when doing so. ~And we have set out our expectations for providing their customers with appropriate care and support – encouraging firms to take action now.
We have also used our powers under the Consumer Rights Act 2015 to intervene where we have identified concerns that terms in the consumer contracts of Deferred Payment Credit providers may be unfair or not transparent.
We encourage firms offering these products to take positive action now, engage with the consultation process and start preparing for what FCA regulation means for their business. This includes preparing to embed the Consumer Duty deliver good consumer outcomes. This will be a vital consideration in our Authorisation assessments.
Embracing reform
Turning now to the review of retained provisions of the Consumer Credit Act. In December 2022, the government published its consultation on the reform of the Act.
We will be working alongside the government through their reform process. We are both keen to ensure consumer credit regulation supports a well-functioning and competitive market whilst maintaining the appropriate degree of consumer protections.
Although much of the regulatory framework for consumer credit falls within our Handbook following transfer from the Office of Fair Trading in 2014, the majority of the Consumer Credit Act remains in place together with an abundance of secondary legislation. Indeed, some of this goes back almost 50 years!
This reform process is an opportunity to update and modernise consumer credit regulation, so that it is suitable for the wide array of modern consumer credit products including how firms interact with their customers through digital and technological developments. The review also considers the extent to which the legislation can be moved across to our rules, potentially allowing a more coherent, flexible and less fragmented credit regime.
We also support the government’s objective that the regulatory environment should be flexible enough to facilitate ongoing innovation in the sector as the market evolves. We recognise that if more requirements were placed in our rules and principles, rather than in legislation, this could provide the opportunity for more flexibility in how we respond to new issues as they emerge in the future.
Improving trust in financial services
We want a well-functioning credit market. One where customers are treated fairly and supported if they get into financial difficulty. One where customers get fair value from products and services and are equipped with the information they need to make good decisions.And one where there is opportunity for innovation.
We will continue to work with you to ensure that the Consumer Duty is implemented effectively and has the desired impact of ensuring good consumer outcomes. If you embrace and deliver on the Consumer Duty expectations, in turn we hope to see improving trust in financial services.
