The FCA and consumer credit: Update

7 July 2022

As the cost of living continues to rise, and subsequent demand for credit increases, the FCA has been clear with lenders as to its expectations for their treatment of customers. Indeed, with inflation predicated to reach 14%, consumers will see a significant reduction in disposable income and many may experience financial vulnerability for the first time. In this context, the FCA has clearly identified that a potential increase in dependence on credit poses significant risks to consumers.

On 16 June 2022 the FCA issued a Dear CEO letter to around 3,500 retail lenders reiterating the importance of treating borrowers fairly. In particular, the FCA emphasised the need for lenders to ensure that their approach to taking on new borrowers takes account of their financial pressures, to consider their treatment of vulnerable consumers, to ensure that fees charged are fair and to direct consumers to money guidance or free debt advice services as necessary.

Whilst the FCA has not issued any new rules, it has stated that it will look to take supervisory and/or enforcement action under its existing regulatory framework for those firms which fall short of these expectations. Any such action is likely to be facilitated by the FCA’s move to an assertive supervisory approach, as well the new Consumer Duty rules expected by the end of July 2022.

In assessing the sector generally, the FCA identified that firms frequently do not do enough to encourage customers to engage with them, fail to take sufficient steps to understand individual circumstances and may fail to consider a range of forbearance options. Similarly, firms should ensure that their policies and procedures are fit for purpose in light of the current economic climate and that their staff are sufficiently experienced to cope with a potential increase in customers who may be in financial difficulty.

The FCA followed this up with a further Dear CEO letter, on 27 June 2022, aimed specifically at Mainstream Consumer Credit Lenders (“MCCL”), i.e. firms providing regulated unsecured overdrafts, loans or credit cards. In this, the FCA reiterated its concerns about the potential growth in demand for credit and confirmed that ensuring consumers in financial difficulty receive fair and appropriate support remains a key priority. The FCA indicated that firms should not seek to increase business, or benefit from increased demand, by reducing the stringency or affordability checks and should continue to apply reasonable and proportionate checks on applicants, including taking steps to determine or reasonably estimate their income, as required under the existing Consumer Credit Sourcebook (CONC) rules. Firms will also need to consider their affordability and creditworthiness policies and procedures to ensure that these are sufficiently robust and to consider what management information they require to monitor this effectively. 

In addition, the retail lending sector is one which, historically, has seen large redress liabilities, often arising from unaffordable lending practices. On 5 July 2022 the FCA published new guidance on its approach to comprise arrangements where regulated firms use mechanisms, such as Schemes of Arrangement, to reduce redress liabilities. In this guidance, the FCA confirmed that it expects to be notified immediately of any such proposal and sets out the information it will require in advance from firms, such as the anticipated pence in the pound return to creditors and details of the action being taken by the firm to remedy the underlying cause. This follows on from its objection, in May 2021, to the initial Scheme of Arrangement proposed by Amigo Loans Ltd, on the basis that it did not provide a fair deal for consumers.

Further information

If you have any questions regarding the blog above, please contact James Alleyne in our Criminal team.

About the author

James Alleyne is Legal Counsel in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.





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