With the financial resilience of consumers becoming increasingly important and protecting vulnerable customers high on its agenda, it comes as little surprise that the FCA remains sceptical of firms offering high cost short term credit (HCSTC) products.
This is evident from the FCA’s introduction of measures impacting the HCSTC market, including limits on the number of rollovers, rules on capping charges and issuing a report exploring alternatives for customers.
Against this ever-changing regulatory landscape and in view of the long-armed reach of the Financial Ombudsman Service (FOS), HCSTC firms are finding it increasingly difficult to prosper and, in some cases, survive.
Encompassing several different types of consumer credit, typically characterised by high interest rates provided to customers on a short-term basis, HCSTC includes payday lending, overdrafts and rent-to-own lending.
The FCA has begun to show its teeth when exercising its supervisory powers, particularly when deciding whether a firm has correctly assessed if the HCSTC products offered to customers are affordable.
The FCA’s agenda
Responsible for the supervision of the consumer credit market since 2014, the FCA’s increased focus on monitoring and supervising the HCSTC market shows little sign of abating, with Charles Randell, the Chair of the FCA recently stating that “affordability and appropriate arrears handling is vital for a fair consumer debt market”.
As a result, HCSTC firms must ensure that:
- appropriate checks are carried out when assessing affordability and as part of this, that lending practices are compliant with the rules in the Consumer Credit Sourcebook, found within the FCA Handbook (CONC); and
- adequate complaints handling procedures are in place, enabling the firm to ascertain the scope and severity of the customer detriment and carrying out a redress or remediation exercise if it is fair and reasonable to do so
Borne out of increasing concerns around unaffordable lending, culminating in “Dear CEO” letters being published late last year and early 2019 (the Letters), this is a topic that remains high on the FCA’s radar.
The Letters make clear that in assessing affordability (that is, the risk of a customer defaulting on a loan on the basis that the level of their income does not support the repayments), firms are required to undertake a reasonable assessment of creditworthiness, based on sufficient information, before either entering into a regulated credit agreement or significantly increasing the amount of credit available to customers.
This should enable firms to then consider the customer’s ability to make repayments out of income:
- without the customer having to borrow to meet the repayments;
- without failing to make any other payment the customer has a contractual or statutory obligation to make; and
- without the repayments having a significant adverse impact on the customer’s financial situation.
Further, as per and in accordance with CONC, the extent and scope of any assessment must be proportionate to the individual circumstances of the customer, including the type and amount of credit and basis for repayment.
In the vast majority of cases it may be appropriate for additional information to be obtained for verification purposes.
This may include, for example, obtaining further data from an independent source in relation to income, such as looking at the recent history/circumstances of a customer, which may make them particularly vulnerable.
Whilst it may not always be possible to foresee an event rendering a loan unaffordable (such as a loss of income), the Letters state that the FCA expects firms to eliminate lending that is predictably unaffordable, mitigating the risk of financial distress.
The FCA is particularly sensitive to repeat borrowing, which creates a dependency on HCSTC which is not sustainable, but detrimental to customers.