The Financial Conduct Authority has written to more than 3,500 lenders to remind them of the standards they should meet as consumers battle with the rising cost of living.
In a Dear CEO letter today (June 16), the FCA said it is critical that lenders act now to meet the standards the regulator expects to support borrowers, including those in financial difficulty.
“We want to ensure that our expectations of you are clear and to urge you all to support your customers,” it wrote. “We need to engage and work effectively as an industry to understand the changing pressures on consumers – now and in the uncertain months ahead.
“We must ensure that the financial services sector serves customers – especially those who might struggle with their finances during this time.”
The City watchdog said many consumers will feel the impact on their personal finances, but it is particularly concerned that consumers least able to bear the rises will be hardest hit.
While the headline average inflation rate is at 9 per cent and rising, the Institute of Fiscal Studies estimated that the poorest households may face average inflation rates as high as 14 per cent.
“This is in the context of a quarter (27 per cent) of the population having low financial resilience, a figure likely to increase over the coming months,” the regulator wrote.
“At the same time, we expect to see higher demand for credit, although rising interest rates, and lower disposable income, may make borrowing less affordable, or unavailable, for some. Firms will also see a wider group of consumers in financial difficulty, who will find it harder to pay their debts.”
The FCA said some of these consumers will be in vulnerable circumstances or may be experiencing financial difficulty for the first time and firms need to remain alert to the changing situation of their customers and target their efforts in response.
FCA executive director of consumer and competition Sheldon Mills, said: “Many consumers are feeling the impact of the rising cost of living in their personal finances and we expect this to increase over the next few months. Early action is important for those struggling with debt.
“We need all firms to get the basics right and provide good quality support. Where we see more serious wrongdoing, we are already acting to ensure these firms improve.”
The regulator said it has looked at how borrowers in financial difficulty are treated by lenders and found examples of lenders providing the right support to their customers.
However, it argued that most firms need to have better conversations to fully understand their customers’ individual circumstances, so they can provide appropriate tailored support and ensure that arrangements to pay back debt are sustainable.
Mills added: “The financial services industry has a significant role in helping consumers manage their finances – and it should expect us to pay close attention to how they do that over the next few months.”
The FCA is also concerned that some customers in vulnerable circumstances are not getting the support they need and some lenders are not discussing the potential benefits of money guidance or free debt advice or helping and supporting borrowers to access these.
It saw these concerns across the sector and serious failings were found at more than 30 firms, largely in the consumer credit sector. The FCA expects these firms to make improvements in how customers are treated.
Through this letter the FCA is reminding lenders that they should provide support to struggling borrowers which is tailored to their specific circumstances and only charge them fees which are fair and that cover the firm’s costs.
The FCA said it expects firm to:
- Provide customers with an appropriate level of care and support - the level of care needed for customers who have characteristics of vulnerability may be different from others and that should be considered.
- Give borrowers in financial difficulty appropriate tailored forbearance and takes account of their individual circumstances.
- Support borrowers showing signs of financial difficulty or struggling with debt, by making them aware of and helping them access money guidance or free debt advice.
- Ensure that any fees and charges levied on borrowers in financial difficulty are fair and do no more than cover your costs.
- Make sure the approach to taking on new borrowers takes account of the financial pressure they may be facing and the impact on their expenditure.
- Consider what more can be done to encourage mortgage borrowers to think about switching to a less costly option where that is available.
- Help consumers avoid falling victim to scams or illegal money lending.
Extension outside of lenders
The FCA said some regulated firms also offer consumer credit products including buy-now pay-later (BNPL) which are exempt from regulation.
Given the rising cost of living and other factors explained, the FCA said it “strongly encourages” authorised firms offering these unregulated products to follow the guidance in this letter in relation to those products.
It will be sending a copy of this letter to several unauthorised firms offering exempt BNPL, and similar products, so they can see the regulator’s expectations for authorised lenders and strongly encourage them to follow the guidance in relation to exempt credit products.
The FCA is also concerned about the treatment of small business customers and said these expectations may also apply to these customers, who will be facing similar challenges.
sonia.rach@ft.com
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