A glance at the regulatory horizon: the consumer credit market

The Short-Term Picture

According to the Bank of England, credit card borrowing grew by £730m in the year to July, which is the fastest rise since October 2005. This trend could continue over the coming months with the run up to Christmas and the anticipated ongoing rise in energy bills.

Challenges with the economic environment and more retail customers leaning towards non-mainstream finance raises questions for firms operating in this financial sector. Firms are challenging themselves on how to mitigate the risk of customer harm through their own actions, through personal circumstances relating to the customer, or due to external factors in the wider marketplace.

With the consumer credit market continuing to adapt to the unstable economic environment, firms are expected to be more alert to changes to their customers’ needs, financial objectives, and risk appetites. The Financial Conduct Authority’s (FCA) flagship conduct reform – the new Consumer Duty – is a reminder of this, urging firms to ensure that customers are provided with the support they need to make informed decisions and reaffirming the need for firms to act to avoid foreseeable harm. Along with adjusting practice to address the new Duty, consumer credit firms should remain mindful of obligations outlined in the Consumer Credit Sourcebook (CONC), as well as the core FCA principles of business. These already require firms to conduct their business with integrity, due skill, care and diligence, and treat customers fairly.

What to be ready for

Consumer credit firms should be ready to address a number of regulatory requirements and expectations including from FCA portfolio letters, legislative reform, and pending regulation.

Prior to the release of the consumer duty final rules, the FCA issued a portfolio letter in June 2022 to firms operating in the Mainstream Consumer Credit Lending (MCCL) market expressing concerns that consumers who are least able to bear the rising costs of living will be the hardest hit. The FCA expressed that they “expect to see higher demand for credit”, coupled with less affordable or even unavailable borrowing, which could lead to the purchase of unsuitable products. Where this leads to issues with collections, the FCA has recommended that lenders consider the Tailored Support Guidance that was issued during the pandemic, which included issuing payment deferrals and offering other forms of forbearance. The letter also outlined some of the key drivers of harm, including:

• Inadequate assessment of affordability;
• Insufficient debt strategies to enable customers to pay down their debt within a reasonable time; and
• s75 Consumer Credit Act (CCA) responsibilities not being correctly honoured.

The government has committed to reforming the CCA, with a consultation expected by the end of the year. This reform is expected to enable the FCA to act faster on regulating new forms of credit, in order to maintain high levels of consumer protection.

While this pending amendment to the legislation continues to develop, firms should also be aware that the regulatory horizon is continuing to tighten. The FCA has forewarned of the pending regulation of Buy-Now-Pay-Later (BNPL) products and informed firms who offer BNPL products that, although some agreements are unregulated, advertising of all BNPL products must comply with the financial promotion rules. The regulator is also aware of the potential impacts of increased household indebtedness and has published a portfolio letter to debt advice firms outlining areas where customers are experiencing harm and the steps which should be taken to minimise this. The government has also outlined a new Statutory Debt Repayment Plan (SDRP) which looks to combine most of an individual’s debts into one to make them more manageable to pay off.

Conclusion

Given these challenges, the credit market should be thinking carefully about how to address challenges that consumers may be facing or will face in the foreseeable future, how to achieve compliance with the new Consumer Duty, and prepare for pending legislative and regulatory changes that will likely impact on the existing framework of CONC rules.

The longstanding general message from the FCA and the government is to put customers first, by making sure they are fully informed, adequately assessed for vulnerabilities and treated accordingly, and that firms are fully equipped to manage customer accounts where issues surface. This includes the development of communication strategies with customers to identify foreseeable harm more quickly and introduce safeguards where unavoidable harm crystalises.