New Consumer Duty is front and centre of FCA's priorities for credit regulation

• United Kingdom

• Financial services disputes and investigations
• Consumer
• Financial services - Consumer Duty

30-03-2022

Last week, the FCA’s Interim Director of Retail Lending, Brian Corr, addressed the consumer credit market in a speech setting out the regulator’s priorities for credit regulation. It is the latest reminder of the FCA’s progression towards outcomes-focused regulation, which seeks to ensure that firms deliver the “right outcomes” to consumers, and a call to action for firms soon-to-be subject to the new Consumer Duty.

The speech was delivered against a backdrop of sharp increases in the cost of living, with inflation hitting a 30 year high-point last month. The result is a very real risk that millions of Britons will hit financial difficulties, in turn causing higher demand for credit. Whilst credit will undoubtedly play an essential role in helping many people through the challenges ahead, the rising cost of obtaining it also brings “significant potential for harm” to consumers. The speech sets out the regulator’s response to these risks.

Front and centre is the new Consumer Duty – the FCA’s self-proclaimed “paradigm shift” planned for all firms which provide financial services and products to retail consumers. Whilst the regulator is still considering firms’ responses to its second consultation, its introduction is all but confirmed, with new rules expected before the end of July 2022.

As expected, Corr focuses on the need for firms to consider the outcomes actually experienced by consumers rather than a narrow focus on technical compliance with regulatory rules. In the context of consumer credit, this means that firms must understand their customers’ credit needs and assess whether the products and services which they deliver actually meet those needs. By way of example, products designed for short-term lending will not be compatible with long-term borrowing by consumers and could lead to persistent debt if used in this way. The regulator will also take a dim view of firms “pushing” consumers towards some credit options by making information about their products and services more prominent or more easily accessible than others. The new Consumer Principle and cross-cutting rules target these types of behaviours by placing a positive duty on firms to ensure that their customers receive good outcomes and avoid foreseeable harm.

So what steps do consumer credit firms need to be taking? In his speech, Corr suggests that firms make sure they have the right “mindset, culture and data in place” and that they begin “looking for gaps” between where they are now and where they need to be by the end of the implementation period (expected to be the end of April 2023). Whilst this is a good starting point, firms need to recognise that the Consumer Duty will pervade every aspect of their businesses, from product design to product and service pricing to dealings with third party suppliers. This gap analysis suggested by the FCA is merely the first step in this process.

Corr is right to flag the importance of data. Proficiency in capturing the right data, monitoring the outcomes experienced by firms’ customers and ensuring that key information is passed upwards in MI is essential if firms are to meet this new, higher standard. Here firms will need to map their existing data schemes against the data they will need to obtain going forwards in order to understand why different cohorts of customers act in different ways. These changes mark some of the most challenging aspects of the new proposals; to stand a chance, firms will need to adopt a programmatic approach to the operational change required in order to understand and identify the regulatory risk involved.

The speech also considers the regulator’s priorities outside the Consumer Duty, one of which seeks to ensure that “borrowers get the right help from their providers when they get into financial difficulty” whilst another aims to help consumers whose financial situation makes it difficult or impossible to use credit to achieve good outcomes. There are signs of progress here, with the regulator having “secured around £1bn in redress and debt write-offs for consumers” and introduced price caps and rules (for example, on persistent credit card debt) to drive out poor practices. Another example is the FCA’s support for the Fair4All Finance no-interest loan scheme which aims to help financially vulnerable consumers.

Evidently, the consumer credit market is one area in which the regulator has identified a real risk of harm to consumers – meaning that firms which provide these products and services will find themselves under close scrutiny if they fail to take its advice onboard. The new Consumer Duty is integral to the FCA’s plans here, with Corr noting that “the Duty is intended to be flexible to allow us and you to respond to circumstances” meaning that “you don’t need to wait for us to give detailed rules” before addressing the changes required. With new rules only four months away, the speech is a timely reminder that firms need to engage with the proposals now.

This article was co-authored by Simon Collins and Ian Stott.