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Dear Director | Release Date: 13th February 2020

To read a shorter summary of this Dear Director letter, click here.

To access the original FCA document, click here.

Long Summary

This letter communicates the Financial Conduct Authority’s (FCA) comprehensive supervision strategy tailored for firms within the Credit Brokers portfolio, detailing expected standards and guidance on mitigating potential risks. The strategy underscores the necessity for credit brokers to evaluate their business practices to ensure they align with consumer protection standards and regulatory requirements.

Portfolio Categorisation

Under the FCA’s new Approach to Supervision, firms are organised into ‘portfolios’ based on similarities in their business models. This letter specifically addresses firms categorised under the Credit Brokers portfolio, which includes entities that introduce customers to lenders or other brokers, facilitating finance options. It is pertinent for firms directly involved in credit broking and those for whom it is an ancillary activity.

Strategic Supervision Period

The outlined supervision strategy spans until March 2022. This period will focus on identifying and addressing potential harm from credit broking activities, assessing the effectiveness of these interventions, and planning future supervisory actions. Post-March 2022, an updated communication will summarise the findings and adjust the supervisory focus as necessary.

Comprehensive Risk Analysis

To identify potential harms, the FCA has analysed extensive data, including regulatory histories and consumer complaints associated with credit brokers. Key findings include:

Regulatory Understanding:

Many credit brokers demonstrate a significant gap in understanding their regulatory obligations. This includes recognising the necessary permissions required for operation and accurately completing regulatory returns. Non-compliance could lead to enforcement actions and negatively impact consumer outcomes.

Staff and Representative Oversight:

There is often inadequate supervision over staff and Appointed Representatives, leading to unchecked sales practices that may increase the likelihood of mis-selling, fraud, and other detrimental consumer outcomes.

Misleading Financial Promotions:

Inaccurate or misleading financial promotions can lead consumers to make uninformed financial decisions, potentially resulting in engagement in suboptimal financial agreements.

Disclosure of Service Levels:

Firms frequently fail to disclose critical information that could influence consumer decisions, such as the nature of their relationships with lenders or the extent to which they receive commissions.

Technology and Cybersecurity Risks:

The growing dependency on technology without adequate risk management exposes firms and their clients to increased threats from cyber-attacks and technological failures, undermining IT resilience.

Targeted Supervisory Focus

The FCA will intensively monitor several critical areas to ensure risk mitigation:

Accurate Regulatory Compliance:

Firms must verify their Firm Details annually within 60 business days of their Accounting Reference Date (ARD) through the Connect system, regardless of changes from the previous year. Compliance with Sup 16.10 rules is crucial, and the FCA will not hesitate to employ enforcement actions against non-compliance.

Understanding and Improving the Consumer Journey:

The FCA’s assessments will include thorough reviews of the consumer journey within credit broking firms, focusing on information provision, sales practices, and complaint handling procedures.

Risk Assessment of Domestic Premises Suppliers (DPS):

Special attention will be given to firms engaging in sales within domestic settings, where high-pressure tactics and exploitation of vulnerable customers are particularly concerning.

Expected Actions and Regulatory Compliance

Credit brokers are expected to proactively revise and enhance their business practices to eliminate or reduce consumer harm. This includes ensuring transparency in financial promotions, diligent oversight of staff and representatives, and robust data protection measures.

Firms must engage with the FCA openly and cooperatively, promptly reporting any significant breaches or changes in their operational environment. Continuous engagement with regulatory updates through resources like the FCA’s ‘Regulation Round Up’ newsletter and online educational materials is encouraged to maintain compliance and stay informed of best practices.

Conclusion and Proactive Steps

The FCA urges all credit brokers to critically assess their operations against the outlined risks and to implement necessary changes to safeguard consumer interests. The authority remains committed to using its full regulatory power to rectify any identified deficiencies and to ensure that credit brokers operate within a framework that prioritises consumer protection.

Firms should prepare for ongoing dialogue with the FCA, ready to demonstrate compliance and effective risk management. For urgent strategic issues, direct contact with designated FCA personnel is advised.

This strategic approach aims not only to rectify current issues but also to foster an industry-wide culture of compliance and consumer-centric practices among credit brokers, enhancing the overall integrity and reliability of the financial markets they serve.

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