Dear CEO | Release Date: 6th October 2022
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) outlines its strategic vision and regulatory expectations for firms offering high-cost lending products. This guidance is crucial, especially in an economic climate where consumers increasingly face financial difficulties. The FCA emphasises that these firms assess and mitigate risks that might impact their customers adversely.
Understanding the FCA’s Focus and Expectations
The FCA’s letter clarifies the expected approach of high-cost lending firms towards managing their business risks and enhancing consumer protection. This section sets the stage for detailed discussions on specific areas of focus such as consumer duty, risk management, and operational resilience.
Preparing for the Consumer Duty
The Consumer Duty, coming into effect on July 31, 2023, is a pivotal element of the FCA’s strategy. It requires firms to ensure their products and services consistently deliver good outcomes for customers. Firms must prepare for this change by evaluating their current practices and aligning them with the new standards that emphasise fairness, transparency, and the avoidance of harm.
Economic Insights: Impact of Rising Cost of Living
Given the rising cost of living, the FCA expects firms to be particularly vigilant about the additional pressures on consumers. Firms should enhance their support mechanisms for customers experiencing increased financial strain, ensuring practices such as fair lending, accurate marketing, and effective risk management are robustly maintained.
Marketing and Financial Promotions
The FCA criticises some high-cost lenders for potentially misleading financial promotions that prey on financially vulnerable consumers. The authority demands that all promotional activities be clear, fair, and not misleading, adhering strictly to financial advertising standards to prevent consumers from engaging with unsuitable or overly costly financial products.
Enhancing Governance and Managing Operational Risks
High-cost lenders are required to strengthen governance frameworks to identify, monitor, and manage potential risks actively. This includes establishing a solid internal control environment and ensuring that decision-making processes are transparent and involve the appropriate levels of oversight, particularly in handling customer complaints and feedback.
Implementation of the Consumer Duty
This new duty compels firms to take proactive steps to ensure their products and services meet higher standards of consumer care. The implementation phase is critical, as firms must integrate these standards into their daily operations and corporate ethos to ensure they contribute positively to their customers’ financial well-being.
Market Dynamics and Consumer Demand
The letter notes significant changes in the high-cost credit market, including a reduction in the supply of such products. Despite these changes, there remains a steady demand for credit, particularly among consumers with changing financial circumstances. The FCA urges firms to lend responsibly and ensure that consumers fully understand the terms and conditions of their credit products.
Supervisory Strategies and Consumer Protection
The FCA outlines its supervisory strategy focused on ensuring that high-cost lending markets operate fairly and effectively. The strategy includes close monitoring of how firms are governed, how they manage their regulatory activities, and how they treat their customers, especially those in financial distress.
Detailed Examination of Key Consumer Protection Areas
The FCA intends to scrutinise several aspects of consumer interaction with high-cost products, including:
- Fair Pricing and Value: Ensuring that the cost of credit is justified by the value it provides to consumers.
- Suitability of Products: Making certain that products and services meet the needs of consumers without causing financial strain.
- Customer Confidence and Market Participation: Enhancing consumer trust in high-cost credit markets.
- Accessibility and Inclusivity: Ensuring products are accessible to a diverse consumer base and meet varied financial needs.
Focus on Operational Effectiveness
The letter stresses the importance of operational resilience, urging firms to maintain robust systems that can withstand economic pressures and continue to serve consumer needs effectively. This includes having contingency plans that address potential disruptions in service.
Consumer Journey and Experience
The FCA highlights the importance of the consumer journey, from the marketing stage through to the life cycle of the loan. This includes ensuring transparency, understanding product suitability, and managing interactions with sensitivity, especially for vulnerable consumers.
Creditworthiness and Affordability Assessments
Firms are reminded of their responsibilities regarding creditworthiness and affordability assessments. The FCA is concerned with how firms reassess affordability, particularly when consumers seek to refinance or increase their borrowing. Accurate and rigorous assessments are crucial to prevent financial over-commitment by consumers.
Managing Borrowers in Financial Difficulty
The authority underscores the need for appropriate treatment of borrowers experiencing financial hardship. This involves offering forbearance and other modifications in loan terms that can help consumers manage their debts more effectively without exacerbating their financial distress.
Complaint Management and Resolution
Effective complaint management is another critical area. The FCA expresses concerns about how complaints related to affordability and lending practices are handled. Firms must ensure that complaints are resolved fairly and that outcomes from these complaints lead to improvements in business practices to prevent similar issues from reoccurring.
Encouraging Innovation and Adapting to Market Changes
The FCA encourages innovation within the high-cost lending sector. However, it insists that any new products or services introduced should be in line with regulatory standards and designed to enhance consumer outcomes. Firms are encouraged to engage with the FCA’s innovation hubs to ensure compliance and alignment with market expectations.
Addressing ESG Factors
The incorporation of Environmental, Social, and Governance (ESG) factors into business practices is highlighted as a key area of focus. Firms are expected to contribute to broader goals of sustainability and social responsibility, aligning their operations with global and local ESG objectives.
Concluding Remarks and Actions Required
Firms are urged to reflect critically on the outlined risks and regulatory changes, proactively adjusting their operations to align with FCA expectations. This includes cooperating with the FCA through regular updates and notifications, especially concerning significant operational changes or issues.
Contact and Communication
The FCA provides contact details for routine inquiries and emphasises the importance of maintaining open lines of communication, particularly for urgent strategic issues. Firms are encouraged to use these contact points effectively to ensure compliance and address any regulatory concerns promptly.
This comprehensive summary not only aligns with the FCA’s strategic objectives and regulatory framework but also provides actionable insights for firms to implement, ensuring they are well-prepared to meet both current and upcoming challenges in the high-cost lending market.