On 16 June 2022, the Financial Conduct Authority (FCA) sent a Dear CEO letter to more than 3,500 lenders, including retail banks and consumer credit firms, to remind them of the standards they should meet as consumers across the country are affected by the rising cost of living. Ultimately, the FCA has stated that firms that do not meet the standards expected risk further regulatory challenge, including possible enforcement action.
This letter is written at a time of economic difficulty for many. While the headline average inflation rate is at 9% and rising, the Institute of Fiscal Studies estimates that the poorest households may face average inflation rates as high as 14%. Further, according to the FCA's Financial Lives Survey and its internal analysis, 27% of the population have low financial resilience. The impact of this situation is unlikely to be purely financial. Therefore, in its letter, the FCA highlights that firms' frontline services will have to deal with more customers presenting a complex range of vulnerable circumstances.
The purpose of the letter is to remind 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 has already been active in this space by conducting four surveys of over 400 lending firms, consumer research and deep dives with a sample of 63 firms, covering a range of firm sizes and lending portfolios. The FCA has asked 34 lenders from the sample group to make improvements. The review identified that most firms did not consistently:
- Explore customers’ circumstances fully to provide help and support that was appropriate and tailored to their specific individual circumstances.
- Identify the specific needs and circumstances of customers with vulnerable characteristics to provide help and support that took account of these.
- Help customers in financial difficulty access money guidance or free debt advice.
In light of this, the FCA reminds lenders to:
- Ensure their approach to taking on new borrowers takes account of the financial pressure they may face and the impact on their expenditure.
- Consider and, where required, improve how they treat consumers in vulnerable circumstances.
- Effectively direct customers who need it to money guidance or free debt advice.
The landscape in this space is changing.
In the letter, the FCA strongly encourages authorised firms offering buy-now-pay-later (BNPL) products that are exempt from regulation to follow the guidance. Further, this month, the Government announced plans to strengthen rules on BNPL. Under the new proposals, providers will be required to carry out checks on consumers, ensure advertisements are fair, clear and not misleading and seek FCA authorisation, among other things. The FCA is likely to look dimly on unregulated firms who ignore this letter and then seek authorisation and may use this as a reason to question the fitness of the applicant. This, coupled with the new Consumer Duty, which is expected to be finalised later this year, explains the FCA's bullish approach to this matter.
The FCA has said it will continue to monitor outcomes and carefully scrutinise firms in this sector. Further, it has stated that it will use its supervisory and enforcement powers to take further action as necessary.