Consumer credit showing your working

As the FCA once again reiterates their focus on the consumer credit sector, it’s worth reflecting on where the regulator is finding fault when it comes to s166 reviews. In a post-SMCR world, the need to keep accurate records and be able to evidence oversight is even more pertinent.

 

FCA regulation of consumer credit – during the pandemic and beyond

Nisha Arora’s speech at the Finance & Leasing Association conference last week outlined the FCA’s areas of focus in the consumer credit sector. Arora, the Director of Consumer and Retail Policy, emphasised the regulator’s continuing focus on ensuring consumers can afford credit, and if they are unable to repay, that they are treated fairly.

The majority of the issues the FCA outline have a greater resonance for underwriters. But there are important considerations for intermediaries too. And it’s useful to reflect on the experience that Bovill has of current s166 activity, in particular when it comes to evidence.

Affordability 

  • Policies and process

The approach to affordability assessment should be customer outcomes focused and TCF led. The extent of verification and assessment should be proportionate to the sums borrowed and the customer’s circumstances. This consideration of customer circumstances is a key point, particularly when dealing with lower income cohorts. If a firm knows customers may have limited disposable income, they should take sufficient care in the assessment process.

And having the right policy is insufficient, if it is not followed correctly. Firms should ensure the 1st line monitoring and QA framework is in place to spot and correct deviations.

  • Governance and strategy

When considering the suitability and appropriateness of the affordability assessment, senior management within firms need to be able to demonstrate that they have actively considered both the commercial and customer outcomes. The approach should be Principles based, not just rules based.

Once the policy has been set, senior management also need to show that they are actively monitoring the results, and taking action if it is apparent that customer detriment is occurring.

In both cases, it is insufficient to merely say this oversight occurred, firms will need to demonstrate the approach with evidence – MI packs, Exco agendas, minuted actions etc.

One of the key risks firms can encounter is a misalignment between business strategy and market reality. We highlighted these issues in our paper Financial Drivers of Conduct Risk.

The current situation with Covid-19 has had a significant economic impact this year (and will probably spread into next). Plus the Brexit transition is creating economic uncertainty – whatever the outcome might be. There would therefore clearly be risks of potential mis-sales if firms were following 3-year business plans which have not accounted for market shifts.

  • Record keeping

Firms should ensure they maintain adequate records of the underwriting decisioning process, and the information they have received from customers. Firms may be required to evidence and justify underwriting decisions made today, in 3 or 5 years time (if the FCA requires a redress exercise).

  • Issues for intermediaries

Consumer credit broking can cover a broad range of activities from merely introducing a customer to an underwriter, to taking an active part in the gathering and verification of customer data.

It is very important for intermediaries to be clear where their regulated activity ends, and the underwriter’s begins. It is definitely wise to have those discussions (and obtain the contractual clarity) well before the FCA comes knocking at the door, waving a s166 requirements notice.

Senior management within intermediaries should also be mindful of Principle 1 (conducting business with integrity), Principle 6 (paying due regard to the interests of customers) and their SMCR obligations. they should consider the level of awareness they have of the outcomes for customers they pass on to the underwriter:

  • Arrears levels
  • Early settlement
  • Complaints
  • Conversions rates (too high could point towards problems with affordability assessments).

Arrears handling 

The approach to arrears handling is less open to interpretation than affordability assessment. The clear focus is on applying a forbearance framework which aligns to the needs of the customers and can be shown as fair.

As with affordability, it is important that senior management can demonstrate (and evidence) their active involvement in considering, discussing and unpacking the relevant rules, and deciding what is the appropriate approach for their customer base.

Senior management should also be able to demonstrate that they have received relevant MI on customer outcomes, and applied course corrections where necessary – including taking learning from the arrears experience and applying them to the sales process.

Also, as with affordability, firms should not expect that historic bad debt assumptions will hold true in a Covid-19 reality. The FCA has put out a range of guidance on its expectations on how firms should be dealing with customer during the pandemic (e.g. FCA confirms next stage of support for consumer credit and overdraft customers). These messages should be incorporated into policies and procedures.

  • Vulnerable customers

The Covid-19 situation has inevitably led to more customers being considered vulnerable due to their circumstances. But firms should also be mindful of inherent vulnerabilities, either for individual customers or across the target market. So, whilst much of the focus of a firm’s approach to vulnerability will be in the collections space, they should also recognise that potential vulnerabilities should be considered at new business too. For example, being mindful of the Principle 7 expectations to develop financial promotions that are appropriate to the specific information needs of the identified target market.

The s166 experience 

Thankfully, most firms can go through life without ever experiencing a Section 166 Skilled Person review. But for those that do, the experience can be a costly one. We are currently acting as the Skilled Person on two consumer credit s166 cases, and are advising a number of other firms on their responses.

In all cases, the points outlined above (on affordability and arrears handling) remain true. Particularly around record keeping and the ability of senior management to evidence their oversight. And the issues regarding senior management have come into sharper focus now the FCA has the SMCR framework.

If those firms receiving a requirement notice had their time again, they would ask themselves:

  • Does my approach ‘feel right’, for the particular circumstances and challenges of my customer base?
  • Am I applying the rules AND the Principles?
  • Can I evidence what I have done?
  • Am I clear of my responsibilities, against that of other parties?
  • Would I be comfortable explaining my approach to the FCA

We can help

If you are looking to review your governance or compliance controls, or would like any advice on dealing with the FCA, get in touch.

Connect with Bovill

Frank Brown

Practice lead, Risk and Transformation

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