FCA calls for action to help with rising cost of living

People

Thousands of lenders have received a Dear CEO letter from the FCA demanding immediate action to support consumers in the current economic climate. Alongside a reminder of the relevant rule books, and last year’s vulnerable customer guidance, the regulator sets out specific expectations around the rising cost of living. Recipients of the letter should look at a few potentially problematic areas to make sure they’re addressing the FCA’s concerns.

The FCA published its latest Dear CEO letter on 16th June 2022. The letter: The rising cost of living – acting now to support consumers was issued to thousands of firms in the mortgage and consumer credit sectors. It is an atypical Dear CEO letter – rather than setting out themes or subjects it expects firms to review and a deadline for either internal assurance of success or of reporting progress to FCA, the letter instead sets out FCA’s expectations for immediate improvement and demonstrable change in how customers, particularly those most likely to be vulnerable, are supported during what many commentators have termed a cost-of-living crisis.

The Dear CEO is clear that it does not only apply to new borrowers looking to take on a new mortgage, loan, hire purchase deal or credit card. It applies just as much, if not more so, to customers who are already indebted and whether or not such customers are currently experiencing payment difficulties.

When considering the requirements set out in the letter, firms, their compliance teams and their senior management will need to look across two main strands:

• Product sales, whether advised or unadvised and whether or not your firm is a provider or a distributor.
• Post sales performance. Not only the performance of the product, but crucially how the customer performs in their ability to maintain payments and whether they display signs of actual or potential financial difficulty.

Actions mortgage and consumer credit firms should consider

In response to the letter there are a number of key areas to look at to make sure that you are protecting consumers during this time and would stand up to scrutiny from the FCA.

Affordability and credit worthiness

Firms do not always have sufficient resources to re-assess and stress test their affordability and credit worthiness assessment processes as frequently as they would like. The FCA’s intervention, along with recent changes in the macro-economy, should prompt firms to carry out a thorough review of credit-worthiness assessments and consider whether amendments are required.

Effective MI for customer risk assessment

Lenders should consider whether they are using all forms of management information which could be at their disposal in the assessment of risk. For example are lenders using credit reference agency data appropriately? Or for customers without a long history could the lender also consider whether Open Banking data may assist the underwriting decision?

Identifying debt consolidation

Staff should be alert to when customers seek to borrow for consolidation, that is where the sole or main reason for borrowing is to clear existing debt. Firms should ensure this is in the best interests of the customer and consider whether the customer has sufficient information on whether the consolidation is in their long term best interests, as well as being immediately more affordable over the short to medium term. Procedures in offline sales should assist staff in having informed conversations with customers about their existing debt, whilst for online sales firms could develop red-flags or other MI tools if customers consolidate.

Is product switching in the customer’s best interest?

Consider product switching and whether this is in both the short- and long-term interests of the customer; for example it may appear to make sense for a customer to switch existing debt to a lower APR, but this will not necessarily be in their overall best interests if the amount repaid overall increases due to an increase in term.

Helping customers who need it most

Firms should build into their processes triggers which determine customers who will neither be encouraged to take new borrowing, nor who will be eligible for new borrowing should they apply (this may be driven by concerns over credit worthiness, among other things). Customers in these segments should instead be referred to free debt advice, such as through the Citizen’s Advice Bureau or Step Change.

Refresh staff training

In keeping with the above, staff may need refresher training on how to spot customers in financial difficulty and refer them either to inhouse debt specialists or external free debt advisors. Firms may need to revisit the circumstances or ‘prompts’ for when such referrals are made as customers increasingly feel the pinch in their household budgets.

Look at fees

Firms should also review their fee charging structure and consider whether a temporary suspension of fees chargeable to accounts should be enacted.

We can help

At Bovill, we have a team dedicated to advising firms in the mortgage, insuance and credit sectors. We have over twenty years’ experience helping firms to become authorised by the FCA and remain compliant with UK regulation. We can provide advice on any of these issues and hands on support where required.

 

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