The new rules for assessing creditworthiness are effective from 1 November 2018. The changes clarify the existing rules and guidance in relation to responsible lending and post contractual requirements. In particular it explains:
- the distinction between affordability and credit risk;
- the factors that should be used when deciding the proportionality of assessments;
- the role of income and expenditure information; and
- FCA expectations around firms’ policies and procedures.
Firms should also read across to the recent Dear CEO Letter to HCSTC lenders on affordability.
Staff incentives, remuneration and performance management
New requirements in relation to staff incentives, remuneration and performance management came into effect on 1 October 2018. There is a new section 2.11 in the Consumer Credit sourcebook which also imposes a requirement on firms to put in place arrangements to detect and manage any risk of non-compliance with their obligations. Helpfully the FCA does provide examples of good and bad practice in FG18/2 but firms must determine for themselves whether their arrangements drive the right behaviours and effectively manage their conduct risk.
Retained provisions of the Consumer Credit Act
As part of the transfer of regulation to the FCA, Parliament repealed some provisions of the Consumer Credit Act 1974 and some of these were replaced by FCA rules. The FCA was also asked to review the remaining CCA provisions to consider whether they should also be replaced by FCA rules and guidance and to report back to the Treasury by 1 April 2019. The FCA has now published an Interim Report which sets out their initial views and whilst the report does not include proposed recommendations it sets out the general direction of travel. The final decision about the future of the CCA provisions will sit with the Government.
Review of the High Cost Short Term Credit price cap
The FCA is reviewing the HCSTC price cap that came into force in January 2015, looking specifically at whether consumers excluded from credit as a result of the price cap are turning to illegal money lenders. In progressing this theme further, the FCA published two Consultation Papers in May 2018:
CP18/12 which considers rent to own, home collected credit, catalogue credit, store cards and alternatives to high cost credit.
CP18/13 which considers arranged and unarranged overdrafts.
Final rules on persistent credit card debt
Final rules to address FCA concerns about the scale and persistent nature of some customer’s credit card debt have now been published in Policy Statement 18/4. Included in this is a requirement for firms to tell customers about the potential implications of continuing low repayments, including the possibility that their account may be suspended and the ensuring impact on their credit file. The FCA also state that they expect three to fours years to be a reasonable timeframe for customers to repay, a period slightly longer than this may be reasonable but in exceptional circumstances and where this results in no additional cost to the customer. The general expectation, though, is that if the debt cannot be repaid over this period, it is appropriate to give forbearance. The final rules come into force on 1 March 2018 but firms have until 1 September 2018 to comply.
In its business plan for 2017/2018 the FCA announced that it was looking at the motor finance market to develop its understanding and assess whether it was functioning properly. The FCA has identified a number of key questions which they are now focusing on:
- Are firms taking the right steps to ensure that they lend responsibly, in particular by appropriately assessing whether potential customers can afford the product in question?
- Are there conflicts of interest arising from commission arrangements between lenders and dealers, and if so are these appropriately managed to avoid harm to consumers?
- Is the information provided to potential customers by firms sufficiently clear and transparent, so that they can understand the risks involved and make informed decisions?
- Are firms managing the risk that asset valuations could fall and ensuring that they are adequately pricing risk?
The FCA expects to finish its review by the end of September 2018 when it will publish details of its findings, identify any areas of concern and explain how it intends to tackle them.
Review of the Consumer Credit Directive
At a European level, the Commission has decided to carry out a full-fledged evaluation of the Consumer Credit Directive in line with the Better Regulation principles. The evaluation is planned to be concluded in 2019.
How we can help
Bovill have worked with a wide range of consumer credit firms, ranging from banks to brewery companies, payday lenders to technology companies and rent-to-own firms to estate agencies. We can help with FCA authorisations, regulatory gap analyses and health checks, regulatory training and other regulatory change projects. Give us a call.