The regulation of consumer credit remains a priority for the FCA both in relation to the outstanding work which needs to be undertaken to replicate some of the original CCA provisions which remain in force, and where the regulator has identified actual or potential consumer detriment.
Staff incentives, remuneration and performance management
Having completed their thematic review into the nature of staff incentives, remuneration and performance management in the consumer credit market, the FCA has identified concerns with a significant proportion of firms from the sample. In particular they found that:
- firm practices were likely to encourage high pressure sales or collections;
- controls were inadequate or ineffective; and
- firms did not understand the risks that their incentive schemes posed and what controls were needed to mitigate those risks.
In light of its findings, the FCA is now consulting on a proposed new rule and guidance. The rule will require firms to put in place adequate arrangements to detect and manage any risk of non-compliance with their regulatory obligations arising from their remuneration or performance management practices. The Handbook guidance will help firms understand the purpose of the new rule. In addition, the FCA is also consulting on new non-Handbook guidance which will provide more detailed assistance, for example by setting out examples of good and poor practice.
Retained provisions of the Consumer Credit Act
As part of the transfer of regulation, Parliament repealed some provisions of the Consumer Credit Act 1974 and some of these were replaced by FCA rules. The FCA was required to undertake a review in relation to the remaining CCA provisions and to report on this to the Treasury by 1 April 2019, including any recommendations for change.
Review of the High Cost Short Term Credit price cap
The FCA has published a Feedback Statement looking at the effectiveness of its HCSTC price cap and covering other issues they have identified. They confirm that the price cap will be maintained at its current level but will be reviewed again in 3 years to ensure it remains effective.
They also set out their priorities for the next stage of their review of this sector. They will be looking at specific products in greater detail – rent to own services, home collected credit and catalogue credit as well as both arranged and unarranged overdrafts. If they determine that further intervention is needed they will issue a consultation paper in Spring 2018.
Proposed rules on persistent credit card debt
Following their 2016 credit card market study, the FCA identified further concerns about the scale and persistent nature of some customers’ credit card debt and firms’ lack of incentive to tackle it. In April 2017 the regulator published a Consultation Paper which proposes a way forward on persistent debt, including earlier identification of customers at risk of financial difficulty and requirements about the interventions which firms must make.
FCA research indicates that whilst most firms do consider affordability in some form, market practices vary considerably. The regulator has therefore issued a Consultation Paper which considers whether it would be helpful to amend their rules and guidance in relation to the affordability assessment. In particular they wish to clarify:
- The distinction between affordability and credit risk;
- The factors that should be used when designing appropriate and proportionate affordability checks;
- The role of income and expenditure information in lending decisions; and
- Their expectations that policies and procedures should focus on outcomes.
The majority of new car finance is taken in the form a Personal Contract Purchase Plan (PCP) which is a type of hire purchase. PCPs are popular with consumers but they are not the only form of finance and are less prevalent in the second hand market. The regulators have identified a number of concerns about the risks these products present, particularly where the affordability assessment was poor and/or the customer did not understand the contract.
The FCA is taking forward a range of work in this area including supervisory work with FCA authorised lenders, analysis of CRA records and scrutiny of firm’s sales practices. They aim to publish an update on this work in early 2018 with details of any interventions they deem necessary.
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.