FCA requires more data from consumer credit firms and sets strong cost of living requirements

April was a busy month for FCA regulation of consumer credit firms with three major publications issued. In their rules on borrowers in financial difficulty, the FCA focuses on protecting vulnerable customers in a cost-of-living crisis.  The FCA have also sought to strengthen their supervisory position by requiring extensive granular data reporting from consumer credit firms, maintaining their data led approach to identifying harm.

In their third publication, the FCA provide good practical guidance for consumer credit firms on their use of appointed representatives (ARs), as the FCA continues to focus on reducing potential for harm to consumers.

Strengthening protections for borrowers in financial difficulty

The FCA’s PS24/2 policy statement (95 pages / 1 MB) – Strengthening protections for borrowers in financial difficulty: consumer credit and mortgages – sets out final rules codifying and updating guidance originally introduced during the coronavirus pandemic.

The new rules significantly strengthen the requirements on consumer credit and mortgage firms to support customers in financial difficulty at an early stage.

From 4 November 2024, firms will be required to apply the definition of “priority debts”  to mortgages and repeat overdraft use. Further, the scope of the consumer credit sourcebook (CONC) as well as the mortgage conduct of business rules (MCOB) will be broadened to make it clear that appropriate support should be provided to customers at risk of payment difficulty as well as those already in payment difficulty.

Included in the new rules are enhanced expectations on firms around customer engagement and the provision of information to customers. For mortgage firms this will involve sending regular statements to all customers in arrears.  Consumer credit firms will be required to take into account individual customer circumstances when providing forbearance.  In all cases, firms will need to consider a wider range of possible forbearance options.  In line with the FCA’s expectations in other areas, notably the Consumer Duty, firms will need to keep their policies and procedures on forbearance under regular review to ensure they remain effective.

Under these new rules, firms will need to be vigilant as to when customers may need support, thinking carefully about forbearance options that are appropriate for each individual while ensuring they maintain records of their approach. Customers in or at risk of financial difficulty may also class as vulnerable customers and firms will need to ensure that their vulnerable customer policies are engaged, and their procedures are effective for such customers.  Finding a balance between appropriate forbearance arrangements while not distressing customers with too-frequent reviews will be an important judgment call for firms to make, especially in light of the risk of customer complaints arriving in the future.

Significant changes to consumer credit data reporting

The FCA has confirmed a major change of approach to its regular reporting, requiring consumer credit firms to report extensive granular data on the sale and performance of credit agreements.  The changes are set out in  PS24/3 (280 pages / 1.6 MB) and will come into force in a phased approach depending on the size of the firm.

The FCA consider that this data will help them monitor whether firms are delivering good outcomes for customers under the Consumer Duty, to monitor the credit market, and to monitor and supervise compliance with the FCA’s rules in the CONC and SYSC chapters of their Handbook and the FCA’s Vulnerable Customers guidance.  Benefits anticipated by the FCA include more focussed regulatory action and a reduction in regulatory engagement where customers are receiving good outcomes.

The new rules are a clear indication of how the FCA intends to approach firm supervision in the future.  The FCA has indicated it will be carrying out its own extensive analysis of the data, combining it with other data sets, notably mortgage data, to obtain its own view of consumer lending.  The data requested is at individual agreement level, enabling the FCA to identify and ask further questions about individual transactions and customer approaches.

Some changes have been made since the consultation stage, principally to make the new requirements more proportionate. The threshold for reporting data has been increased to £2 million in outstanding balances or £2m in new advances. This will remove a number of firms from scope who were facing a significant implementation cost burden.  Additionally, in response to feedback and further analysis the FCA has given large firms (£20m plus) 14 months and small firms (£2 - £20m) 20 months (both from the date of the policy statement) to prepare for implementation.

Although the FCA has said it anticipates the new data reports will lead to less and better focussed regulatory engagement, it remains very much a ‘wait and see’ as to whether this will be the case.  With this level of data however, firms can expect FCA engagement to ask detailed questions from the start.  To prepare for this, we would recommend firms ensure that they are able to retrieve data and records easily and that they are pro-actively analysing and interrogating potential issues revealed by the data in line with the Consumer Duty monitoring expectations.

Areas for improved supervision of appointed representatives

The FCA recently published a report on the supervision by principal firms of their appointed representatives (ARs) and introducer appointed representatives (IARs) who undertake credit broking, highlighting areas for improvement.

An AR is a firm or individual that carries out regulated activity under the responsibility of an FCA authorised firm. The firm is responsible for ensuring the AR complies with FCA rules, operating in a proper manner in line with their appointment. An IAR is a type of AR that can only undertake limited activities, such as distributing non-real time financial promotions on behalf of the firm.

Improving the appointed representative regime has been a continued focus of the FCA due to concerns about the risk of harm from ARs. Rules introduced in December 2022 require firms to conduct more due diligence and have more robust supervision over their appointed representatives.

The FCA’s report follows up on the recent rules by examining how an area that traditionally has a high number of ARs, consumer credit, has applied the new rules and expectations.  The report highlights many areas of good practice such as clear procedures for onboarding ARs, training programmes, onsite visits and customer contact and feedback to monitor the AR.

Areas firms may need to improve on include a failure to appreciate conflicts of interests between the companies or individuals involved in an AR agreement. This includes failure to carry out checks of activities and of AR websites for compliance with FCA rules, with firms too often relying on automated checks when onboarding ARs or IARs.

Firms looking to appoint ARs and IARs should note the FCA’s expectations on assessing their prospective appointments and on ongoing monitoring. Sufficient resource should be dedicated to ensuring their AR or IAR is aware of their obligations and monitoring the AR or IAR’s compliance with those obligations.

Co-written by Caroline Whitten of Pinsent Masons.