FCA to focus on affordability and culture in regulation of consumer credit

The SMCR comes into force for consumer credit firms on 9 December, as the FCA rolls out the extension of its application from the banking and insurance sector.

In a speech last week FCA executive director of supervision for retail and authorisations Jonathan Davidson said the SMCR would provide minimum standards for a “healthy, purposeful culture” that would help firms deliver value.

“In such a diverse sector as consumer credit, each of your firm’s cultures is different. And at the FCA, we do not believe there should be a ‘one size fits all’ culture and we do not prescribe what any firm’s culture should be. As far as rules go, our Senior Managers and Certification Regime is the minimum standard we require of your culture, of your behaviours and mindsets,” Davidson said at the Credit Summit last week.

Davidson said consumer credit firms which had already built healthy cultures were “highly performing and sustainably so”. He said the FCA would act where it saw firms without strong compliance cultures.

Consumer credit expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law.com, said firms should start to look at their culture now in order to be ready for the SMCR implementation.

“In light of the 9 December 2019 SMCR implementation date, clients should begin their preparations by holistically reviewing the culture they are fostering. Any gap between what a firm ‘says’ on culture and what it ‘does’ will need to be closed in order to ensure that their approach to business is positive, engaging employees and enhancing consumer trust. Steps taken now will significantly reduce regulatory and compliance risk in the long term,” Barber said.

Davidson said firms in the high-cost credit sector should take note of a letter published earlier in March (4 page / 189KB PDF), which focused on relending and affordability. He said the FCA had seen high levels of repeat lending in all areas of the high-cost credit sector and the regulator would be doing further work to understand the motivation for this and its impact.

Barber said: “It is unsurprising that the FCA talks about the need for firms to address the issues of affordability and creditworthiness; these have been areas of focus since the FCA took over the regulation of consumer credit. While there has been improvement, the FCA clearly thinks that there are some firms that are still not getting this right."

“As prompted by Jonathan Davidson, firms should be looking at the FCA’s approach to these topics within other parts of the sector and applying the learnings now, rather than waiting for the FCA to come knocking at their door,” Barber said.

Davidson said the FCA would be examining the growth of guarantor loans in the past few years, and whether potential guarantors had enough information to understand the likelihood of a guarantee being enforced.

He said that the FCA had already amended rules to ensure that protections for borrowers also extend to guarantors.

“My top tip for today is to keep ahead of the rules, you can invest in expensive tick box compliance or you can get on top of your culture. A healthy purposeful culture will be the best way to deliver value for you, your clients and your business,” Davidson concluded.