Managing the Cost of Living – What The FCA Expects
With the cost-of-living crisis continuing to bite as October draws to a close, financial services firms are walking an ever-longer tightrope between the circumstances and needs of their customers and the stability of the market.
The Financial Services conduct regulator, the Financial Conduct Authority, is working to try to reassure firms and consumers during this difficult period. Recent speeches highlight that the Regulator sees the work of the previous decade as having laid a solid foundation that should both help the economy stay afloat and provide the toolkit that firms need to be able to support their customers. In short, the FCA will expect firms to offer proactive, tailored support to their customers over the winter.
FCA work in the consumer credit sector has limited practices that - whilst not common in the sector – undoubtedly led to consumer detriment and increased the resilience of the credit industry as well as trust in lenders and collectors, something that will play a significant role in keeping the UK economy afloat during the next 12 months.
Many consumers will find it difficult to pay their bills over winter, and with Christmas on the horizon, many more people are likely to turn to credit to help with paying for what they need.
An October letter to high-cost short-term credit lenders warned that lending criteria needs to be tightened to make sure that the risk of harm is minimized. The portfolio letter told firms to consider how the crisis will affect their customers and to take steps to support them, reviewing whether current processes will be appropriate or sufficient.
A particular concern is that more consumers will be “susceptible to purchasing unsuitable products”. As firms gear up to implement the Consumer Duty, shifting focus to actively delivering good outcomes, the Regulator devotes almost three pages of a seven page letter to reminding firms of the requirements of the Duty, in particular highlighting that Boards should have high-level implementation plans in place by the end of October; the suggestion here is that these then inform treatment of customers over the winter.
The FCA is pre-empting an unprecedented demand for credit. The Regulator has made clear that firms offering credit must “do so responsibly. Consumers should be able to understand and afford their credit products.”
The focus will be on how products are promoted, described, and on the quality of information given to customers, on firms’ approach to affordability including creditworthiness assessments, and sustainable borrowing for consumers.
Sludge practices, unsurprisingly, come in for some heat. The FCA makes clear that it expects firm management to “take the lead to remove such practices” – important because this signals clearly that it won’t wait for the Consumer Duty implementation date before it ramps up holding senior staff to account for sludge practices.
The balance between friction and sludge is a difficult one to navigate. In helping customers to fully understand the products they’re buying and how to use them, this creates some friction through adding steps to make customers aware of the risks and benefits of the product or consequences of cancellation, for example. Friction becomes sludge when they create barriers for customers acting in their own best interests, particularly where there are commercial incentives for the firm.
The creditworthiness balance, and the need to provide sustainable credit to customers who would struggle without it is another potential issue. More customers are likely to be in, or in danger of being in, financial difficulties over this winter and more customers than ever before are likely to be vulnerable. Whether products are affordable for the customer is a key concern.
The FCA has been vocal about repeat borrowing, which lenders must look for to assess whether a more rigorous creditworthiness assessment is needed. In its letter to high-cost lenders, the FCA points out that failure to properly assess creditworthiness when relending has led to firms failing in the past.
Finally, forbearance of course plays a significant role in helping customers to weather the next six months. Firms are expected to:
Support customers in line with their needs
Understand that vulnerable customers and those in financial difficulties may have different needs from others
Give those in financial difficulties tailored forbearance
Explore individual customers’ circumstances to understand what appropriate support looks like
Support those in financial difficulties by helping them to access guidance and free advice
Make sure fees and charges are fair and are not a source of profit for the company
The Regulator also warned that the economic environment could mean increased operational risks, meaning that governance arrangements should be reviewed.
Our range of Consumer Duty resources, including free webinars and downloadable items including a roadmap, checklists, templates and more can be found here.
Our dedicated Financial Difficulties course takes learners through techniques that have been tried and tested, covers questioning skills, empathy and active listening, what to say, when to say it, and how to support customers.
Priced at just £20 per user, the courses are accessible at the delegate’s convenience and provide a certificate upon successful completion, allowing firms to track and record each user’s progress.
For large groups, we can offer several Corporate Packages.