The Financial Conduct Authority (FCA) will be responsible for regulating consumer credit from 1 April 2014. It is anticipated that it will take a significantly different approach to the Office of Fair Trading (OFT) and will regulate the market more intrusively, intensively and rigorously. Firms should consider evolving how they organise and control their credit business to help reduce the risk of enhanced scrutiny and enforcement action. Both could undermine brand and demand time plus senior management resource.
Firms need to apply for interim permission by 31 March 2014. The FCA says interim permission is not just a tick-box exercise and firms should consider their business model and operations before applying. The FCA will determine when firms must apply for full authorisation based on their sector. During full authorisation, the FCA will complete a full business model analysis.
Likely focus areas
Based on our FCA proposals review and interaction with clients and the FCA, we believe the FCA is likely to focus of the following areas:
- Culture, governance and control – do firms have corporate governance structures with enough maturity and forward-looking management information to drive business decisions?
- Remuneration and incentives – are incentives designed to promote fair customer outcomes, as opposed to supporting aggressive sales and collections techniques?
- Business model and strategy – is the pressure on firms to strengthen balance sheets undermining the control framework and affecting customers unfavourably?
- Product design – are the products/services designed to maximise profit or minimise credit risk, rather than meet the customer need?
- Sales process – are risks, fees, charges and penalties documented transparently? What attention is being paid to customer risk or the ability and propensity to pay assessments taken before the sale?
- Complaints handling – do firms record credit complaints and sufficiently investigate and resolve them for all customers?
Challenges facing firms
The hardest challenge facing most firms – especially ones without FCA regulation – is adapting their culture to match the FCA’s principles. The FCA’s starting point is that customers should be central to every financial services business and that this may reduce your desire to maximise profit. Governance arrangements will need to be structured to show how the business organises its affairs and how it’s designed to match culture with operations.
Ensuring customers can afford a product through completing an appropriate and robust creditworthiness assessment is a major issue for firms. To determine what is proportionate, and therefore appropriate regarding a particular product, lenders must consider the product and individual borrower risks. Some firms are opting for electronic creditworthiness assessments provided by credit bureaus, whilst others are considering full income and expenditure assessments. The FCA has not issued any guidance on this and will use the following months after the transfer to decide what ‘good’ looks like. In the meantime, firms should use their product and customer-type assessments to form their own views.