Thank you for inviting me to speak to you this morning. The theme of this morning’s seminar is the Consumer Credit Sourcebook six months on. Rather than focusing on the specific detail of the rulebook I will be looking at its practical application and how we are using it improve outcomes for consumers. It has only been six months since the FCA began regulating consumer credit. We undertook a large amount of preparation in advance of taking on this new responsibility. This put us in a good position from day one and we have done a huge amount of work in what is a relatively short period of time. I will come on to this in more detail shortly. The following speech will outline what has been done in addition to what we will be doing in the next six months and beyond. There is still a lot to do to ensure we have a fair consumer credit market that delivers good consumer outcomes.
To begin with though, I thought it important to say that while credit is something new for us, the way we regulate this area and the principles we apply, are consistent with the approach we take to other areas that we oversee. For many of you this will already be familiar ground, but it is important to review given the changes the FCA has seen in the two years.
Consumer credit objectives
The FCA’s strategic objective for consumer credit is to ensure that the market functions well for consumers. The three operational objectives we apply are to:
- secure an appropriate degree of protection for consumers
- protect and enhance market integrity
- promote effective competition in the interests of consumers
As our understanding of the market has grown, we’ve been able to exercise judgment to understand the diversity of it and what the end user is experiencing as they engage with its different components.
We are now more focused on the big issues that matter, and are getting better at identifying the risks to consumers in this market.
We’re more outcome-focused policies and checklists are important, but they do not guarantee good conduct. As such we are consistently asking what a firm’s actions mean for consumers on the ground and challenging business models to ensure consumer outcomes are at the heart of all strategic decision making.
The change from OFT to FCA
So that’s the big picture. But more specifically, what does this mean in terms of consumer credit? In April of this year, the number of firms regulated by the FCA rose from around 27,000 to well over 70,000. Two-thirds of the FCA's total regulated population conducts consumer credit activities.
These new firms are diverse in their nature and size. Credit is an incredibly varied market, with credit cards, overdrafts, brokers, payday lending, credit reference agencies, debt collection and debt management, to name just a few. The vast majority are smaller C4 firms. As C3 and C4 firms do not have named supervisors, their primary contact route is the Customer Contact Centre. However, in the event that we see risks to our statutory objectives, our supervisors will work to understand the issue and resolve or mitigate them as we do for any larger firm.
Some firms that were already regulated by the FCA before 1 April may see their category change when they apply for full credit authorisation. For example, a firm that has been a C4 so far, because its non-credit regulated activities have been relatively small, may find that it becomes a C3 or C2 once credit activities are included. Where this happens the change will be communicated by us in plenty of time for appropriate arrangements to be made.
For C1 and C2 firms key relationships will continue with existing supervisors or the supervisory team. Further to this the consumer credit team will assist them in relation to credit specific matters.
The new regime also represents a big change for many of the firms themselves.
Consumer Credit Requirements
Rather than a ‘tick-box’ approach to compliance with rules and guidance, the FCA’s threshold conditions and high level principles for businesses such as ‘treating customers fairly’ seek to put the interests of customers at the heart of every firm’s business. Having good consumer outcomes at every stage of the credit journey is key.
The previous regime for consumer credit was based on a requirement for licensed credit firms to comply with the requirements of the Consumer Credit Act and not to engage in unfair or improper conduct identified in OFT guidance. The OFT regulatory regime was largely reactive. This was the mandate it had. The FCA however has a bigger regulatory toolkit, and can measure firms against our principles, as well as the rulebook and the retained parts of the Consumer Credit Act. More resources are also available to carry out work and adapt to changing market practices.
Changes to the approach
Rather than a ‘tick-box’ approach to compliance with rules and guidance, the FCA’s threshold conditions and high level principles for businesses such as ‘treating customers fairly’ seek to put the interests of customers at the heart of every firm’s business. Having good consumer outcomes at every stage of the credit journey is key. This includes:
- in advertising and financial promotions
- in product terms and conditions
- at the application stage
- in customer service during the life of the product
- post-sale problems, including debt recovery, debt management and complaints handling
Interim permission and authorisation
In April, we had around 50,000 firms with interim permission. Getting that number of firms through the Authorisation gateway was a challenge, both for the FCA and for the firms themselves.
The good news is that many firms have been active in engaging with the FCA and are readying themselves for the process. Trade bodies and associations are also playing an important role in getting key messages out to their members and in guiding them as they prepare for their application period.
The application deadline
It is important that firms are aware of when the deadline for their application for full permission is. Those that have not applied by the time their interim permission lapses will need to cease trading. That’s not something we want to see. The application should not be left to the last minute. Our online application system allows firms to start their application and save it for completion at a later stage. There are a range of tools on our website to help with the process, along with our Contact Centre who can answer any questions. We also have a series of webinars coming up over the next few months. We have held two of these so far and will be holding more three months prior to the start of each application period.
Our expectations
It is our expectation that firms must comply with the letter and spirit of rules and guidance as of the 1 April 2014, not just from when they apply for full authorisation.
The authorisation process is an on-going journey for firms. It is an important opportunity to demonstrate that they are exhibiting attitudes and actions that benefit customers and that they are central to a firm’s systems, business model and culture.
How we regulate, in practice
The way we regulate credit firms is consistent with our approach to supervising other financial services. On a day-to-day basis this is centered on three key pillars – the Firm Systematic Framework, Event Driven, and Issues and Products work.
Pillar 1: The Firm Systematic Framework, also known as Pillar 1, aims to make forward-looking assessments of firms, and the risks they pose to our objectives. It is designed to answer the key question of ‘are the interests of customers and market integrity at the heart of how this firm is run?’ As part of our pro-active engagement with firms during the interim permission period, we are conducting firm-specific visits to the largest firms within certain subsectors. Additionally we have already visited firms in two subsectors, home-collected credit and debt management. We will shortly begin visiting debt collection firms, followed by pawnbroking firms.
Pillar 2: The second supervisory pillar is based on dealing with issues that are emerging or those that have happened, and are unforeseen in their nature. We call this ‘event driven work’. It covers everything from issues arising from mergers and acquisitions to whistleblowing allegations; spikes in reported complaints to investigating reports of mis-selling. With all cases, we will act with pace and proportionality, with a focus on securing customer redress, where applicable. Pillar II intelligence comes from a range of sources, including the firm itself, consumers, other firms and other organisations including the Financial Ombudsman Service and Local Authority Trading Standards Services.
Of the fifteen sub-sectors that are used to categorise consumer credit activity, four have generated the most alerts in our first six months: credit broking, debt management, debt collection and payday lending. Unsecured lending and credit cards come fifth and sixth. Pillar II work has been the biggest focus for the FCA over the past six months and will continue to be so during the interim permission regime.
Pillar 3: The final pillar is broadly termed ‘issues and products’ and is commonly known as thematic work. This will identify and determine the extent of any cross-firm or product issues, and provide a wider basis for us to investigate and, if needed, mitigate.
A current example includes the ongoing thematic review into the forbearance practices of high-cost short-term credit providers. The new consumer credit rulebook means that anybody taking out a payday loan will be treated much better than before. The reality is that a significant number of borrowers struggle to repay these loans on time, if at all. The thematic review is therefore looking at how high-cost short term lenders treat their customers when they are in difficulty, as well as examining the culture of each firm to see whether the focus is truly on the customer as it should be. We expect to report on this work in early 2015 and will feed back to the individual firms in due course.
Another thematic review is also underway to look at the quality of advice provided by debt management companies. Evidence suggests that consumers with multiple debts approach debt management providers when these debts become unmanageable. It is vital that when they do so, the advice they receive is appropriate and not driven solely by firms’ own incentive structures.
Penalties
Since April we have issued final notices against two firms who have had their applications refused. Seven firms’ bank accounts have been frozen to protect client money, fourteen firms have agreed to stop taking on new business and we have directed seven firms to appoint a “skilled person” to report on the firm’s compliance with FCA rules. We are also investigating a number of other debt management firms and individuals.
Other thematic projects will include credit firms as part of a wider sample. Our current work on unauthorised transactions is a good example of this. We will look at whether consumers that suffer unauthorised transactions on their bank or credit card account are getting fair outcomes. This will include ensuring that firms are not placing unreasonable obstacles or responsibilities on their customers, or unfairly rejecting claims. Some of you will have received information requests already to inform our work in this area. We’ll be reporting our findings next year.
We’ll also be focusing on cross-cutting issues that will permeate all of our work, such as how firms assess not just a customer’s ability to repay, but also whether the credit they are offered is truly affordable.
And culture is key. It’s not only about setting out and reinforcing to staff the values by which a firm wishes to be known, and judged by. It is also about how its people demonstrate the firm’s values through their actions. The actions of staff at every level of a firm, from the boardroom to product designers, from the bank branch to the outsourced call centre.
Recent issues and examples
As I mentioned it has been a busy first six months and I think it would be useful to give a few examples of particular issues we have found and what we have been doing to address areas of concern.
Financial promotions
Principle 7 of the FCA’s Principles for Business states that firms should communicate with consumers ‘in a way which is clear, fair and not misleading’. Promotions that fail to do so can pose real risks, as they often lead consumers to buy the wrong product or service. In August we issued a warning to consumer credit firms over their use of misleading adverts. At that time, we opened 227 cases against credit firms concerning non-compliant adverts.
A quarter of these cases relate to advertisements for high-cost short-term credit, with many not prominently displaying a risk warning or representative APR. Other common areas included debt management firms that did not make it clear that services are not free of charge, and promotions that guaranteed firms would provide credit regardless of customers’ circumstances.
Firms have generally responded positively when contacted by the FCA and have been quick to make changes to promotions that do not meet the standards. However, we are disappointed to see standards fall short of what we expect and we believe that firms in this sector can do more to ensure financial promotions meet the standards. Our rules in this regard are clear and well established. We expect firms to act in accordance with the spirit of the law as well as the letter and ask them to put themselves in the place of consumers when designing their advertisements.
Outsourcing
It is a given that firms must have appropriate oversight, systems and controls in place when outsourcing any activities. For consumer credit in particular, firms need to ensure that the third parties they use have suitable permissions, whether interim permission or full authorisation, where they are conducting regulated activities on behalf of the firm. For example, we’ve seen cases where outsourcers have stepped over the regulatory line from providing purely administrative support to dealing with queries relating to the customer’s credit position. We have been working with firms to address this. However it is important that all firms consider their approach to overseeing any outsourced work, and that they keep the wider point in mind that even where firms outsource activities and act responsibly.
Debt collection letters
One issue that has received a lot of public attention is the use of pseudo-legal letters when collecting debts.
We have reviewed consumer complaints relating to debt collection practices received since 1 April 2014. While harassment made up the largest proportion, including the pursuit of disputed debts, the next largest group related to misleading practices, including the use of debt collection letters in a different name from that of the lender.
We have already concluded interventions in respect of some of the cases passed over to us from the OFT cases – including the £2.6 million redress that Wonga has agreed to pay to around 45,000 customers - and are actively investigating the debt collection activities of a number of other creditors, debt purchasers and debt collection firms.
FCA Principles
It is unacceptable for any firm to mislead consumers, whether by the content or style of its correspondence or by virtue of the business name used. Two of our Principles for Business are particularly relevant here: Principle 6 states that firms must treat their customers fairly, while Principle 7 says that a firm must communicate information to its clients in a way which is clear, fair and not misleading. Our credit sourcebook, CONC, goes into more detail, stating that a firm must not carry on a credit-related regulated activity under a name which is likely to mislead customers about the status of the firm or the nature of its business.
Working with industry
There are also a number of positive examples of projects where the FCA is joining up with industry to achieve better outcomes for firms, regulator and consumers alike.
Project Innovate
The first is the FCA’s Project Innovate. Regulation can sometimes seem to get in the way of innovation. Technology moves quickly and rather than hold up progress, we want the FCA to help firms that are innovating, at the same time as ensuring that consumers’ interests are at the heart of new developments.
To help this happen, the FCA is working closely with financial service firms who are developing innovative approaches. For example, earlier this year we launched a hub that will provide more bespoke FCA support to innovators in three key ways:
- we’re providing compliance expertise to firms developing new models or products so they can navigate regulation. This might include services that aren’t explicitly covered by regulatory rules or where the guidance looks ambivalent
- we’re launching an incubator (dedicated team) to actively support innovative financial businesses as they get ready to apply for authorisation. This will involve proactive engagement and support on how to approach the authorisation process, for example, in relation to presenting a business plan
- we’re looking for areas where the system itself needs to adapt to new technology or broader change – rather than the other way round. To achieve this we issued a call for input on Project Innovate in July this year, and earlier this month we published the feedback received from six roundtable discussions we hosted in July and August. We will announce the final design later this year. More details for Project Innovate are available on the FCA website
Let me be clear we’re not clamping down on the credit market, but on unaffordable lending and unfair treatment of consumers. We want to raise standards in the credit industry by making sure that there is a culture among firms of ‘doing the right thing’ for customers at every stage in the customer credit journey.
Credit card proof of concept
We’re always looking for more efficient ways to collect data to reduce the reporting burden on firms and to ensure that we have the right sort of data to do our job effectively. We’re pleased that a number of credit card firms have volunteered to help us with a 12-week project to explore the best way for us to collect and analyse firm data. This aligns with our data strategy published last year.
We are increasing our understanding of which consumers are using credit cards, how they behave with credit cards and the credit card products themselves. Our aim is to be able to determine the type of data that is required to enable us to regulate the credit card market effectively and what range of options are available to us to acquire this. We hope that this will result in a better use of data by the FCA, and reduce reporting burdens on firms.
Consumers in vulnerable circumstances
Many of you have also made a valuable contribution to our ongoing work on consumers in vulnerable circumstances. This project has enabled us to hear from firms with ‘a good story to tell’. In addition to the think piece which will be published in early 2015, we’ll be using the learnings in this area to inform our wider work, including the way we supervise firms.
We want to raise standards in the credit industry by making sure that there is a culture among firms of ‘doing the right thing’ for customers at every stage in the customer credit journey.
What does the year ahead (and beyond) look like?
By April 2016, all consumer credit firms will have moved from the interim permission regime to full authorisation. It is likely that the credit landscape will look different in the future. Some lenders and intermediaries will decide to leave the market, new entrants will join and others will merge. We have already started seeing this change occurring.
Let me be clear we’re not clamping down on the credit market, but on unaffordable lending and unfair treatment of consumers. We want to raise standards in the credit industry by making sure that there is a culture among firms of ‘doing the right thing’ for customers at every stage in the customer credit journey. And for fair trading businesses this will present opportunities. Good outcomes for consumers mean good outcomes for fair trading businesses. We want to see firms competing on ‘a level playing field’ on factors such as innovation, high levels of customer service, etc.
For all credit firms, good conduct means:
- transparent communication
- responsible lending based on proper affordability requirements
- treating customers in difficulty with forbearance
- providing suitable debt advice in the way the consumer wants to access it
For the FCA, this means using the tools available to us in an appropriate and proportionate manner. This will include proactive engagement with firms, before, during and after they come through the Authorisation gateway, as well as reacting to events as they happen. We’ll also continue to use our enforcement powers where necessary.
When we took over regulation of consumer credit we announced that we would carry out a market study on credit cards. 30 million people in the UK hold at least one credit card, with 56 million cards in issue. This is a hugely important market and we want to find out if it is working well for consumers. We carried out research earlier this year and identified potential areas of concern for consumers, for example not being able to choose the best card and facing increasing debt after being issued with credit cards.
In November, we are planning to publish the terms of reference for the market study, which will last for a year. We will then decide whether we need to introduce remedies to help protect consumers. We also plan on meeting with industry and consumer groups before we publish the terms of reference and throughout the process.
We’ll continue to review the credit rulebook and guidance (CONC) to ensure it reflects the market and addresses the existing and emerging issues in that market. We will also be assessing and acting on the changes in the credit landscape, from the effect of any interchange fee cap to the impact of potential base rate rises.
During this time we will be engaging with firms, trade bodies and other regulatory bodies to work towards a credit market that works for firms themselves and, most importantly, the consumers they serve.
Summary
This has given you a good overview of what we have been doing over the first six months as well as what we have planned going forward. There is still a lot to do across the range of credit sub sectors that we are now responsible for regulating. We are very much focused on making consumer credit regulation part of our ‘business as usual’ and ensuring firms are authorised is part of that. In addition to the ongoing supervision of firms that was established as part of our supervisory approach. If you need further information on anything to do with the authorisation process, please engage with us as early as possible.
This is a new market for us and a new regime for many of the firms within it. However, our overall objective remains the same for all the areas we regulate: ensuring the best possible outcomes for consumers.