As the economic headwinds increase, the FCA continues to develop its work on borrowers in financial difficulty (BiFD) – with the regulator focusing on outcomes not only for consumers, but also SMEs. When assessing firms, the FCA has found gaps in policies and procedures, inadequate staff training, insufficient MI and outcomes testing, a lack of consideration for vulnerable customers and firms not using the full range of forbearance options available. Scrutiny in this area will only increase with the introduction of the forthcoming Consumer Duty principle. This means it is important for firms to act now, and to ensure that their collections processes as well as their lending processes meet expectations and would stand up to scrutiny from the regulator.
Lending
Poor outcomes for borrowers can start with inappropriate lending decisions. With demand for credit increasing, it is important for firms to maintain effective control over credit granting and ensure that credit is affordable, and also sustainable. At Hogan Lovells, our consultants have worked with many firms who have been challenged by the FCA to explain their historic credit granting decisions and how they have satisfied themselves that the lending was affordable.
Questions to ask:
- Is the firm’s approach to responsible lending clearly documented with policies, procedures and processes?
- Has senior management approved the approach, and given due consideration to the balance between commercial and conduct requirements?
- Would the firm be comfortable describing its approach to the FCA?
- Does the firm’s record keeping enable it to accurately rebuild individual lending decisions and demonstrate the affordability checks made?
- Is there MI available to show that lending is within expected conversion rate levels, and to the agreed target market? Does senior management review the MI?
Collections
Collections is a key area where the FCA is expecting firms to demonstrate how good customer outcomes have been achieved. There is an expectation that firms must show that they are using the full range of forbearance options available, and that they are also being proactive in identifying and addressing potential issues that customers may face. Meeting these requirements can put a strain on collections teams, so it is important to ensure there is sufficient capacity and capability to meet the inevitable rise in customer queries that is set to come.
Questions to ask:
- Is the firm’s approach to collections and forbearance clearly documented with policies, procedures and processes?
- Has senior management approved the approach, and given due consideration to the balance between commercial and conduct requirements?
- Would the firm be comfortable describing its approach to the FCA?
- Is there MI available to show that the collections process is meeting conduct, not just commercial objectives? Does senior management review the MI?
- Are the learnings from the collections team fed through into sales and product development?
- Is there sufficient demand monitoring to ensure the collections team is sufficiently staffed to meet customer needs?
- Has the firm assessed whether its loans are enforceable under the Consumer Credit Act?
Vulnerable customers
Ensuring vulnerable customers receive adequate support is a key focus of the FCA. Most lending firms have concentrated their efforts in the training and management of collections teams, but it is important to consider customer vulnerability in the sales process too. Firms should think about how they identify customers seeking credit who may be vulnerable – particularly in relation to the vulnerability of being financially unsophisticated.
Questions to ask:
- For online-only sales channels, can the firm have confidence that customers fully understand the product and the sales process?
- Is the full range of customer vulnerabilities considered?
- Is there sufficient focus on teams and departments who may not be customer facing, but can have an impact on outcomes (e.g. IT and Marketing)?
Consumer Duty
The challenge the FCA is giving firms on their fair treatment of borrowers will only increase once the Consumer Duty principle is in force. Consumer Duty brings in a range of additional requirements, such as cross-cutting rules which go above and beyond the current expectations of TCF. Concepts such as the need to avoid ‘foreseeable harm’, and the need to ensure fair value for customers, have the potential to significantly change the way lending firms develop products and go to market.
Questions to ask:
- Has the firm started to map out Consumer Duty gaps and issues?
- Can fair value be demonstrated for the products?
- Are there elements of the sales process or business model that may be open to challenge?
Oversight and control
Achieving these objectives is predicated on the effectiveness of the control framework and the governance arrangements. As noted above, where the FCA has found failings, these can be traced to deficiencies in policies, procedures, training and oversight. Uplifting these controls is dependent on the senior management team understanding where the deficiencies are, and driving improvements.
Questions to ask:
- Is there effective Quality Assurance within the First Line of Defence to spot and address errors and control failures?
- Do role profiles and performance management objectives include sufficient weighting for conduct risk and customer outcomes?
- Can functional heads show they have taken reasonable steps to assess products, monitor their sale, and take action to address customer harms?
- Is there effective oversight, and performance MI, across the Three Lines of Defence? Does senior management take action when results are outside tolerance?
How Hogan Lovells can help
Faced with increased regulatory scrutiny, firms need to take proactive steps to assess whether their collections and credit granting procedures would meet the FCA requirements, both now and as the Consumer Duty requirements are developed.
At Hogan Lovells, the combined experience of our legal and consulting teams enables us to offer our clients a joined-up approach to support them. We are able to consider both legal and regulatory obligations, and also how they can be operationalised within the First Line of Defence.
Authored by Frank Brown.
