Implementing the Consumer Duty in Mainstream Consumer Credit Lenders (MCCL) [pdf]

The Financial Conduct Authority, FCA, has published an open „Dear CEO Letter“ addressed at firms engaged in consumer credit lending or so-called „Mainstream Consumer Credit Lenders (MCCLs)“, as regards the upcoming new consumer duty. Among other things, the letter
– reminds firms of the implementation timeline of the new duty,
– summarizes the key pillars of the duty,
– outlines how these pillars apply towards such firms,
– provides feedback from a recent review of firms‘ level of adaptation to the new duty,
– sets out the expectations of the FCA in this context,
– provides some good and poor practices as far as the adaptation to the new duty is concerned, and
– summarizes some key issues firms shall take into account when transposing their new requirements.
Some of the key issues addressed in the letter are briefly summarized below. It shall be noted in this context that the summary is far from complete which is why affected firms MUST review the original Letter.
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##### Issues to consider when transposing the new requirements and how the new duty applies to credit lenders
Credit lending institutions particularly need to review their products and services offered to retail customers. This entails an assessment as to whether or not a particular lending arrangement suits the target market and meets the needs of borrowers. The target market should thereby be described as detailed as possible to ascertain that the right group of borrowers gets the credit it is intended to get. Additionally, credit lenders should regularly review their loan products to ensure that they still meet customers‘ needs.
Credit lending institutions must particularly focus on the „value for money issue“. In this context, the FCA notes that lenders must adequately assess the financial situation and the credit history of a client to ensure that a loan product is affordable for the customer. Additionally, firms need to review their pricing policies so as to ascertain that specific groups of customers – e.g. customers with low credit ratings – are not overcharged via excessive fees for initiating a loan arrangement or via extraordinary high interest rates. The fees and rates must be commensurate with a customer’s creditworthiness and an institution’s risk appetite.
The FCA also expects credit lenders to help customers understand the basic terms and provisions underlying a loan arrangement and to make them aware of any options they may be having in this context (e.g. loan consolidations). Latter particularly holds true in times such as this one where inflation is high and money is quite tight for most customers. Any communication with customers must be clear and „tailored according to the complexity of the products and the characteristics of the customers intended to receive them“. Additionally, firms need to monitor and ensure that these communications function as intended so as to enable borrowers to make informed decisions about any loans.
Finally, credit lending institutions must implement an adequate level of customer support, particularly in view of (anticipated) financial difficulties. This means that they shall determine „good“ ways to offer customer service, e.g. via phone or e-mail, to support customers with any issues such as the deferral of payment or consolidation of loans, or any other issue relevant for the client’s outcome. Such support systems must be adequately monitored and controlled.
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##### The implementation timeline of the new duty
– The policy statement to the new duty was published on July 27, 2022 (please see EventID 16865 in this context for more information).
– A corresponding guidance (FG 22/5) was issued at the same time.
– The FCA expects / expected that by October 2022, all management boards have agreed upon a plan to implement the new duty.
– By April 2023, manufacturers of products, including creators of loan arrangements, should have concluded their reviews to ensure that their products or services meet the above noted requirements.
– On July 31, 2023, the duty comes into force for new or renewable products and services.
– On July 31, 2024, the duty comes into force for legacy products or services not subject to any renewals.
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##### Findings from a recent review of firms‘ level of adaptation to the new duty
Most firms have understood and „embraced“ the new duty and have assigned a significant number of resources and have implemented adequate plans to transpose the new requirements. However, some firms still seem to lack prioritization of the new duty and / or are unclear on how to do this. In this context, the FCA notes that they shall look at above noted issues and determine „where they are likely to be furthest away from the requirements of the Duty“. Furthermore, they shall focus on issues that could potentially lead to consumer harm.
The FCA also found that many credit lenders are over-confident that their current policies and procedures are sufficient to satisfy the new requirements. Therefore, and in view of the scope of the new consumer duty, the FCA strongly urges lenders to review their loan products, pricing strategies, and customer support to ensure that they are truly prepared for the new obligations
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Finally, the FCA concludes that in light of the tremendous significance of this business sector for retail customers, it is currently developing a strategy for supervised lenders „to embed the Duty in our Supervision work and tackle key harms“.