Consumer credit regulation: the journey so far

It is now two years since regulation of consumer credit transferred to the FCA. We saw another key milestone at the end of the last month as the deadline passed for firms which had interim permission to apply for full authorisation. So it is now an opportune time to reflect on the changes we have seen in the past two years.

On the 1 April 2014 around 50,000 firms transferred with interim permission from the OFT to the FCA, since then we have determined over 30,000 applications for authorisation including over 8,000 firms which are new to the consumer credit market.

We have sent 440,000 emails to firms to help them through the authorisation process, our contact centre has taken over 150,000 calls relating to consumer credit, we have conducted 12 roadshows attended by over 900 people and over 13,000 people have watched our 14 webinars.

We have, together, made significant progress in driving up standards in the sector. There is much still to do but, from our perspective, consumer credit regulation is now firmly embedded as a key part of what we do at the FCA.

Twenty-three redress schemes have been put in place which will result in £334m of redress to consumers. In March we sent out 16,000 letters to consumers who had debt management plans with a company which had been refused authorisation, to inform them of their options and point them towards sources of free advice.

Alongside all of this we have completed thematic reviews into how payday lenders and other high-cost short-term credit providers collect debt and treat borrowers in financial difficulty. We have reported our findings on the quality of debt management advice.

We have also published the interim report on our credit card market study and introduced new rules on credit broking and a cap on payday lending charges.

So we have certainly been busy and I know that you have too as you adapt to the new regulatory regime. And with that in mind I want to start by thanking you for your positive engagement with us over the last two years.

We have, together, made significant progress in driving up standards in the sector. There is much still to do but, from our perspective, consumer credit regulation is now firmly embedded as a key part of what we do at the FCA.

And this is reflected in the Business Plan we published this week. In previous years our Business Plan highlighted consumer credit as a separate priority. However, two years on, we consider this to be a part of our core business. So the fact it does not get a separate name check is not a reflection of us focussing on the sector less. Indeed quite the opposite.

As you will have seen a number of the priorities we identify in the plan for the next year are very clearly applicable to consumer credit firms including advice; culture and governance; technology and innovation; treatment of existing customers; and financial crime. And we still have a big job to do in concluding the authorisation process.

So you should not expect to be seeing, or hearing, any less of us next year.

Of course effective regulation requires effective collaboration. In the spirit of this, we have a team on-hand today to offer practical support to your businesses. I hope you will use them. I also hope this session will be an interactive one. I plan to speak for about 20 minutes and will then take questions.

This morning, I will cover where we think we are now and what effective future regulation looks like for the sector.

An effectively regulated, trusted and sustainable credit sector is, of course, an imperative not just for us, but for your millions of customers.

At some point or another, most of the population use your services. In the credit card sector alone, there are 30 million credit cardholders with £61bn in outstanding credit card balances. So you don’t need me to spell out the material importance to the economy of effective, affordable credit.

And our regulatory approach is focused on how we help deliver that goal. How we ensure credit is available to those who need it without individuals falling into unsustainable debt that they will never be able to pay off, with the personal and social costs that brings.

So our approach has been, and will be, to target areas where we see the greatest risk of detriment through poor practices – credit broking, debt management and payday lending being some examples. And we have used, and continue to use, the gateway – our authorisation process – to drive up standards and keep out the firms that don’t meet them.

Where are we now?

I am not confident that we can yet say we have seen the end of the poor practices that have tarnished the industry. But we are determined to drive up standards and, encouragingly, we are seeing businesses begin to make the necessary changes to meet the requirements of the new world.

You know as well as I do, that a lot of the work you do is not really talked about at all. Respectable and valuable – it’s an activity that simply doesn’t set reporters’ pulses racing.

But unfortunately some sections of the credit industry have attracted a lot more media and political attention in the past than others. And rarely for good reasons. Indeed the intro talk highlighted this.

I don’t need to go into great detail about the headlines here. We’re all familiar with the lowlights, particularly across areas like payday and, fresh in all our minds, concerns over debt management.

Are these failures representative of the consumer credit industry as whole? Very clearly not. Consumer credit lending was reported to be over £180bn this year. And the majority of that is lent responsibility to customers who can afford it and use it sensibly.

But if you just went on what was reported in the press you would not know that. And the stories you would have seen were not pretty ones. Clear examples of customers, often in vulnerable circumstances, being treated very badly indeed.

It is clear that there has been an approach and a culture in some parts of the sector where the primary objective was to take advantage of customers, not to serve their best interests.

I’ll give a topical example here. When we refused to authorise PDHL to continue to operate its debt management business last month, we relied on evidence gathered through our authorisation and supervisory process. That revealed cases of customers’ files not being reviewed for months despite them reporting job losses. In one instance, we found the firm insisting a client should maintain £30 monthly repayments, despite the client having no income.

So I am not confident that we can yet say we have seen the end of the poor practices that have tarnished the industry. But we are determined to drive up standards and, encouragingly, we are seeing businesses begin to make the necessary changes to meet the requirements of the new world.

One example is the significant changes we have seen being made in the high-cost, short-term credit market. We have seen firms changing their business models, training staff to deal with struggling customers and improving how they assess whether loans are affordable to their customers.

And, let’s be honest, that has led to a reduction in business generated. In each of the last three years, we’ve seen the number of loans originated by payday firms decreasing. From 6.3 million in the first half of 2013, to 4.2 million for the same period in 2014, to 1.8 million last year. But encouragingly, Citizens’ Advice reports a reduction over the same timeframe in the number of clients they see with problem debt arising from payday.

But, of course, not everyone has been able or willing to adapt their practices. I think everyone in this room is aware that we’ve also seen certain types of firms exit the industry since the FCA took over consumer credit regulation.

We have refused authorisation to 40 consumer credit firms who didn’t meet our standards. We have also seen over 100 debt management firms leave the industry. Over 1400 firms in total have either been refused or decided to withdraw their application

Now, you can ask: ‘is this what success looks like to the FCA?’ Smaller business, fewer firms? And that is a fair question.

So let me be very clear in answering it. We have set out our expectations of the standards firms must meet to be authorised. And in many cases these are a step change from what was required in the past. But they are not a nice to have. They are critical to ensuring proper protection of your customers.

We are content to see firms leave the industry if they cannot meet these standards. And we think you should want that too. You should be competing on a level playing field where your peers don’t gain advantages by cutting corners or exploiting customers.

Having said that I don’t want to appear in any way glib or off-hand about the burden of regulation. We make no apology for imposing high standards. But we do recognise that adjusting to the new regime has been challenging, particularly for firms who don’t offer financial services as part of their core business proposition.

We’ve worked hard to minimise this impact on your firms. As I’m sure you’re all aware, over 17,000 consumer credit firms are in the limited permission regime. This recognises the lower risk posed by these businesses and provides a regulatory approach which is commensurate with those risks.

And as I mentioned earlier we have put significant effort into providing support and guidance. We are committed to continuing to try to support you and answer your questions.

Practical, sensible, deliverable suggestions on making regulation more effective are always welcome. And as part of that we have started a process to review the retained provisions of the Consumer Credit Act to ensure it makes sense in today’s environment.

We want to hear from you about whether you think the Consumer Credit Act is fit for purpose or whether you think it’s overly burdensome.

We want to hear your views on which of the Consumer Credit Act’s provisions should be reviewed and how best we should engage with you on this process.

We have published a call for input on this question (responses due by 18 May) but please speak to our team here today if you have thoughts on this.

Working together

It is worth noting that while a degree of challenge and creative tension between the regulator and the industry is not only healthy but also desirable, ultimately, in most of what we do the regulator and the industry are aligned.

We both want the industry to be known for the highest standards of conduct towards consumers.

We both want a competitive landscape, which rewards innovation and creativity and where customers have the ability and willingness to choose to take their business to the best providers.

And we both want the market to work well – with profitable, sustainable businesses meeting the needs of customers now and in the future.

And as our population changes – with increasing numbers of older consumers, an increasingly indebted younger population, later entry of individuals into the housing market and so on, the products and services you provide will remain critical but will need to evolve to meet the new landscape.

And we recognise regulation plays a part here.

The natural desire to take regulatory action in the face of conduct failures can focus activity disproportionally on short-term goals or impose restrictions which prevent firms innovating and adapting.

Equally, the sensible aim of reducing unnecessary regulation can lead the pendulum to swing too far in the other direction. Stepping too far back at a time when more control or tougher intervention is required.

So we need to take a long-term view to anticipate and prevent the problems of the future.

But how do we achieve this? I have been around long enough to see the cycle of ‘regulate, de-regulate, repeat’, the seemingly perpetual swinging of the pendulum.

But, odd though it may sound coming from a regulator, it is not enough to make and enforce rules, behaviour will only change permanently for the good if it is self-reinforced.

The ‘steady state’ future

To state the obvious, the industry won’t win public affection or, more importantly, public trust and respect, by engaging teams of lawyers to rake over dubious business propositions to see if they’re ‘doable’ or will ‘get by the regulator’. The question you should be asking is: ‘are they right for the customer?’

So the first feature of a ‘steady state’ future under FCA regulation will be that we expect you to promote, embed and enforce the right culture in your businesses. It’s not our job to define that culture – but what we want to see as an outcome is an approach where the interests of customers and the market are at the heart of your business and where you and your staff focus on delivering the right outcomes, not just meeting regulatory requirements.

To state the obvious, the industry won’t win public affection or, more importantly, public trust and respect, by engaging teams of lawyers to rake over dubious business propositions to see if they’re ‘doable’ or will ‘get by the regulator’. The question you should be asking is: ‘are they right for the customer?’

Ultimately, unless ‘doing the right thing’ becomes part of the DNA of all firms, unless the business frontline owns this change and buys into it, it won’t happen, no matter how many laudable mission statements we hear from those at the top.

An analogy I have used before is that the cultural change we are looking for is something akin to the shift in attitudes to drink driving between my parents’ generation and my own.

For them, reluctance to have a drink and get behind the wheel was mainly because they were scared of being caught. This was not seen as an ethical dilemma.

Many will have treated it like perhaps many of us we do speeding today – fine as long as you get away with it. So you slow down when you see a speed camera not because it makes you think speeding is wrong but because you fear the fine you may have to pay if you do not.

For my generation however, drinking and driving was presented as a moral issue. We were made to think about whether it was right or wrong by being forced to focus on the impact it could have on others’ lives.

So the interesting challenge is how we move from thinking about regulatory issues as being akin to speeding – about needing “a cop on every corner” to make good things happen – to a world where people more often make the right decision instinctively. Not because they’re being watched, but because they know that’s what’s expected and valued by their peers, their colleagues and their firms and because they’ll be ostracised if they don’t.

For today’s purposes, this means we expect you to continually assess if you’re pitching the right products at the right customers.

Are the costs of credit clear at point of sale? Is there an effective assessment of the ability to repay debt? What should happen if the customer is over-indebted? Is there proper forbearance if the customer gets into arrears? And to be clear here we are just as concerned about over forbearance as under forbearance.

And, where changes need to be made, who has responsibility for making sure they happen?

All fairly simple and sensible questions, I hope you’ll agree – but they’re crucial ones that we expect firms to be able to answer when we come calling.

Competition

So, you should expect the FCA to quiz you as much over basic questions of how you treat your customers and how your business model reflects this, as we do over your compliance with detailed rules.

You should also expect us to push for a consumer credit market where you look to attract customers by outdoing your peers on value and quality.

Our objective to promote effective competition in the interests of consumers is a core feature of the FCA regulatory regime.

For the avoidance of doubt, we don’t pick winners. But we do want to help new businesses come into the consumer credit sector if they can offer value to consumers. And we will support new and existing firms alike, who are looking to introduce useful innovations.

One of the ways in which we have sought to achieve this is by establishing an Innovation Hub – a unit within the FCA specifically geared towards working with large and small innovative businesses.

Essentially the Hub does two things. One is to provide direct support to firms that are exploring new innovations. And, we’ve already supported five innovative consumer credit firms into the authorisation process.

The second strand of work is about us, as a regulator, listening to the industry. We want to hear if regulatory barriers are preventing innovation, to ensure our regulatory framework remains fit for purpose for the 21st century and new methods of delivering products and services.

The Hub has been very successful, with over 177 innovating firms provided with assistance so far. But we are not resting on our laurels.

We have announced that from 9 May we will open the doors to our regulatory ‘sandbox’. A safe space in which new entrants and established players alike can experiment with innovative products, services, business models and delivery channels without immediately incurring all the normal regulatory consequences.

For the public, a significant benefit of this approach is that it may offer an opportunity to get useful innovations to market more quickly – in much the same way that we’ve seen the pharmaceutical industry working with regulators over the years to bring promising treatments to patients more quickly.

So as part of the initiative, there will be a range of practical options open to firms, including: authorisation for testing; the promise of no enforcement action letters; and individual guidance and waivers.

Alongside this, there’ll also be safeguards for consumers involved in that testing (so there’ll unequivocally be no lowering of consumer protection standards), and the terms of reference for testing will also be agreed between firms and the FCA prior to commencement, by way of making sure everyone is protected.

I hope the consumer credit industry will continue to make full and enthusiastic use of the Innovation Hub, and the sandbox when it’s up and running next month.

Our competition remit is, however, not just encouraging new entrants, or new products, as useful and important as this is.

We’re equally determined to make sure competition works effectively between existing players. One way we do this is through market studies, where we review specific areas of financial services to assess how competitive they are.

I’ve no doubt some in this room will already have engaged on the market study we launched at this conference in 2014 into the UK’s credit card market.

As we reported last November, we think it’s working reasonably well for most customers, with firms competing strongly for customers on some features, and consumers shopping around.

But we have flagged specific concerns. First, we’ve highlighted the two million or so card users who are in arrears, or have defaulted. Second, the two million who have persistent debt that they’re possibly struggling to repay. And third, the 1.6 million who are making minimum payments on their debt, not just once but repeatedly. More needs to be done to address the needs of those customers.

We published an interim report setting out possible remedies in November. We are now getting feedback from industry and other stakeholders and expect to publish our final report in the summer.

Regulatory returns

And to end on a very practical note, just as FCA regulation has been new to the industry, we are also still learning about the sector. One of the key elements to enabling effective, targeted and proportionate regulation is good data and information. And a key tool here is reporting and regulatory returns.

As we move into a steady-state environment, we expect firms to submit information to us regularly.

Most of you in this room will have direct experience of this. And I don’t pretend it is popular. But it is imperative that the firms we supervise keep us up to date with details about their business. This includes regular prescribed reporting on issues such as income from consumer credit activities and customer complaints.

But we also want more than that. For the industry to benefit from proactive regulation, firms must be active themselves.

We want to know if you are undergoing major changes, like new management, or if there’s a business problem, IT systems going down for example. So if a question arises we want your mind-set to be ‘do I need to tell the FCA?’ And if you are not sure, just do it.

Conclusion

By way of conclusion, let me thank you again for your positive engagement with the FCA over the last two years.

I do appreciate it is not always easy to adapt to new regulation. But, together, we have seen real change over the past two years. We need to maintain that momentum and I hope you’ll agree that any short term pain is well worth the long term gain to have a sector that is trusted, respected and admired. Thank you.