FCA regulation of consumer credit – during the pandemic and beyond

Speaker: Nisha Arora, Director of Consumer and Retail Policy
Event: Delivered online at the Finance & Leasing Association Annual Regulation Conference 
Delivered: 13 October 
Note: This is a drafted speech and may differ from the delivered version

Highlights

• Whilst the range of firms, consumers and uses of credit varies widely, across the board we want credit markets to achieve certain key outcomes for consumers.
• We want to ensure credit markets work well for consumers – that means people don’t get into unaffordable debt and are treated well if they do.
• The coronavirus (Covid-19) pandemic has highlighted the need for the regulator, Government, industry and consumer and debt advice organisations to continue to work together in partnership to ensure that consumer credit markets work well for consumers.

Introduction 

Credit is absolutely vital to the economy and to people’s everyday lives. And its importance has become even more apparent in the last months as the pandemic has impacted the financial lives of millions of consumers and businesses. It has highlighted the need for many consumers, particularly the poorest and most vulnerable, to have access to affordable credit. More than ever, we need to work together to ensure credit markets work well and that consumers get the right outcomes. 

So I really welcome the opportunity to speak to you today and to give you my reflections on: 

• why credit markets have been and remain a priority for the FCA
• what outcomes we consider to be critical to well-functioning credit markets 
• how our work in the past years and recent months has reflected that, and will continue to do so going forward.

The importance of credit markets  

Consumer credit is used by millions of people every day, with 85% of all UK adults holding at least one credit or loan product.  

It is also by far the largest sector we supervise in terms of number of firms, with around 40,000 firms authorised by the FCA. These firms vary in size and complexity and offer a wide range of products to consumers for different purposes.

While many consumers use credit for expensive, one-off purchases, many need access to credit simply to make ends meet. 

But whilst the range of firms, consumers and uses of credit varies widely, across the board, we want credit markets to achieve certain key outcomes for consumers. 

More than ever we need to work together to ensure credit markets work well and that consumers get the right outcomes

You will have seen the FCA talking increasingly about outcomes-based regulation. Given just how important credit is to people’s lives, we need to make sure that, as the market develops, it delivers the best outcomes for consumers. And that is why the Board has asked Chris Woolard to conduct a review[1] into how regulation can support a healthy unsecured lending market, and why ensuring consumer credit markets work well is one of the FCA’s business priorities that we set out in our Business Plan[2], published in April this year. 

In our plan, we set out that we want to ensure credit markets work well for consumers – that means people don’t get into unaffordable debt and are treated well if they do. And to deliver this, we set out 4 outcomes we want to see:

• We want consumers to be able to find products that meet their needs and make informed decisions in their best interests.
• We don’t want consumers to become over-indebted by being given credit they cannot afford. 
• We want affordable credit to be available so that people can manage their day-to-day spend, meet unexpected costs and make essential purchases they could not otherwise afford but without becoming dependent on credit in the long-term, and entering into a spiral of debt.
• We want consumers to be able to take control of their debt at an early stage when they fall into financial difficulty –  with firms identifying and providing support at an early stage, and consumers engaging with debt advice if necessary before their financial problems become too severe. 

These outcomes are grounded in how we have regulated the consumer credit market since 2014 and build on the principles that we consider to be absolutely essential for the market to function well for consumers. Despite the complexities and differences between the wide range of credit markets, there are some underlying tenets that have formed the basis of our regulation up to now, and through the crisis, and which will continue to guide our work to ensure the market works well and delivers good outcomes into the future. 

The principles that underline our regulation – past and future 

Since taking over regulation of consumer credit in 2014, we have worked with industry and other stakeholders to raise standards and improve outcomes for consumers in these markets. We’ve done this by deploying a wide range of regulatory tools – engagement with and guidance to firms to raise standards and encourage good business models and practices, targeted supervisory and enforcement action to address harm and ensure that bad actors improve or leave the market, and new rules to change practices and outcomes across a market. 

Whatever tool we’ve used, our regulation has been based on a core set of principles and outcomes.

In all our work to protect consumers in credit and other markets, we are guided by our Principles for Business. In particular, Principle 6 on treating customers fairly and Principle 7 on information needs and ensuring that information is clear, fair and not misleading. And we also expect firms to take extra care in their treatment of vulnerable consumers[3] in order to ensure they receive outcomes as good as other consumers. 

When it comes to regulating credit markets specifically, our focus has been on the 2 key outcomes set out in the Credit Priority in the Business Plan: 

• ensuring consumers can afford credit, and 
• if they are unable to repay, that they are treated fairly. 

Affordability   

Our creditworthiness rules and guidance protect consumers from being granted credit that is predictably unaffordable at the point it is taken out. We want firms to make a reasonable assessment, not just of whether a customer will repay, but importantly of their ability to repay affordably and without this having a significant impact on their financial situation and their ability to afford essential expenses – to ensure people can maintain a basic quality of life. 

Even with good affordability checks, people can get into problem debt. We know from our Financial Lives Survey that 14% of UK adults have problem debt – finding it a heavy burden to keep up with their bills or have missed payments for bills or credit in 3 or more of the last 6 months

And where in markets we’ve seen excessive prices causing harm to consumers, particularly the most vulnerable, we have tackled that by introducing price caps in the high-cost short-term credit market and the rent-to-own market. 

We are also working with Government and others to encourage the growth of alternative, affordable forms of credit. Last year, we published a report on alternatives to high-cost credit[4] and in July this year we issued a statement on employer salary advance schemes[5]. These are newly emerging products (many of which don’t meet the definition of credit) that are promoted as an alternative to high cost credit, and our work aims to help this market develop well for consumers.

Good forbearance and collection 

The other key outcome set out in the Business Priority is to ensure that people are treated fairly if they are unable to repay their debts as planned. 

Even with good affordability checks, people can get into problem debt. We know from our Financial Lives Survey that 14% of UK adults have problem debt – finding it a heavy burden to keep up with their bills or have missed payments for bills or credit in 3 or more of the last 6 months. 

And that was before the pandemic hit. We know that between February and July, the percentage of adults with low financial resilience increased from 19% to 23%, and that 24% of adults believe they will come out of the pandemic in more debt than before.

Since we took over credit regulation and in our recent guidance[6] responding to the crisis, good forbearance has been at the heart of our work. 

Over the last few years, we have used our tools to embed our forbearance rules and clarify our expectations. We have published reviews and followed up with action, including enforcement cases where customers were not treated fairly when in financial difficulties. And in February 2020, we ran an event on the need for cultural change within collections activity to move the focus to better customer outcomes being achieved. 

Consumer credit and mortgages: coronavirus guidance 

I’ve set out the principles and outcomes we consider to be key to well-functioning credit markets. As I’ve said, these have underpinned the work we’ve done in the past 6 years but also most recently in the guidance we’ve produced setting expectations for firms on how to support customers both in the early stages of the crisis and as we move through it in the months ahead.

We know that between February and July, the percentage of adults with low financial resilience increased from 19% to 23%, and that 24% of adults believe they will come out of the pandemic in more debt than before

I’m going to turn to talk about that now. Our response to the pandemic can be divided into 3 phases. 

Phase 1. At the start of the crisis, we needed to act quickly to get support to consumers – overnight, millions of people suffered income shocks and uncertainty, impacting their ability to pay their mortgage and credit debts. 

So in that first phase, we needed to work with you to deliver quick, clear, and simple support that was easy for consumers to understand and easy for firms to operationalise. In essence, this took the form of 3-month payment deferrals for those financially impacted by Covid. Recognising the temporary and exceptional nature of the support, we said the deferral should not result in a negative impact on customers’ credit files. 

Phase 2. The first set of guidance lasted for 3 months so with people coming off payment deferrals in June we needed to review our approach. We carried out research to understand the uptake of payment deferrals and whether and what sort of further support might be needed. 

We found that a majority of people coming to the end of their initial payment deferral would be able to restart repayments, and some would be able to afford partial repayments, but others would need to continue the support they had. 

So it was clear that different people would have different needs. We extended the guidance[7] to 31 October, retained the payment deferral support but shifted away from the earlier blanket approach towards a greater range of support being provided, depending on customers’ needs. 

Phase 3. Again this guidance was temporary. So as people moved off their second payment deferrals and as the 31 October deadline was coming closer we needed to assess what if any further support would be needed.

Around 1.8 million people have taken a deferral on a mortgage and around 1.7 million a deferral on a credit card or personal loan. We know that over 80% of people with payment deferrals found them helpful and that many would have struggled without them. A majority of people who took them have been able to repay but a significant number of people will need further support. For those in the subprime markets the future looks particularly uncertain. 

We have recently published new guidance on both mortgages and credit, which aims to ensure that both people coming to the end of payment deferrals, and those who are impacted by coronavirus after the current guidance ends on 31 October, get the support they need.  

The guidance builds on the existing forbearance framework in our rules and our Principles for Businesses. It sets expectations based on what we consider to be industry good practice in forbearance and debt collection, based on individual circumstances and needs, and importantly that reflect the greater challenges and uncertainties of the pandemic environment. 

I want to emphasise some aspects of the guidance that we consider are particularly important to consumers getting the necessary support and good outcomes at this time:  

• First, firms should contact customers at an early stage to provide appropriate support to avoid them getting into difficulty. 
• Second, the support should be tailored to meet customers’ needs. With uncertainty driven by public health restrictions and changing economic circumstances, firms will need to show flexibility in the support they offer. Some customers may find themselves in temporary difficulties and will just need short-term support, which might include a further period of no or reduced payments to be able to get back on track. Others will face longer-term difficulties and need different types of support, such as a repayment plan.
• Third, with growing numbers of people showing signs of vulnerability – 1.5 million more adults are showing characteristics of vulnerability since the start of the pandemic – we have emphasised the need for firms to recognise vulnerability and respond to the particular needs of vulnerable customers. 
• Fourth, as with our previous guidance, we’ve emphasised the need for lenders to play a role in supporting customers through money guidance, and to signpost or refer customers to debt advice if needed.

Over 80% of people with payment deferrals found them helpful and many would have struggled without them. A majority of people who took them have been able to repay but a significant number will need further support

• Fifth, whilst the ban on repossessions will end on 31 October, we are reminding firms that repossessions should be a last resort and of the need to treat customers fairly. This means that if someone is self-isolating for example, or otherwise affected by a lockdown, and can’t access alternative accommodation or essential goods, lenders should not repossess.
• And, in a shift away from the current guidance, the new guidance makes clear that the support customers receive may be reflected on their credit files in accordance with normal reporting processes. This will help to ensure that lenders have an accurate picture of consumers’ financial circumstances and reduce the risk of unaffordable lending.
• The above expectations apply to both the mortgages and credit guidance. Given the particular complexities and vulnerabilities in the credit market, we have set out additional expectations, based on current industry good practice, to help people get back on track where possible, and to avoid creating significant hardship or a worse debt situation.
• We have set out that once firms have agreed a repayment arrangement with a customer, they should waive or reduce interest, fees and charges to the extent necessary to prevent the balance from escalating. This will help to avoid the debt becoming unmanageable for the customer and make it easier for them to get back on track. 
• We have also set out an expectation that firms put in place sustainable repayment arrangements so that consumers can meet their essential expenses and priority debts. And for those with multiple debts, we want firms to take only a fair share of what the consumer can afford. This is to ensure that customers are given a reasonable time and opportunity to pay their debts, and in a way that doesn’t create wider detriment and hardship.

Over the next months, we will be supporting firms to apply the guidance. Given changing circumstances, we will be keeping the guidance under regular review to ensure it has the intended impact, and within 6 months will review whether it remains relevant to the crisis situation and provides the necessary support, or whether changes or different measures are needed. 

Our Business Priority and next steps

As I mentioned before, the outcomes we’ve set out in our Business Priority for credit markets are grounded in our longstanding views of what is needed to make these markets work well and secure good consumer outcomes, and this is reflected in much of our work in the last years as well as in our recent guidance. 

It’s important that consumers are treated fairly, given clear, accurate information to be able to make informed decisions that meet their needs, that consumers should not get into unaffordable debt in the first place but where they are in financial difficulty, should be given the right support at an early stage to avoid debt escalating and consumers experiencing significant hardship.

It’s important that consumers should not get into unaffordable debt in the first place but where they are in financial difficulty, should be given the right support at an early stage to avoid debt escalating

The next months will be tough and uncertain for consumers and for firms. We expect more people to need support and we know that will put pressure on firms and the debt advice sector. In a recent survey, we found that more than a third of people taking deferrals on consumer credit products expected to fall behind on loan payments. 4 million adults say they are very likely to seek debt advice in the next 6 months.  

In the short to medium term, for the FCA that means:

• Supporting and engaging with firms to ensure the guidance is put into practice to deliver the intended outcomes
• Keeping our guidance and our rules and approach to the market under review in the light of the pandemic and its impact on the economy, firms and consumers
• Working with the debt advice sector to help to ensure that, for those people who can’t get back on track without additional debts advice and support, their needs are met

And in the longer term, it means ensuring that as circumstances change and as the market develops, it works well and achieves the outcomes that are set out in our Business Priority.

Conclusion

Consumer credit has always been a priority for the FCA and over the past 6 years we have worked with industry and other stakeholders to improve outcomes for consumers across credit markets. 

The pandemic and its economic impact have highlighted the importance of the market to consumers, firms and the economy. And it has highlighted the need for the regulator, Government, industry and consumer and debt advice organisations to continue to work together in partnership to ensure that consumer credit markets work well for consumers.

We look forward to working with the you in the months and years to come.