Speech on the FCA’s priorities for the credit market, by Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations.
Speaker: Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations
Event: Credit Week at the Credit Festival
Delivered: 3 November 2020
Note: this is the speech as drafted and may differ from the delivered version
- The pandemic is a challenging new scenario, and consumer credit firms and their staff have taken decisive and effective action.
- With this new phase of the crisis, there is no time for credit firms to rest on our laurels.
- We want to make clear our expectations around forbearance, the operational challenge for firms to overcome, the importance of vulnerability, and the future direction of the industry.
Consumer credit includes around 40,000 firms and serves millions of consumers. It remains one of my top priorities. I want to speak today about the challenges of the coronavirus (Covid-19) crisis, our expectations around forbearance, the operational challenges firms will need to overcome, the importance of vulnerability, and the future direction of the industry.
The challenges of the pandemic
The fair treatment of consumers in an effective credit market has long been a top priority for the FCA, and we have set standards high. Indeed, we named it as 1 of 5 in our 2020/21 Business Plan .
This long-term priority has been drawn ever more sharply into focus by the coronavirus pandemic, with the risk of significant consumer harm. There are 2 key mechanisms by which harm occurs. Firstly, consumers faced a hit to their financial resilience as a result of the coronavirus crisis. A significant proportion of consumers already had low financial resilience as approximately a third of UK adults have less than £2,000 of cash savings, and 1 in 8 has no cash savings at all. Coronavirus has made this worse by hitting jobs and income and making pre-existing debt problematic.
Secondly, there have been impacts on mental health. We expect economic uncertainty, increased disease and bereavements, and social isolation to have a significant impact on mental health. We recognise health problems, including mental health, as a key driver of vulnerability. In addition, mental health problems can have impacts on financial capability. Research from the Money and Mental Health Policy Institute suggested that 48% of people with mental health problems were unable to weigh up the advantages and disadvantages of a loan product. As a result, the impacts on mental health could increase the risk that consumers make decisions not in their best interests.
The pandemic is a challenging new scenario for firms, and I am impressed by and grateful for the decisive and effective action that firms and their staff daily take to help. Firms have been repeatedly flexible and helpful in response to our guidance, have enabled payment deferrals, and responded effectively to operational challenges.
Recognising the risks of problem debt and the inevitability of some consumers falling behind in their payments, the crisis has sharpened our focus on appropriate forbearance for consumers.
In the course of this crisis, payment deferrals were taken for more than 1.7 million credit cards and personal loans. For small and medium-sized enterprises (SMEs), the Bounce Back Loan Scheme has delivered more than 1.2 million loans to businesses, totalling £36.9 billion. All of this while credit firms themselves have not been spared the effects of the pandemic, with hits to their financial stability, employee wellbeing and the operational challenges of working from home.
And yet it is clear that this crisis is not over yet. We face a second wave and the economic challenges of coping with restrictions that come with an extended pandemic. There may be further drops in employment and growth, adversely impacting financial resilience and mental health, and deeper damage for consumers in the credit markets. With this new phase of the crisis, there is no time to rest on our laurels. So I want to reiterate our expectations as we move into this next phase.
Our expectations around forbearance
Credit is a critical cornerstone for the UK economy, and it is for good reason that credit is used by millions of consumers every day to help meet unexpected costs, smooth expenditure and make essential purchases they could not otherwise afford. However, when things go wrong, and people get trapped in problem debts, credit can result in people ending up trapped in a cycle of debt and unable to meet a basic standard of living. This is perhaps the clearest example of harm we must act on.
Recognising the risks of problem debt and the inevitability of some consumers falling behind in their payments, the crisis has sharpened our focus on appropriate forbearance for consumers. We expect firms to ensure this through taking actions that meet our expectations as set out in our guidance.
At the start of the crisis, we needed to act quickly to deliver quick support that was helpful and clear for consumers and easy for firms to operationalise. This generally took the form of 3-month payment deferrals for those financially impacted by coronavirus. After this, given the range of outcomes for different consumers on payment deferrals, it was clear that we could not pursue a one-size-fits-all approach for all consumers. We extended the guidance to 31 October and shifted towards a greater range of support mechanisms.
On September 30, we published our finalised consumer credit guidance for forbearance post payment deferral. This builds on the expectations set out for forbearance in our rules and principles in light of coronavirus.
We’ve outlined the outcomes we want to achieve and the steps for firms to meet these outcomes:
- We want customers to get the time and advice needed to get a repayment plan that is suitable for their individual circumstances. We don’t want to see customers pressurised into unaffordable and unsustainable plans. Instead, they should be allowed time to consider their options and, if necessary, seek debt advice before making a decision on the support they take, and are referred to debt advice if this is appropriate. 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 this meets their needs and circumstances. When a customer proposes an affordable plan then firms should respond to that appropriately.
- We want to see reasonable and sustainable repayment plans. Ideally, we want firms to contact customers at an early stage to provide appropriate support to avoid them getting into difficulty. Sustainable repayment plans also means that they are affordable repayment arrangements taking into account other priority debts and essential living costs. Reasonable and sustainable also means they are protected from escalating balances under any forbearance arrangements. To meet this, we expect firms to freeze interest, fees and charges to prevent balances escalating.
- We want to see firms responding to the particular needs and challenges facing vulnerable customers. This means having a holistic approach to recognising and responding to signs of vulnerability.
Positive outcomes represent the end-state we want to achieve. We want to move beyond a tickbox approach to compliance, and instead are focused on the outcomes we want to see. This allows us and firms to have a clearer idea of progress that we might be making. This should allow us to promote a culture of purposeful contribution to the economy.
Our view is that the majority of firms have followed our guidance. We are monitoring firms’ embedding of this guidance. We will engage with firms, and, if necessary, take action where firms have failed to meet our standards. I recognise that this approach presents a number of challenges for firms, and we wanted to touch on the challenges which firms might face to meet this.
Meeting the operational challenges
I recognise that this approach requires significant action from firms which brings a range of operational challenges. Scaling up appropriate forbearance is complex to get right, involves significant volumes of work, and can often bring up unexpected problems to solve. This becomes significantly more complex when we consider doing so while employees are working from home long-term, significant staff redeployment is needed and there might be complex modifications to IT systems.
While aware of the challenges, we expect firms to take the necessary steps to treat customers fairly. And we expect firms to have the systems and people in place to support consumers with the help they need. I have a few reflections on what firms can do to ensure a strong response.
Firstly, effective planning will form a critical part of success. We expect firms to plan for a variety of scenarios and ensure they can move flexibly in response to new developments.
Secondly, as in our Principles, we expect solutions to be tailored to the individual needs of consumers. While scaling up via digital solutions will likely be vital for this new work, it cannot come at the expense of tailoring to consumer needs.
We recognise vulnerability as a priority across sectors, and especially for credit markets, where vulnerable customers are disproportionately impacted.
Third, while remarkably challenging, the speed and flexibility of change already successfully achieved is very promising. Firms should consider how they might build on the experience of the pandemic. The experience of your firms focused on a clear purpose up and down and across their organisations is particularly relevant to the job that now faces us all.
Over the coming months, we are dedicating significant resources in our supervision to look at how firms have adapted to these challenges and the outcomes consumers receive. This will include considering how well firms have planned, resourced and trained their staff to ensure that borrowers get appropriate support and forbearance, when they need it. We will be looking for firms to be flexible and employ a full range of short and long-term forbearance options to support consumers and minimise avoidable difficulties and anxiety. We have also set up a small business unit to coordinate the activities across the FCA to identify and address issues for small businesses.
I understand that this is a difficult environment, and we are not looking to catch out firms on minor mistakes. We want to work together to support consumers and ensure they get the best possible outcomes. Where we see firms trying to do the right thing, we intend to work with you to support the resolution of these issues. Nonetheless, if we do see significant issues, we will intervene.
Meeting the challenges of vulnerability
As noted, we have emphasised the need for firms to recognise and respond to the needs of vulnerable customers. Vulnerability has been a persistent focus for our policy work, intelligence gathering and supervision of firms. Vulnerable consumers may be significantly less able to represent their own interests, they may have different needs, and more prone to unconscious biases that impact their decision making. In the credit market, these difficulties can naturally lead to consumers falling into problem debt and failing to access the help they need. This exposes vulnerable customers to higher levels of harm.
We emphasised the need for appropriate treatment of vulnerable customers as a core outcome in our credit guidance. Unfortunately, vulnerability has sharply increased in the UK due to the pandemic, as 1.5 million more people were displaying signs of vulnerability in July compared to February, and the percentage of adults with low financial resilience had grown to 23% – or 12 million adults.
Credit Strategy are running a vulnerability awareness week, and we look forward to what will be discussed here.
We identify 4 key drivers which increase the risk of consumer vulnerability:
Health: consumers have health conditions or illnesses that affect the ability to carry out day-to-day tasks.
Life events: major life events such as bereavement, job loss or relationship breakdown.
Resilience: low ability to withstand financial shocks.
Capability: low knowledge of financial matters, low confidence in managing money, or low capability in other relevant skills eg literacy or digital skills.
We have emphasised our expectations for a holistic approach to firm treatment of vulnerable consumers in our vulnerability guidance. We expect the fair treatment of vulnerable customers to be embedded across the workforce, with frontline staff given appropriate skills, capability and support to treat vulnerable customers with due care. We expect firms to spot signs of vulnerability and deliver appropriate customer service that responds flexibly to the needs of vulnerable consumers. And to follow up, we expect firms to implement appropriate processes to evaluate where the needs of vulnerable consumers are not met, so that they can make improvements. We have been consulting on this guidance, ahead of a final publication.
We recognise this as a priority across sectors, and especially for credit markets, where vulnerable customers are disproportionately impacted. We will monitor firms’ embedding of this guidance.
We are thinking actively about the future, and are committed to emerging with a credit industry which is healthy, vibrant, and innovative.
I emphasise that vulnerability has only increased as a priority since the crisis, and we are aware that the move to working from home brings its own difficulties. So it is worth considering the challenges which this might bring.
In a world where staff are being reprioritised to deal with collections or deferrals, is the treatment of vulnerable customers part of their training?
If automation is being used to scale up deferrals or collections, how is the customer process designed to enable a holistic customer experience or effectively identify and address customer vulnerability?
How will you evaluate your progress on these fronts so that you can enable continuous improvement and share best practice with wider industry?
Considering these kinds of questions should help vulnerable consumers experience outcomes that are just as good as those for everyone else.
It’s easy to get lost in the immediate. So I want to end by looking at the future direction which the credit market might be taking. We are thinking actively about the future, and are committed to emerging with an industry which is healthy, vibrant, and innovative. We’ve outlined our vision for the credit market in our business priority as: ’To ensure credit markets function well.’
Our priority both looks to encourage beneficial outcomes and prevent harmful ones. We want to ensure that consumers do not become over-indebted by being given credit they cannot afford, and consumers can take control of their debt at an early stage when they fall into financial difficulty. On the other hand, we also want to ensure that consumers have access to clear and simple information to help them find products that meet their needs, and that there is a healthy supply of affordable credit available to smooth consumption, increasing access to affordable credit where possible.
When considering the supply of affordable credit, we note the growth of new business models and possible alternatives to high-cost credit. We welcome options which can improve access to affordable credit, but we note that some models might lie outside of our regulation. This means that we need to consider carefully whether our regulation is evolving fast enough to ensure that models continue to meet consumer needs and prevent escalating balances.
An example has been our consideration of Employee Salary Advance Schemes. Risks persist in this area: the regulatory framework does not require that these firms perform an affordability check, which may mean that consumers take out a product unsuitable for their needs. On the other hand, there remains the risk of an employee taking their salary early, it is more likely they will run short towards the end of the next payday, potentially leading to a cycle of repeat advances and escalating fees. While firms may already be trying to mitigate these risks, we will continue to maintain a watchful eye.
You may have seen that our former interim chief executive, Christopher Woolard, is performing a comprehensive review of unsecured credit, considering the impact of the pandemic and the growth of unregulated retail products.
I encourage you to engage with this review constructively and ensure that it provides an informed response to these developments and support for positive innovation.
We hope that the credit market continues to be an innovative and critical pillar of the UK economy, and look forward to working with you to steer this to a beneficial destination.