Balancing regulatory objectives in the dynamic consumer credit market

Speech by Jonathan Davidson, Director of Supervision – retail and authorisations at the FCA, at the Future of Lending Conference.

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Speaker: Jonathan Davidson, Director of Supervision – retail and authorisations
Event: The Future of Lending Conference, London
Delivered on: 27 September 2016
Note: this is the speech as drafted and may differ from delivered version


  • Authorisation is not a one-off focus on performance – we continuously expect you to follow our rules, and the spirit of those rules, following authorisation.
  • We want to continue to listen to industry feedback, to reduce barriers to entry and continue to improve our communication and transparency with firms. 
  • Our focus on innovation and competition doesn’t mean we’ve compromised our expectations on consumer protection. 
  • We are looking continually at how business models are evolving but also the risks we are seeing and how this might impact market integrity.


I note in the pre-conference material you’ve been promised a run through of the lending world as I see it. And my plan is to deliver exactly that.

Before I go too far though, I want to offer my thanks to firms for their engagement with the FCA since we took over consumer credit in 2014.

I’m delighted to join you – and delighted to have the opportunity to make it clear to you, in person, that we see the consumer credit sector as extremely important.

The sector has over 35,000 firms so it’s an imperative we have a clear understanding of each other. Not just regarding the rules. But the spirit of what we’re trying to achieve together.

No-one in this room needs me to spell out the social and economic importance of personal lending. It is pretty evident your work is central to the lives of millions of people in the UK.

However, we are extremely aware of the challenge you’ve faced managing regulatory change, alongside unpredictable trends in areas like technology.

In this fast moving landscape, we see our role as central to fostering a dynamic, diversified personal lending market by working together, and developing a shared understanding of what we’re trying to achieve, which will ultimately build confidence amongst your customers.

I like to think this is a goal we can all rally around, with healthy competition particularly important in terms of rewarding you for quality service and products and ideas.

A point I need to stress though today, from the outset, is that competition is one of three priorities that we take great care to balance.

We are often challenged to order our statutory objectives – as if our competition objective was separate from, or even in conflict with our other objectives around consumer protection and market integrity.

We tend not to see the world that way, there are lots of overlaps and consistencies.

I do appreciate though that the FCA’s different priorities do affect you in slightly different ways.

So today I want to discuss where your firm may be under our different priorities. Specifically looking at how we see them shaping the future of the UK’s personal lending market.


In this fast moving landscape, we see our role as central to fostering a dynamic, diversified personal lending market by working together, and developing a shared understanding of what we’re trying to achieve, which will ultimately build confidence amongst your customers.

Let me start with competition.

The first point is that we see promoting useful innovation, and promoting effective competition in the interests of consumers, as priorities.

The FCA, as far as I know, is almost unique among financial regulators in the world, Malta being another, who have a top-line objective to promote competition.

When we took over regulation of consumer credit we were concerned that our high standards would put off new entrants. Potentially affecting competition in your sector.

In fact, it is quite the opposite, and we are very pleased that our authorisations unit has determined around 15,000 applications from new businesses wanting to enter the consumer credit market since we took over from the OFT [Office of Fair Trading].

This has created challenges. I am aware there’ll be lots of businesses in this room with recent experience of getting authorised.

Since we took responsibility for regulating consumer credit in 2014, we’ve handled some 39,000 applications. This was a lot more than we had anticipated.

Nevertheless, we have now dealt with 95% of them, and 99% of those we’ve processed to deadline.

We want to make the process as straightforward as possible for new firms. Hence we took the decision to prioritise new entrants in order to allow them to start trading, whilst those in interim permissions could continue trading.

I also need to stress that we’ve listened to your appeals for more direct engagement from the FCA during the authorisation process.

And we’ve introduced commitments which include more timely communications and SLAs for response times to improve the process and ensure that we are clear on any concerns we have with firms’ applications.

Our intention is to continue to listen to feedback from the industry. To continue to reduce unnecessary barriers to entry. And to continue improving our communication and transparency with firms.

There are a number of important reasons why I think we’ll keep seeing personal lenders coming through the doors.

One big factor is the hangover from the global financial crisis. So we expect innovative lenders to continue taking advantage of the current high margin, low interest rate landscape.

The other major drivers of course are new platforms and technologies. So you can point to developments like real time data sharing, predictive analytics, and mobile tech, as well as opportunities from the API Open Banking Standard.

From a competition regulator’s perspective, I need to make it clear from the outset that we’re very open to new firms taking advantage of today’s favourable market conditions – assuming they have ideas for useful products.

We also see innovation as a particular imperative. So if you have innovative ideas – whether you are new to the industry or well established – please approach the FCA’s Innovation Hub.

The Hub has two main objectives. First, to support firms, to bring new ideas to the market. Second, to collect feedback from businesses on how to improve our own processes.

In the first year of the project, we supported 177 firms – just 10 months later that number has increased to just over 300. Including over 40 lending firms.

More recently in May, we launched the Regulatory Sandbox which allows innovative firms to test out new business models in a controlled environment, where consumers are suitably protected, but without incurring all of the normal regulatory consequences of engaging in those activities.

There has been a really significant response to our first period for applications across the full range of financial services and from both large and small firms. And we are really pleased with the range and scale of ideas we’ve seen.

Our focus on innovation and competition doesn’t mean we’ve compromised our expectations on consumer protection.

No-one in the FCA is fretting about your business making money from bold but fair customer propositions.

However, we will categorically not wave through innovations with no useful purpose to consumers.

Consumer protection – authorisations and supervision

We see promoting useful innovation and promoting effective competition in the interests of consumers, as priorities.

And this brings me to my second topic, consumer protection.

At the moment, we see a number of risks in personal lending. I do not intend to go over them in exhaustive detail.

But I want to pinpoint two in particular: namely, affordability and the treatment of customers in financial difficulty.

On affordability; last month we published an Occasional Paper setting out independent research into credit, debt and financial distress in Britain

It sets out the extent to which debts lead to financial distress, anxiety and lower life satisfaction and it also looks at the extent to which financial distress can be predicted.

This will feed into our much larger ongoing project on how firms assess consumers’ creditworthiness and the affordability of their products. We aim to publish a paper later this year.

One of our current thematic projects is assessing the treatment of customers who are in the early stages of arrears. Having scrutinised firms’ policies and practices, including detailed visits, we will publish a report and take further steps as appropriate later this year.

We’re also nearing completion of another thematic review into staff remuneration – in consumer credit, there is not just the risk of mis-selling, but also of not exercising appropriate forbearance if staff are financially incentivised to collect from customers in arrears.

More widely, our credit card market study has identified long-term persistent debt as a major area of concern, and we’ll be consulting soon on our proposals to deal with this issue.

Where we do identify issues with firms, we will not hesitate to take action. You will have seen last week in the media the action we have taken with CFO Lending, who’ve entered into an agreement with us to provide over £34m redress, to more than 97,000 customers, for issues including failing to assess affordability and failing to treat customers in financial difficulties fairly.

Another important way we make sure the market works fairly is through the use of the gateway – our authorisation process – to drive up standards and keep out the firms that don’t meet them.

Our authorisations process for interim permission firms has meant a tough and sometimes long journey for some of you.

I recently had a conversation with a non-exec director at a consumer credit firm who told me that the authorisations process had been, in his words, a ‘nightmare’.

However, he then went on to say that his firm was in the best place that it had ever been as a result of that process.

We are very pleased with the large number of firms that have proactively engaged with us on our concerns, and made radical changes. Naturally this has caused delays for firms, but we believe it has had a positive outcome.

We currently have just under 1,700 cases remaining to be determined. The length of time we take to finalise those applications will be affected by lots of different factors. Complex cases from higher risk sectors for example tend to take longer.

And this brings me to an important message to all firms, please be aware that we do not see authorisation as a one-off focus on performance, equivalent to cramming for an exam and then forgetting everything you’ve learnt.

We will continue to expect you to understand our rules – and take on board their spirit – long after you’ve gained authorisation.

We expect that firms continue to meet our threshold conditions at all times. A point that I think is particularly urgent today given that we’re seeing businesses innovate and change very quickly.

For our part, we have in place sectoral teams who are analysing evolving business models to identify risks to consumer protection or fair competition.

As a baseline though, please be clear that the emphasis is on firms to make sure they don’t inadvertently or ‘advertently’ breach rules.

We see your responsibility as twofold. We certainly expect you to look out for your individual customers. But we also want you to be aware of your wider responsibility to the UK economy and society.

We are looking continually at how business models are evolving but also the risks we are seeing and how this might impact market integrity, in particular where firms are competing through growing volumes by relaxing lending standards.

Market integrity – keeping an eye on P2P

The FCA is committed to promoting innovation. We’ve already authorised 12 firms who are operating P2P platforms and are assessing 86 additional applications, of which 39 are operating under interim permission.

And this takes me to my third and final topic for today.

The FCA has a statutory responsibility to enhance market integrity, which means we take direct interest in issues ranging from orderly resolution and market abuse, through to efficiency and transparency.

The point I specifically want to address today though is related to issues around the transmission and distribution of risk.

We fully understand debt and credit are integral to economic growth. Allowing consumption smoothing and investment.

However, we also know that if credit grows too fast, affordability suffers.

Taking me to my final topic for today, peer to peer lending.

The FCA, as I think I’ve made pretty clear, is committed to promoting innovation and I know many people here are active in this space.

From the regulator’s perspective, we’ve already authorised 12 firms who are operating P2P platforms and are assessing 85 additional applications, of which 39 are operating under interim permission. So there is clearly a lot of business interest.

However, we are well aware that a lot of the innovative models firing up enthusiasm today have yet to be stress-tested through a full economic cycle.

Peer-to-peer lending was a tiny industry in 2008, we are today seeing more and more money enter the market, particularly from retail investors and hedge funds.

I should immediately say this is not a surprise with yields on bonds at historically low levels. Investors earn as much as 10% on three to five-year P2P loans.

We believe that the P2P sector is an important source of innovation. The UK to a relatively small degree, and Europe to a relatively large one, have both got catching up to do with the US when it comes to diversifying their finance markets.

Nevertheless, there are trends we need to keep an eye on – a notable one being whether loan volumes in P2P are growing fast enough to keep up with investor appetite.

The important question for us is ‘how do P2P lenders respond to this greater demand?’ So we will keep a close eye on the market to make sure firms don’t respond by lowering underwriting standards, creating affordability issues for borrowers and credit risk for lenders.

We published a call for input in July, as part of our post-implementation review of the FCA’s crowdfunding rules, to see whether the market has evolved in such a way that we need to consider changes to the rules.

The call for input is the first stage of the post-implementation review. We are also conducting firm and consumer research to understand further how different parties engage in the market and their needs and understandings.

This is helping us develop an increasingly sophisticated picture of both investor, and borrower experiences and needs, as well as business models and practices, systems and controls.

The next step will be to look at all this information and decide whether the current rules remain appropriate, or whether we need to think about any changes. And we will be saying more about this in due course.

My call to you in the industry is to keep us updated where you are seeing innovative trends you are unsure of. We get a lot of thoughts from trade and industry bodies of where risks might be evolving. We want this to continue.


To end, let me just reiterate my main point that we believe our three objectives are firmly complementary – with competition supporting both market integrity and consumer protection.

I also hope I have made it abundantly clear that we see our role as integral to making sure your industry is focused on promoting good customer outcomes.

We will continue to pay close attention to personal lenders, and we will certainly not relax our standards. We want to see firms following our rules, but also the spirit of what we are trying to achieve.

Ultimately, we all want a landscape where the general public has confidence in you. And we all want a market in which you have confidence that your market is working well – with principled firms protected from unprincipled ones.

In that spirit, let me end with a final thank you again for your engagement with us. And I look forward to continuing to work with you closely as we move forward.