Speech by Christopher Woolard, Director of Policy, Risk and Research, the FCA, at Frontier Economics, London. This is the text of the speech as drafted, which may differ from the delivered version.
Evolution of an industry
Frontier Economics’ research on everything from climate change to Christmas, airports to advertising, and pretty much most things in between, is now indispensable reading at the FCA economics department – so it is a great pleasure to be here.
I want to offer some broad reflections this evening on the FCA approach to consumer credit, and focus on how we intend to move things forward.
But before looking ahead I want to cast an eye back - and make the point that the evolution and innovation we’re seeing today in consumer credit is part and parcel of a much longer trend.
Over the past 120 or so years, this industry has been evolving and reinventing itself. Paper credit vouchers in the 19th century became metal payment cards at the turn of the 20th century. Then metal became plastic. And plastic becomes contactless or on to your mobile phone.
And somewhere in between all this technological transformation, there’s been an equally remarkable change in society’s attitude to credit.
Effectively, the UK has turned from being a nation that was deeply ambivalent about the value of lending; to one where consumer credit, as a percentage of GDP, is now higher than any other country in the world, bar Cyprus.
Switch over to the FCA
Now, there’s no doubt this growth creates significant possibilities. It’s difficult to quarrel over the importance of credit to families and businesses. Some 70 per cent of cars would be taken off the road tomorrow if we removed every vehicle bought with motor finance.
But it’s also clear that the almost exponential growth we’ve seen here has created an industry in real need of robust regulation.
StepChange, Citizens Advice; Debt Helpline, CAP and the like – these organisations are all concerned about the uptick in work they’re doing with people in deep financial trouble as a result of getting into debt.
The Centre for Social Justice last year released a report suggesting almost half of UK homes in the lowest income decile spent more than a quarter of their income on debt repayment in 2011. The same publication also talks of 5,000 people a year being made homeless as a result of mortgage or rent arrears.
On top of this, we find charities providing more and more anecdotal evidence of poor practice in industry, and as we get closer to 1 April we are seeing more consumers directly.
The key issue here is that the current regime is struggling to protect consumers – the NAO has talked of at least £450m of potential financial harm not being addressed at the moment.
In other words, the evolution of the UK consumer credit industry has outpaced its current regulation. And that, in a nutshell, is why we find ourselves where we are today – with the FCA on the cusp of taking responsibility for some 50,000 consumer credit firms.
Planning for the takeover
Now, getting to this point has involved a great deal of hard work, from a lot of people. It’s also deliberately involved a lot of listening.
Over the last year, the FCA has organised road shows in Exeter, Leeds, Newcastle, Liverpool, Edinburgh, Belfast, Birmingham and Cardiff – as well as hosting a couple from our own offices down in Canary Wharf.
On top of this, we’ve been up and down the country to talk to the industry and listening to consumers in cities like Manchester and Glasgow.
And we’ve taken to the internet and streamed a webinar on the changes for firms and trade bodies, which close to 1,000 people have logged on to and used.
The long-term goal in all of the above has been to help the new regime land as smoothly as possible. I’d be first to recognise that majority of want to be compliant and work within the law. This is also a very different population to the one that the FCA regulates today with large numbers of small retailers. We didn’t want to make life impossibly difficult for small firms or compliance departments on April 1. Hence the reason this has been a step-by-step journey.
The key stages here: first, we published the FCA policy statement about the detailed rules for consumer credit firms. This was pretty dry and technical in parts – welcome to my world – but it was important in terms of setting out the FCA stall.
Following on from this, we published a consultation paper in October outlining our interim proposals. These included setting higher standards for high-cost, short-term credit, payday lending and debt management firms.
On the back of that consultation, we received some 300 responses, which we looked at alongside feedback from the roadshows.
Overall, the picture was very positive. We saw respondents broadly welcome the new FCA approach to regulating consumer credit.
As you’d expect, industry was not shy about recommending improvements where it didn’t think we’d called it right. In a number of cases we’ve kept our proposals in place, but there are also places where we didn’t have it quite right, so we’ve made the following changes:
- amended the risk warnings that high-cost, short-term lenders will be required to include in their financial promotions.
- amended the rules on continuous payment authorities, to allow for the same loans – high-cost, short-term – to be repaid in instalments.
- revised our proposals for regulatory fees, so smaller firms will pay less than originally consulted on.
On top of the rulebook, we also have a new duty to cap the total cost of credit supplied by high-cost short-term credit lenders – and we’ll be consulting on what that might look like.
At the moment we’re gathering data here, as well as engaging companies and other interested parties. The aim is to get to a position where we can put forward strong proposals for consultation in the summer.
For all firms on fees, we’ll publish an update later this month and we have published a guide to help firms prepare for the transfer of regulation from the OFT to the FCA.
There’ll also be more webinars. We’ll be broadcasting video tutorials to give extra support. And there will be more information available on our broad approach to regulating consumer credit.
So, as we can see, there’s been a lot of activity and movement over the last few months. The plan is to continue this work, both as we get closer to regulatory transfer, and as we accelerate past it.
So far we’ve seen over 40,000 firms register for interim permission from the FCA – an essential step for any company that wants to carry out consumer credit business from April.
We’re also working hard to make sure other businesses with an OFT consumer credit licence, understand that it will expire at the end of March.
The next step, in May, will see us contact firms with interim permission to remind them of the need to apply for authorisation. Clearly, most firms want to comply and most have engaged positively with the FCA.
But a key issue here for us in all this process and procedure: is an acknowledgement of the fact this will be the first time many firms have been supervised by a principles-based regulator. Sitting over our rules are 11 principles for businesses we regulate.
I want to quickly highlight two of the most important principles:
Principle six – which states that: ‘a firm must pay due regard to the interests of its customers and treat them fairly’. This is usually called ‘treating customers fairly’.
We’ve published half a dozen ‘consumer outcomes’ online to help explain what we want this principle to achieve. Cornerstones of this one are things like promoting clear information and ensuring the products sold to consumers are appropriate for them.
For those of you in compliance – and there are a few here today – there are also examples in the FCA Handbook of behaviours that are likely to contravene the treating customers fairly principle.
The other key principle to touch on is principle three: ‘a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems’.
Broadly, this covers the following:
- Robust governance arrangements
- Skills, knowledge and expertise of staff
- Outsourcing responsibilities
- Conflicts of interest
Clearly, the types of systems and controls a firm must have in place here reflect the nature, scale and complexity of the business, as well as the risk the activity might pose to consumers.
Spirit and letter of supervision
So, these are the basic principles – which do bring change with them. Not just in tone, but also in application.
For some firms, FCA supervision will feel more probing. There’ will be more engagement with businesses so we can make sensible suggestions, or judgements about business models, strategies, culture and so on.
There will also be more influencing, persuading, prodding and where appropriate, use of formal powers if we find shortcomings in firm cultures.
The basic approach is based on the so-called ‘Three Pillars’:
- Pillar one is all about firm-specific supervision, aimed at identifying and mitigating the key drivers of conduct risk within firms – the ones that could generate poor outcomes for consumers, or risks to market integrity.
- Pillar two is reactive supervision. In other words, dealing rapidly with events that could result, or are already resulting in poor outcomes for consumers or, again, to market integrity.
- Pillar three is basically the forward look option. Carrying out in-depth thematic reviews of issues or products in a sector where we think there could be increased risks to consumers.
A key issue here for us is that the FCA supervisory approach is intended to be a proportionate one. We concentrate our focus on the firms, or markets that we have good reason to believe may present the highest risks.
To help us understand where those risks are, we work closely with other stakeholders like trade bodies, Trading Standards and the Department of Enterprise, Trade and Investment in Northern Ireland. Partly to help us improve our understanding of the sectors. Partly to share intelligence. And partly to intervene early, if needed.
If the latter option is needed the FCA does have more legal punch than the OFT.
I think it’s important for firms to understand this - and to understand the implications. Whether that means the FCA holding senior management to account, placing temporary bans on products, or putting a stop on misleading financial advertising. This is all part and parcel of the regulatory toolkit.
And for consumer credit firms dealing with the most vulnerable consumers – like the ones I mentioned at the start – I do want to give one final reminder today that the FCA has a very strong consumer protection objective.
So, on key issues like the price cap, like continuous payment authorities and so on and so forth, there will be a focus on preventing customer detriment. In other words, the FCA will look forward to anticipate problems downstream. Not simply to react to problems as they pass by.
This should be firmly in all our interests and the FCA will, I hope, help this important industry to continue to provide the very best consumer outcomes.
We fully understand that there are enormous differences in business models and approaches within an industry that creates so many possibilities. From the ability of first time buyers to furnish their new homes,all the way through to big business funding the large scale, fixed capital investments that drive our economy onwards and upwards.
I also want to put on the public record that, for the FCA at least, there’s more to consumer credit than the issue of payday lending, as hugely important and visible as it is.
Firms will get a sense of this at the end of the month when we publish our annual Business Plan, which will give a broad overview of the areas of consumer credit focus for the year ahead.
I can’t give any spoilers today – but I can say the plan will reflect the fact this is a hugely important, valued and valuable sector – touching the lives of almost every household in the country in one form or another.
Our long-term goal is to make sure these touch points are, far more often than not, a positive one for consumers and firms alike.