What can the consumer credit sector expect from the FCA?

Speech by Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations, at the Credit Summit, London.

fca board j davidson web.jpg

Speaker: Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations
Event: Credit Summit, London​​​
Delivered: 21 March 2019
Note: this is the speech as drafted and may differ from the delivered version


  • There has been a lot of change in the consumer credit sector, but our focus on affordability, business models and culture hasn’t and won’t change.
  • 2 areas of focus for the FCA in the high cost credit sector will be relending and affordability.
  • A healthy, purposeful culture will be the best way to deliver value for firms, their clients and their employees. The Senior Managers and Certification Regime (SM&CR) provides some minimum standards for culture.


Last year I spoke about the importance of getting affordability right and how healthy business models and healthy cultures will support that. Since I last spoke to you there has been a lot happening in the consumer credit sector. A lot has changed. 

But some things don’t change and won’t change, including our focus on affordability, business models and culture. There have been too many notable events to list so I will just mention a few that I find significant because they illustrate our consistency.

We continue to focus on business models: 

  • Business models were the impetus behind our new rules for price-capping Rent to Own companies which will be introduced on 1 April 2019 and will save some of the most vulnerable consumers in the UK up to £22.7 million a year.
  • Business models were the impetus behind our investigation into the world of motor finance which raised serious concerns about the way in which lenders in the motor finance market are choosing to reward car retailers and other credit brokers for business. This was despite the efforts of the Finance & Leasing Association (FLA) and many of its members to move the industry away from the difference in charges business model.

We continue to focus on the culture of firms, including their systems and controls over affordability:

  • Affordability was a key issue in the collapse of Wonga into administration. 
  • Affordability and culture were also a key part of our work in the debt management sector that identified much improved compliance for most firms. The firms that were doing best were those that went beyond a compliance culture and purposefully focused their culture on customer outcomes.

While growth in the sector has slowed, consumer credit has grown by 6.5% over the last 12 months, according to the Bank of England. This growth rightly attracts a lot of attention from all areas of society, including us as regulators.

The economic environment remains an uncertain one, and while Brexit adds to this uncertainty, the one thing that is certain is that the day after Brexit will not change the way we regulate your sector.

Today, I want not just to be consistent but also be predictable.

How we supervise the consumer credit sector and what you can expect over the next year

The consumer credit sector remains by far and away the largest sector in terms of number of firms we supervise, with approximately 40,000 firms authorised by the FCA and continuing to grow.

Last year we published our Approach to Supervision, in which we highlighted that to supervise firms effectively we need to be forward-looking and pre-emptive in our approach to engaging with firms.

With each portfolio, we determine the inherent harms and agree a strategy to take pre-emptive action with firms posing the greatest risk harm.

The consumer credit firms we supervise vary greatly in size, complexity and in the risks of harm they pose to both consumers and market integrity. Therefore, we aim to supervise the sector in a way that is practical and proportionate. To achieve this, the vast majority of consumer credit firms are supervised within a portfolio of firms each of which share a similar business model.

With each portfolio, we determine the inherent harms and agree a strategy to take pre-emptive action with firms posing the greatest risk harm. 

We communicate the risks and our supervision strategy to firms within that portfolio in a letter which is published on our website. We outline to those firms the key risks we see those firms pose to their consumers and the markets they operate in. We encourage firms to look at how they can reduce those risks. We also include details of any work to identify, diagnose and remedy the harms, and evaluate the impact of our interventions.

Please look out for these letters. The first of these we have published for your sector was the letter to the High Cost Credit sector. The contents of the high cost credit sector letter is relevant for most lenders and brokers in the consumer credit sector.

Firms that offer high cost credit are diverse, the consumers that use them tend to share similar characteristics - they tend to have poor credit histories and low financial resilience, with many of them likely to be vulnerable. Nowhere is getting affordability right more important.

There are 2 topics in the letter that should be of general interest for everyone who wants to predict what is on our mind in terms of affordability. The first is relending and the second is affordability in the guarantor loans business.

We have seen high levels of relending in all areas of high cost credit. Repeat lending was a key factor in some important Financial Ombudsman Service (FOS) decisions that have had significant impact in the payday lending world. We will be doing further work to understand both the motivation for, and the impact of, relending on both consumers and firms. These levels of relending raise questions about the adequacy of creditworthiness assessments and its appropriateness for the consumer.

While this work will be across the high cost credit sector, there will be a focus on home-collected credit, where we have and will be proactively engaging with these firms to ensure they understand our expectations.  

Rules and guidance came into force this week relating to relending in home-collected credit. These require firms to explain to customers, who are looking to borrow more money, the comparative costs of refinancing an existing loan versus taking out a new loan. We have also recently made clear our expectations in relation to firms compliance with s49 of the Consumer Credit Act 1974, which prevent home-collected credit firms from initiating discussions about new loans or refinancing during home visits without a previous specific written and signed request from the customer.

Over the last few years we have seen a dramatic increase in the use of guarantor loans by consumers. Balances on guarantor loans are fast approaching £1 billion and these have more than doubled since 2016.  

We will be doing further work to understand both the motivation for, and the impact of, relending on both consumers and firms.

While these products provide an opportunity for those with thin credit files - poor or limited credit history - we do have concerns. Concerns about affordability. Recent work we have done in this area showed that many guarantors are making at least 1 payment and the proportion of guarantors making these payments is growing.

There is also growing anecdotal evidence that guarantors may not understand how likely it is that they will be called upon to make a payment. Our work will therefore focus on affordability and on understanding whether potential guarantors have enough information to understand the likelihood and implications of the guarantee being enforced. 

We have already amended certain rules to ensure that the protections they provide to borrowers also extend to guarantors, for example rules requiring forbearance, pre-contractual explanations and fair treatment. In assessing creditworthiness, we have clarified that firms must undertake a reasonable assessment of the potential for the guarantor’s commitment to have a significant adverse impact on their financial situation.

And if the guarantor is called upon, we have published guidance on our view of what constitutes ‘enforcement’ of the guarantee under the CCA – in practice this means we expect firms to provide guarantors with adequate notice before exercising a Continuous Payment Authority (CPA).

Recent work we have done in this area showed that many guarantors are making at least 1 payment and the proportion of guarantors making these payments is growing.

There are also questions over the level of interest rates charged on these products considering that these guarantors are deemed to be credit worthy, we will therefore be considering this and the business models of these firms.

So you can expect us to be consistent and predictable in our focus on affordability. What else?

The Senior Managers and Certification Regime

While I have spoken about rules and guidance, this is not the only answer to reducing consumer harm and having a healthy sustainable business. Culture is the key to a healthy business. Culture is a root cause driver of behaviours and outcomes in firms. Culture eats strategy for breakfast.

A tick box cultural approach to compliance will be expensive and will likely not be enough to ensure that customers receive the right outcomes. In our recent debt management thematic review, we found that those firms who had focused their culture on what is best for their customers, and not just on compliance, had made the biggest strides.

This is why we are working hard to promote effective cultures across the industry. 

...at the FCA, we do not believe there should be a ‘one size fits all’ culture and we do not prescribe what any firm’s culture should be. 

In such a diverse sector as consumer credit, each of your firm’s cultures is different. And at the FCA, we do not believe there should be a ‘one size fits all’ culture and we do not prescribe what any firm’s culture should be. As far as rules go, our Senior Managers and Certification Regime is the minimum standard we require of your culture, of your behaviours and mindsets.

The Senior Managers and Certification Regime, or SM&CR for short, went live for insurers in December 2018 and earlier for banks and other dual regulated firms. We are now extending it to the rest of the firms we regulate on 9 December 2019. This is being extended in a way that is proportionate to the size of the firm and, if you haven’t already done so, you will need to check which tier of the regime applies to you and what steps you will need to take.

At the heart of the regime are 5 simple rules, the Conduct Rules, for the behaviour of almost all financial services staff.  I hope that these rules will reinforce the idea that everyone will take accountability for their own actions.  If you are asked to do something that isn’t right, you have the full force of the regulator behind you to make you stand up for what is right and call it out.  I hope it will lead to a speaking up culture or, even better, a listening up culture - of which more in a moment.

The second important component of SM&CR is the Senior Managers Regime. The rules for you talk about being clear about your area of responsibility and taking reasonable steps to ensure that there is no breach in your area. In my mind, this is no more or less than the role of a leader. You need to role model and drive the culture in your areas.

In banks, where this regime was first introduced in 2016, there was undoubtedly fear about the regime at the start. However, once firms started to implement it, we found that leaders welcomed the clarity of the accountabilities and responsibilities it gave them and how it supported a healthy culture.

The third component of the SM&CR is the Certification Regime. Instead of us approving those employees who could cause significant harm at the start of their roles, it will be a firm’s responsibility to certify that they are fit and proper at least annually.

Our rules are only a minimum standard for culture. This raises the question nevertheless: is there such a thing as a good culture, a healthy culture? We have been engaging leaders in your industry, broader financial services, academics, coaches, politicians, consumer groups and many others with this question. The big ideas that are emerging are that:

  • there are healthy cultures, ones that lead to sustainable high performance in the long as well as the short term and the long term;
  • that healthy cultures lead to high employee fulfilment, engagement and productivity; and
  • that healthy cultures lead to good outcomes for clients. 

What do these healthy cultures feel, sound and look like? The healthy cultures all have a strong sense of purpose. That purpose resonates with employees - it's why they come to work and feel inspired to give their best. It is a psychologically safe culture – it’s safe to speak up. In fact, in many it is a listening up and inclusive culture. New ideas coming from diversity are sought out and deliver innovation and reduce the risk from not reflecting on what might go wrong. Small mistakes are seen as an opportunity to learn and avoid big mistakes. 

In a purposeful and safe culture, compliance is much easier. If everyone is focusing on delivering the right outcomes and have the right capabilities then you have less need for some of the ponderous and complicated compliance functions and tick box processes that we see burgeoning.

How to be purposeful? You must make a conscious decision as to whether your purpose should be one that focuses on being ethical or one that is commercially driven with a heavy compliance overlay.

To start with, your purpose and business model must be authentic and consistent. The idea that you are going to be able to have an ethical culture without an ethical business model is ludicrous, but we see a lot of firms try. They have an unbridgeably large ‘say-do’ gap. And it results in loss of trust and a lot of disengaged, cynical employees and customers.

Where we see cultures in which the purpose is experienced in the behaviours of those around them and there isn’t a ‘say-do’ gap, it results in much higher employee engagement, greater customer trust, and better financial returns. 

If you have a healthy purpose, the role of leaders is critical. As leaders, your behaviour speaks much louder than your words. This is why we are focused on leaders in the Senior Managers Regime.

A healthy purposeful culture will be the best way to deliver value for you, your clients and your business.

Our work with firms also shows that reinforcing the purpose, requires consistency in governance practices, in employee incentives and in employee capabilities. 

Above all, living the culture requires consistency. Consistency between purpose, business model, leadership, governance practices and people practices. It also requires consistency over time. It is true that culture comes from the top but it also comes from history. 

In the consumer credit sector, I see some firms who have built and live healthy cultures. They are highly performing and sustainably so. I see a few firms that just don’t get it at all and don’t even have a compliance culture. We act where we see this. I see many firms who are attempting to trade off the interests of customers with those of shareholders. These aren’t yet in a great place. Overall, I sincerely hope that with the introduction of SM&CR can make a step change to a healthy culture in all firms.

In summary

Today, I have spoken to you about just few of the things going on in the consumer credit sector. The sector services around 40 million consumers and plays a hugely important role in the economy of our country. And while the economic environment presents challenges, it also provides great opportunities for healthy businesses.

My top tip for today is to keep ahead of the rules, you can invest in expensive tick box compliance or you can get on top of your culture. A healthy purposeful culture will be the best way to deliver value for you, your clients and your business.