Lenders and credit brokers have been firmly in the spotlight of late.
Here we outline the main changes affecting both industries.
Summary of Creditworthiness & Affordability – Final rules PS18/19
A reminder to all firms which are involved in making lending decisions that CONC 5.2A comes into force on 1 November 2018. Please view the new rules and guidance here: https://www.handbook.fca.org.uk/handbook/CONC/5/2A.html?date=2018-11-01
A key element of the new rules is an increased emphasis on adequate policies and procedures,
and being able to demonstrate compliance if challenged.
Firms which determine lending decisions must consider the following:
- That creditworthiness and affordability are two distinct tests that must both be applied in any lending decision;
- That the data collected at the point of sale is sufficient to undertake an affordability assessment and that you may need to verify that data;
- That your creditworthiness and affordability policies are robust and effective by monitoring repayments and conducting periodic reviews and sampling;
- That your record keeping is sufficient to demonstrate that the requirements of your creditworthiness and affordability policies have been met.
Credit risk and affordability
The FCA has formally defined creditworthiness as consisting of both credit risk and affordability. Firms must consider the risk to themselves that the customer will not pay (credit risk) and how difficult it may be for the customer to meet repayments (affordability). Credit risk is lender focussed whereas affordability is borrower focussed.
Content and scope of affordability assessments
Firms are now required to determine whether information received from a customer needs to be verified and you may consider implementing guidance to staff as to what customer information must be verified and what information is considered sufficient to undertake an affordability assessment. Any assessment should depend upon and be proportionate to the individual circumstances.
Firms must ensure that they have a documented vulnerable customer process to ensure their needs are catered for.
Meaning of affordability
Firms must ensure that any creditworthiness and affordability assessments consider whether a customer is able to afford the credit over the lifetime of the agreement. Consider future rises in interest rates as well as any foreseeable changes to income, such as temporary employment, a potential reduction in hours, possible redundancy, increase in the number of dependants.
The impact of not conducting a creditworthiness and affordability assessment.
If a customer falls into financial difficulties as a result of the credit provided, the burden of proof will now lie with the lender to demonstrate why one was not carried out. This is why it is important to adopt a case by case basis and avoid a “blanket approach”.
Governance of Policies and Procedures
Not only must firms have documented policies and procedures, but they must now periodically review them to ensure that they are still appropriate and achieve their aims. Records must be sufficient to enable the FCA to monitor the firm’s compliance.
Firms must keep records of when credit agreements are entered into, when a significant credit increase is granted (or when there are signs of smaller repeat borrowing which may add up to a “significant amount”) and when an affordability assessment is carried out.
All policies and procedures must be agreed and signed off by a senior manager who must be prepared to review them periodically
Affordability of HCSTC l(high-cost short-term credit)
The FCA has written to the CEOs of HCSTC firms regarding issues surrounding an increase in complaints about unaffordable lending (including complaints about a ‘chain’ of loans over an extended period) https://www.fca.org.uk/publication/correspondence/dear-ceo-affordability-high-cost-short-term-credit-loans.pdf
The FCA has set out how it expects HCSTC firms to manage the impact. Firms’ complaint-handling procedures should ensure that they can improve the way in which they handle complaints, in the light of relevant determinations by the Financial Ombudsman Service (‘the Ombudsman’) of complaints about the firm. The FCA noted that the Ombudsman has recently published four examples of determinations of individual complaints about payday loans to illustrate its approach to the issues raised in those complaints:
https://www.financial-ombudsman.org.uk/publications/technical.htm .If relevant, firms should take these examples of determinations into account as part of establishing their own effective procedures for complaints handling (see DISP 1.3.1R).
Credit broking remuneration at the point of sale
The FCA has published the results of its thematic review TR18/2.
The FCA surveyed 349 credit broking firms and 1,208 consumers. It did not consider lenders selling their own products directly to consumers, or motor finance firms as this market are subject to a separate FCA review.
Credit broking is usually an important source of income for these businesses. However, the likely suitability of the products meeting the customer’s requirements appeared to be the main factor which influenced the information presented to them. The level of commission generally appeared to play little, or no, part.
The research suggested that most consumers saw their experience of buying products on credit through a finance broker as positive, regardless of whether commission was paid or not.
Many brokers in the survey only offered products where they have a commercial relationship with the lender. The FCA did not see evidence that this practice was likely to restrict customer choice resulting in them presented with significantly worse products than they could obtain elsewhere.
The FCA will continue to monitor credit broking activity as part of its ongoing supervisory strategy. It will publish the findings of its motor finance project later this year.
The impact of staff incentives, remuneration & performance management in consumer credit
The FCA’s review into staff incentives, remuneration and performance management in consumer credit FG18/2 https://www.fca.org.uk/publication/finalised-guidance/fg18-02.pdf gave insight into good and poor practices.
As a result of the review, another gentle reminder that CONC 2.11 came into force on 1 October 2018 please view the new Rule here: https://www.handbook.fca.org.uk/handbook/CONC/2/11.html?date=2018-10-01
Firms must make adequate arrangements to identify and effectively manage risks arising from remuneration and performance management schemes. The extent of the arrangements should consider the nature, scale and complexity of the business. The new rule includes examples of the measures and procedures that firms may introduce. Firms must also monitor any potential conflicts of interest where the responsibility for monitoring an employee’s activities rests with their line manager. To help you identify any risk areas, ask yourself the following questions: –
- Is your bonus scheme determined by the value/volume of credit provided?
- Are performance targets measured against the value/volume of credit provided?
- Are there any incentives to sell credit?
- Are credit sales activities monitored?
- Do you collect MI to detect sales behaviour?
- Have you established procedures to ensure appropriate action is taken if adverse behaviour is identified?
- Is the process overseen by senior management?
- If management bonus is affected by the sale of credit, are any conflicts of interest identified?
Factors that may reduce or mitigate risks in remuneration schemes include:
- Schemes based purely on quality;
- Use of customer satisfaction surveys;
- Loss of bonus for failing to meet quality standards;
- Claw-back of incentives based on quality reviews;
- Incorporate quality measures into the scheme;
- Cumulative or rolling targets to avoid end of month pressures
In need of a remuneration policy? Get in touch NOW
In its 2018/19 business plan, the FCA stated that data security and the operational resilience of financial services firms plays a prominent role in the regulator’s priorities, with an acknowledgement that cyber-attacks in the financial sector are becoming more frequent and widespread.
The FCA will “strengthen supervisory assessments of the highest impact firms to better understand their current and planned use of technology, resilience to cyber -attacks and staff expertise. We will also review how governance, strategy, systems architecture, risk management and culture contribute to firms’ data security.”
Under Principle 11 of the FCA Handbook, firms must report material cyber incidents. An incident may be material if it:
- results in significant loss of data, or the availability or control of your IT systems
- affects a large number of customers
- results in unauthorised access to, or malicious software present on, your information and communication systems
The FCA has published some basic guidance to help firms make their networks secure:
Matters of prominence
A reminder to firms that it is not just the FCA which regulates misleading marketing. The ASA works to keep UK advertising “legal, decent, honest and truthful”. Camden Council’s Trading Standards Team acts as the ASA’s legal ‘backstop’ for non-broadcast advertising to enforce advertising rules.
The ASA received a complaint about whether a TV ad for Sunny Loans breached the CAP Code because the representative APR was not given adequate prominence.
The ASA noted that CONC rules 3.5.7 (1) (c) and (2) stated that an ad must include a representative APR (RAPR) if it included, amongst other elements, an incentive to apply for credit, and the RAPR must be given no less prominence than the incentive to apply for credit.
As such, the ad was required to include an RAPR with no less prominence than the incentive to apply for credit.
The ASA concluded that the RAPR was given less prominence than the incentive to apply for credit, and as such, the ad breached the Code.
If you are in any doubt, why not run your proposed marketing material through us.