By Mike Ward, Executive Chairman of Armalytix
Why the FCA’s new regulations for the consumer credit sector are a win-win situation for lenders & borrowers alike
Amidst rapid technological and social changes, the UK consumer credit sector is constantly evolving. One of the biggest recent shake-ups to regulation of the sector has been the introduction of the Financial Conduct Authority’s (FCA) Consumer Duty regulations. These Consumer Duty regulations, which apply to products and services across the sector, seek to ensure that borrowers receive ‘good outcomes’ and that lenders provide evidence that these outcomes are being met.
FCA shake-up
The changes introduced by the FCA are significant, with the concept of forbearance brought to the fore, and some in the 50,000+ firm sector have been taken by surprise. The FCA have introduced rules to protect borrowers who are struggling to make repayments and making it harder to push those borrowers into default. Today, greater attempts must be taken to provide appropriate support and options, alongside treating borrowers in financial trouble with extra care. According to one FCA report:
- Over half of borrowers have suffered a negative life event through no fault of their own and were facing financial difficulties as a result.
- A significant proportion also had physical or mental health issues, which needed to be taken into consideration when seeking support on their financial difficulties.
- 40% of borrowers in financial difficulty had either a negative or indifferent experience with their lender.
Putting borrowers into default will make it very hard for them to get credit in the future, compounding financial difficulties, and making it difficult for them to put themselves on a better financial footing, potentially driving them to illegal lenders.
Economic necessity
Newly released data shows that in excess of three million people across the UK have borrowed from an illegal money lender in the past three years, according to non-profit finance organisation Fair4All Finance. With the ONS reporting a 17% increase on last year’s borrowing, it’s clear that with a cost-of-living crisis there is a greater dependence in the UK on these sorts of loans. Now, the consumer credit industry can rise to the occasion and continue to support responsible lending.
A positive for all
By embracing the ethos of delivering good borrower outcomes, there is a path to benefits for all parties. Lenders offering appropriate forbearance options with repayments plans suitable for borrowers in financial difficulties should reap significant rewards. With happier, less financially stressed borrowers, lenders will instil loyalty, repeat custom, and reduce the need to write off loans for hard-up borrowers. There will also be less of a need to hand over debt collection to third parties at a fraction of the original loan price. A better regulated industry will create an atmosphere of good relations between lenders, borrowers, and the ombudsman, leading to fewer complaints to deal with. Use of smart technology to achieve the necessary understanding of borrowers’ financial situations and ability to pay will also streamline lenders’ processes and reduce resource overhead.
With the Consumer Duty regulations, consumer credit firms will need to ensure that they have:
- Regular monitoring and review of borrower arrangements.
- An accurate and current understanding of the borrowers’ financial situation and circumstances.
- Staff training to identify the characteristics of vulnerability.
- Practical options beyond standard repayment plans and debt collection.
- Accessible contact channels so that borrowers can communicate with them when they are in financial difficulty.
All these measures will mean that borrowers are better protected and can result in a positive impact for consumer credit firms. Failure to do so could risk greater speed bumps in the future.
Background on Mike:
- Compliance expert with experience helping gambling and conveyance industry adapt to White Paper and anti-money laundering regulations.
- Spent 20 years in banking heading up equity desks for Bank of America, Deutsche Bank and Nomura which involved regular dealings with the FCA regulator.
- Co-founded Armalytix to help stem the rise of financial crime and help firms manage consumer financial risk.