On 23 October 2024, the FCA published its findings following a multi-firm review (MFR) of the financial resilience of consumer credit firms and non-bank lenders.

The MFR was conducted during the second half of 2023 and the first half of 2024 and involved a sample of consumer credit firms and non-bank mortgage lenders.

Findings

Overall, the FCA found that the majority of firms could improve their approach to risk governance and risk management. In particular, firms did not always identify and monitor their firm’s risks and financial metrics to give a greater insight into the challenges they face.

The FCA also found:

  • Some firms that had an inadequate approach to identifying the risks that could affect their business.
  • Firms used a variety of approaches to identify and measure the inherent risks in their businesses with varying levels of success.
  • Most firms had an underdeveloped approach to identifying, assessing, monitoring and managing risks, i.e. their risk management framework was not fully developed.
  • Some firms did not undertake any stress testing and relied on their base business plan projections alone.
  • There was a lack of adequate wind down planning undertaken by firms. This meant firms were at greater risk of a disorderly failure. 

Good practice

The FCA also sets out observed good practices and areas for improvement.

For example, good practices the FCA observed from consumer credit firms regarding their setting of risk appetite and establishing appropriate systems and controls included:

  • Board/management team had set a clear risk appetite, outlining their desired risk profile and the types of risks the firm was willing to accept. For example, the firm does not want arrears to rise above a certain level and sets a range of warning level triggers prompting it to take action as arrears levels increase.
  • Robust business planning, producing forecast financial statements that clearly show the regulatory capital position and reported performance against these forecasts.
  • Actively considering levels of liquidity required to run the business and setting triggers or buffer levels to allow early warning of potential issues.
  • Well-developed risk management and oversight processes with some firms operating a three lines of defence approach and, where necessary, using external support.
  • Compliance team with a clear mandate to ensure adequate oversight of appointed representatives and risk management.

Next steps

The FCA expects consumer credit firms and non-bank lenders to review their arrangements against the finings of the MFR and make any improvements that may be necessary.

Firms are also referred to the FCA’s expectations set out in Finalised Guidance 20/1 ‘Our framework: assessing adequate financial resources’ and Thematic Review 22/1 ‘Observations on wind-down planning and our Wind-down Planning Guide’.