On 27 June 2022, the FCA published a Dear CEO letter concerning its supervisory strategy for the mainstream consumer credit lenders (MCCL) portfolio.

The Dear CEO letter follows an earlier letter published in December 2020 and:

Provides an updated view of the key risks that MCCL firms pose to their consumers and the markets in which they operate. This includes:

  • the rising cost of living and the treatment of borrowers who fall into financial difficulty. Against a backdrop of higher inflation and increasing interest rates, ensuring that customers in financial difficulty receive fair and appropriate support remains a key priority for the FCA;
  • inadequate assessments of affordability. Firms should apply reasonable and proportional checks on customers applying for credit including, taking reasonable steps to determine or reasonably estimate to establish a customer’s income. Furthermore, firms are reminded of their obligations under CONC 5.2A.12 (5) that repayments should not “have a significant adverse impact on the customer’s financial situation”. Finally firms should monitor the effectiveness of their creditworthiness assessment policy and procedures, and consider what management information and metrics they could use to help inform this. The FCA will be monitoring the market for signs of inadequate affordability assessments;
  • insufficient persistent debt strategies. In 2018, the FCA introduced a package of measures to help customers in persistent credit card debt. Since the introduction of these rules, firms have been engaging with a significant number of customers in persistent debt to discuss the options available to them, in order to pay down their debt within a reasonable period. This remains a priority risk for the FCA and they will continue to review the effectiveness of these remedies;
  • inappropriately dealing with responsibilities under section 75 Consumer Credit Act 1974. There has been a growth in s75 CCA claims since the COVID-19 pandemic and a growing number of these lead to customer complaints, some of which are being upheld by the Financial Ombudsman Service. As such, the FCA has requested data from firms on this matter to review how these claims/complaints have been handled. This data will be reviewed for evidence that firms have met, and continue to meet, their responsibilities and the FCA will act on concerns.
  • firms changing business models which potentially lead to poor customer outcomes. Among other things, the FCA is seeing more examples of firms seeking to use Open Banking (OB) as a means of assessing customers’ ability to afford a loan. The FCA is concerned that firms are placing an overreliance on OB data or failing to consider how other data or sources of information should be used alongside OB to provide a more holistic picture of the customer’s situation.

Outlines the FCA’s expectations of MCCL firms, including how firms should be mitigating these key risks.

Provides an overview of the FCA’s supervisory strategy and programme of work to ensure that firms are meeting the regulator’s expectations, and harms are being appropriately mitigated. This includes the FCA’s new consumer duty and the fair treatment of consumers with vulnerable characteristics.

In relation to the rising cost of living, the FCA states, among other things, that it may affect firms’ ability to respond to, recover and learn from operational disruptions. Firms should ensure that they have robust governance arrangements that can effectively identify, manage, monitor and report the risks they may be exposed to such as sudden increases in the volume of consumer contacts and data protection and cyber resilience risks. Firms should consider different scenarios that may test their operations, to ensure that their internal processes and control mechanisms are adequate.