On 6 March 2019, the FCA published a Dear CEO letter it had sent to firms setting out the regulator’s view of the key risks that high cost lenders pose to their consumers or the markets they operate in.

The Dear CEO letter applies to firms providing the following products:

  • guarantor loans;
  • high-cost short-term credit (HCSTC);
  • high-cost unsecured loans aimed at sub-prime customers;
  • home-collected credit;
  • income smoothing products;
  • logbook loans;
  • pawn broking; and
  • rent-to-own.

It also applies to community development finance institutions.

The Dear CEO letter sets out the FCA’s view of the key causes of harm across the high-cost lenders portfolio. The FCA also sets out the areas where it will prioritise supervisory work. These areas include:

  • The FCA will carry out diagnostic work across the portfolio so that it can better understand the motivation for, and impact of, relending on both consumers and firms. This work will examine aspects of relending such as customers’ borrowing journeys, firms’ marketing strategies for offering additional credit and the costs of relending for consumers. The FCA will also proactively engage with home-collected credit firms to ensure that they understand its expectations. This will include any changes to processes as a result of the new rules and guidance in the December 2018 Policy Statement on high-cost credit;
  • The FCA refers to the October 2018 Dear CEO letter it sent to HCSTC firms and the July 2018 Policy Statement which clarified its expectations on creditworthiness by issuing new rules and guidance that came into effect on 1 November 2018. The FCA expects firms to comply with the new rules, it will take action where it identifies non-compliance;
  • The FCA expects all firms to fulfil all relevant obligations, including analysing the root causes of complaints and taking into account the Financial Ombudsman Service’s relevant decisions;
  • buying/selling existing loan portfolios. The FCA expects any firm considering buying or selling an existing loan portfolio to be mindful of their obligations to treat customers fairly and, where appropriate, to notify it of their intentions at an early stage;
  • changes to business model. Firms should be aware that they are required to hold the correct permission(s) for all of their regulated activities; and
  • compliance with new FCA rules and guidance. The FCA expects firms to comply with the new rules and guidance published over the course of its high-cost credit review.

In addition to the above areas, the FCA will prioritise its supervisory work with firms that provide guarantor loans in the following area: payments made by guarantor. This work will establish whether potential guarantors have enough information to understand the likelihood and implications of the guarantee being enforced.