FCA sets out actions for Consumer Lending Firms to reduce harm to consumers

On 20 March 2024, the FCA published a portfolio letter to three consumer lending portfolios: high-cost lenders, mainstream consumer credit lenders, and credit unions (Firms). 

This letter sets out the FCA's supervisory strategy for these Firms, and its views on the key risks of harm that Firms pose to consumers.  These risks will shape the FCA's focus and engagement with the market over the next two years. 

What harm did the FCA find? 

Poor governance and inadequate senior management oversight have been identified as a root cause behind several drivers of harm, along with the failure to implement effective monitoring and oversight of third-party providers. Such drivers of harm include inadequate creditworthiness assessments, relying on relending business models and designing products to promote persistent use, ineffective complaints management and failing to meet redress liabilities on time. 

The FCA is particularly concerned about sludge practices, which hinder responsible and sustainable lending by creating barriers for consumers, hinder transparency and the ability for customers to get support from lenders. The letter also identifies that Firms are not taking sufficient account of individual customer needs or providing tailored forbearance. 

What actions do you need to take? 

The FCA's priority areas of focus for the next two years fall into three categories, all underpinned by the higher standards prescribed by the Consumer Duty. 

• Affordable credit: Firms are encouraged to innovate to provide greater access to affordable credit. Firms must make sound affordability and creditworthiness checks and demonstrate their products are fair value. 
• Supporting consumers: Firms must support consumers in financial difficulty, including by taking personal circumstances into account and providing tailored forbearance. More generally, Firms must ensure they handle complaints effectively, including by monitoring outcomes and identifying learnings.  
• Governance, oversight, and financial crime: Firms must maintain appropriate systems and controls to mitigate risk of financial crime, including the growing risk of illegal money lending and domestic financial abuse, reinforced through robust oversight and governance.

The supervisory strategy highlights just how much emphasis the FCA will put on compliance with the Consumer Duty in the sector. Therefore, good compliance with the Consumer Duty is essential in ensuring Firms meet many of these expectations. 

The FCA plans to test Firms against its expectations, so actions Firms should be taking include: 

• considering how to best support customers that are declined credit, e.g. by signposting to a third party that provides reliable and relevant information and/or to Money Helper 
• distinguishing between positive and harmful frictions
• ensuring staff are trained to manage calls, and offer appropriate forbearance options to support consumers, taking account of individual circumstances
• regularly monitoring complaints outcomes
• preparing to apply the Consumer Duty to closed book products. 

Big unknowns remain such as exactly how the FCA will test Firms, whether it will agree with Firms' interpretation of the Consumer Duty and how it will ensure it uses its supervision and enforcement powers consistently across the industry.