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10 May 2021

On 22nd April 2021, Charles Randell, Chair of the FCA and PSR, delivered a speech to the Finance & Leasing Association titled ‘Cautious optimism for the post-pandemic world’. The speech generally contained cross-sectoral themes however included a couple of references that specifically applies to retail lenders/consumer credit providers. Charles reiterated the FCA’s four priorities to advance consumer protection, namely (1) safe and accessible payments, (2) sustainable credit, (3) clear and safe investment choices and (4) fair product terms, including price. In the context of sustainable credit, Charles referred to the following extract from the August 2020 FCA report into relending in the high-cost credit sector:

“The review raises several concerns about firms’ conduct, including poor practice in the use of online accounts and apps to encourage consumers to borrow more, and marketing messages which emphasised the ease, convenience and benefits of taking more credit. Some firms suggested that consumers could use additional borrowing, for example to take a holiday, and reinforced the message by including imagery of exotic locations. Some firms also appeared to use ‘nudge’ techniques such as appealing to social norms by conveying a message that relending is common practice and normal behaviour.”

We recommend that retail lenders protect consumers from harm and support the sustainable credit priority by operating financial promotions and communication strategies that are predicated on clearly and fairly communicating to customers the core message that credit can be harmful and that customers should make a carefully considered decision to enter into a credit agreement. This cautious message should form the foundation of a retail lender’s communication strategy and can be overlaid with a lender’s own marketing/brand message provided that it does not dilute or counter the consumer protection-focused core message. It is prudent for a retail lender to document its financial promotions and communication strategy to be able to demonstrate its formal process in relation to marketing.

Another salient point from Charles’ speech touched on the topic of firms focussing on outcomes (e.g. the results that a retail lender’s business strategy ultimately achieves for its customer base). Charles set out that firms “…must identify if consumers are trapped in a cycle of unaffordable debt and take action to break that cycle…” As intimated by the aforementioned statement, the FCA’s expectation is that lenders’ creditworthiness assessment processes are holistic and not only considers affordability from a £ value perspective but considers the suitability of the customer entering into the credit agreement based on the customer’s personal and financial circumstances (including where the customer’s financial records demonstrate a cycle of unaffordable debt). Where a retail lender identifies that a customer is in a cycle of unaffordable debt, its duty to treat customers fairly under Principle 6, requires the firm to support the customer by, for example, referring the customer to a debt advice organisation. A retail lender should definitely not, in the words of Charles, ‘extract further rents from the most vulnerable [(i.e. customers in a cycle of unaffordable debt)]’. We recommend that retail lending firms ensure that their credit policies make provision for an expansive assessment of a customer’s personal and financial circumstances to inform, not just an affordable lending decision from a £ value perspective, but an overall responsible lending decision which aligns with the TCF principle and the consumer protection objective.

By Ian Beardmore

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