FCA regulation
2018/2019 Business Plan
The FCA published its Business Plan 2018/19 in April, with headline priorities including culture & governance, high cost credit, tackling financial crime, data security, increased use of technology and the treatment of existing customers. The regulator is continuing work on affordability/creditworthiness assessments, progressing a Thematic Review on commission and other remuneration models, publishing an Interim Report on the 2019 Review of the Consumer Credit Act and undertaking further work in the motor finance sector looking at responsible lending and consumer information.
Work on Motor Finance
The FCA assumed responsibility for regulating the consumer credit market in April 2014, and has since conducted a wide range of studies into the market to build up its understanding of the market and also identify any gaps in regulation. As part of its 2017-18 Business Plan, the FCA announced it would conduct an exploratory piece of work on the Motor Finance sector. The FCA initially focused on four key themes in order to develop its understanding of motor finance products and how they are sold, and to assess if products cause harm to consumers and if the market was functioning as well as it could.
The FCA published an update to its work in March 2018, covering off progress so far and identifying areas of further focus. The update confirmed that current motor finance products including Personal Contract Purchase (PCP) provide consumers with flexibility, and that most of the recent growth in motor finance is amongst lower credit risk consumers, with arrears and default rates remaining low (albeit higher among sub-prime customers). The exploratory work found that lenders were adequately managing prudential risks, that asset valuations and risk management processes appeared to be robust, and that appropriate strategic plans were in place.
The regulator is now focusing its efforts on further developing its understanding of the way in which commission arrangements are structured, and on customer information and affordability assessments, particularly in the sub-prime and second-hand markets. The FCA is conducting a targeted survey alongside mystery shopping exercises to gain insight into these areas. The FLA is continuing to work with members on its programme of action, including a market-wide survey on commission structures to compliment the FCA’s work.
The FCA expects to publish its final report in Q1 2019.
Creditworthiness and affordability
Throughout its work on consumer credit, the FCA has increasingly focused on the issue of affordability, highlighting the importance of assessing a customer’s ability to repay affordably and minimising the risk of financial distress.
The FCA issued final rules in July 2018 on assessing creditworthiness in consumer credit, which set out how it expects firms to assess affordability. It also provides useful examples of what over and under-compliance may look like, to help clarify what is proportional for firms. Whilst the final rules are very much in line with current FLA guidance, below are some key points to consider:
- The FCA recognises that it is appropriate to consider household and not only individual income
- Income and expenditure may be assessed as part of the decision-making process, but the FCA will not prescribe how this should be done.
- ‘Income’ may include income derived from non-salary sources (including household income and savings)
- While firms should take into consideration potential future changes when assessing affordability, this should only be what is reasonably foreseeable.
The FCA is also looking at the issue of affordability as part of its work on motor finance – primarily within the sub-prime market and is expected to report on its findings in Q1 2019.
We have worked with members to develop practical guidance on how lenders may wish to approach assessing the affordability of a credit agreement which can be found here. These measures could include taking into account likely future circumstances of the customer, and using income and expenditure data if it is proportionate to do so.