UK regulator publishes portfolio strategy letter for mainstream consumer credit lenders


Drivers of harm

In the letter, the FCA identified operational and financial pressures that can potentially turn into harm for consumers. These potential harms were identified before the pandemic but are acute in the current climate, with the FCA emphasising that appropriate governance is vital in balancing the needs of customers and a firm's own business interests.

To ensure customers are treated fairly, firms should strive towards outcomes that guarantee:

  • Customers are treated with forbearance and due consideration.
  • Customers are given sustainable arrangements with essential living costs and other debts considered, giving them a reasonable opportunity to repay their debt.
  • Customers are not pressurised to pay their debt within an unreasonable amount of time.
  • Customers are protected from escalating debt once they have entered into a forbearance arrangement based on what they can afford to pay.
  • Customers are allowed time to consider their options, seeking debt advice if necessary.
  • Customers are referred to debt advice, if appropriate.
  • Firms should recognise vulnerability and respond to the needs of vulnerable customers.
  • Firms should have clear, effective and appropriate policies and procedures for dealing with customers in financial difficulty, with adequately trained staff to provide appropriate assistance.

FCA expectations and areas of focus

In the letter, the FCA stated the ways in which consumers and markets may be harmed, and discussed its expectations of firms, detailed below.


The FCA's 2020/2021 Business Plan emphasised the importance of ensuring that customers were not given credit they could not afford, creating over-indebtedness. The FCA observed there were two main influences on affordability conduct issues for firms: the setting of ambitious growth targets in unsecured lending, and business models focusing on speed and ease of approval based on automation, avoiding any reliance or burden on consumers to provide more information.

MCCLs' business models should be designed to deliver good customer outcomes with robust affordability assessments to avoid over-indebtedness, asking customers to provide additional information where necessary, the FCA said. Firms are directed to the updated affordability rules, setting out the considerations that firms must make prior to providing credit, including the customer's ability to make repayments under the relevant credit agreement, without such repayments having a significant adverse impact on their financial circumstances.

As part of its analysis, however, the FCA found indications of high proportions of accounts in arrears, which could be a sign of unaffordable lending; inadequate creditworthiness assessments; over-reliance on credit risk modelling which uses data to predict whether repayments will be made, rather than whether the customer can afford to make them, and a reliance on credit reference agency and other statistical or modelled data or tools within affordability assessments, without a full understanding of the data and its limitations.

As a result, more rigorous assessments should be made of the affordability risk posed to customers by the credit they are applying for. Firms should look at individual circumstances, especially for higher risk customers, when making lending decisions, avoiding overreliance on data and automation.

Treatment of customers in arrears

The FCA also found firms are failing to establish and implement clear, effective and appropriate policies and procedures for customers in arrears, resulting in unfair or inappropriate outcomes for those facing financial difficulties. The regulator is concerned about the inadequate treatment of these customers and how firms maintain appropriate oversight where they have outsourced arrears management activities, such as debt collection.

Firms should have clear and effective policies and procedures for customers who fall into arrears; ensure appropriate skills and resources are in place to deliver these, and ensure they are treating customers fairly.

In the letter, the FCA also reminded firms that even where they outsourced their arrears management activities, they are responsible for ensuring regulatory compliance, as per SYSC 8.1.6R. This would include having appropriate oversight and governance for the activities carried out by the outsourced firm.

Embedding of regulatory changes

The FCA explains that as part of its Credit Card Market Study, it developed remedies to tackle persistent debt and provide earlier intervention. The regulator has found however that firms are potentially treating customers unfairly while embedding and responding to FCA credit card persistent debt regulatory remedies. These remedies are intended to address the problem of credit cards being improperly and expensively used for long-term borrowing.

The varied way firms may comply with persistent debt rules made by the FCA remains an important focus, and in the letter the FCA reiterates that it expects firms to "not only meet the letter of our rules, but also consider the requirement to treat customers fairly when implementing them". The regulator also explains that this continues to be an area of focus for the FCA, who has completed a multi-firm piece of work on persistent debt remedies, and will assess the effectiveness of them once sufficient time has passed to assess consumer outcomes.

Transparency of pricing and features

The FCA explains that some firms are lacking transparency in pricing structures and features of consumer credit products, leading to adverse customer outcomes.

Firms should make sure disclosures and adequate explanations across all distribution channels mean customers are able to make informed decisions when considering a consumer credit product, particularly in relation to the withdrawal of introductory promotional rates in 0% balance transfers and the circumstances in which interest will be charged.

Furthermore, the FCA reminds firms of the rules to reform the overdraft market which address how some firms were charging the most vulnerable customers an effective interest rate of more than 80% a year on their arranged overdraft. Measures introduced by the FCA in April 2020 included firms ensuring all overdraft customers would be no worse off when compared to the prices they were charged before the new overdraft rules, as well as interest-free overdrafts up to £500.

Firms are expected to proactively monitor customer outcomes across their consumer credit products and check that the borrowers are using them in a way that suggests they understand them. Where there is evidence that they are not, firms should act. If the FCA identifies harm occurring from a lack of transparency, it will intervene.


Firms should consider how the end of the transition period (December 31, 2020) will affect them and their customers and what action they need to take to be ready for January 1, 2021.

What do firms need to do?

MCCLs are expected to reflect on the issues highlighted in the letter and consider the way it operates to minimise the consumer and market harm it may cause.

As part of FCA supervision of firms, the regulator will engage with some MCCLs to discuss their business models, strategies and cultures as well as employing appropriate supervisory tools to test and mitigate potential areas of harm. The FCA will continue to monitor and review firms' practices and will act against firms where evidence of poor practice is found from a failure to follow its rules.

Article co-authored by Anna Burdzy.

This article was first published in Thomson Reuters on 9 December 2020.