This is the latest in a series of blogs looking at the impact on regulators with the intention of shedding light on a particularly significant regulatory event.
Yesterday the Financial Conduct Authority (FCA) published its proposals for firms to provide temporary relief for customers with unsecured credit products. All firms who offer their customers loans, overdrafts, credit or store cards will be impacted.
Below is a brief analysis of the proposals that I've put together with my colleagues Alex Sanger and Alison Crotch-Harvey.
Before considering the proposals in more detail, it’s worth reflecting on the speed of policy making involved and what this might mean for the future. Typically, and not least in consumer credit, the FCA was taking many months to define and analyse various markets, and many more to come forward with carefully crafted and usually quite narrow proposals (e.g. on price caps). Firms were then given extended implementation periods.
For good reason, all this careful consideration is now being passed over and, while the regulator will have benefited enormously from its previous analysis, it’s not a stretch to imagine that such rapid formulation and introduction of radical policy changes will have significant unintended consequences. Below, we have distilled the FCA’s proposals and set out some key questions for firms to consider.
In reality, given the scale of COVID-19’s impact, it is unlikely the FCA will want to make many changes. But firms should still take some time to identify what the downsides could look like, for consumers as well as themselves. Implementation is likely to be rocky and, not least for Senior Managers, it will be important later to show that you have thought in advance about what might go wrong and not just reacted.
Looking ahead, unwinding these changes will also be anything but easy. And, if the process is judged a success, the FCA may become more inclined to use this fast track approach in a wider range of situations.
The FCA’s focus is to protect users of these credit products who are faced with the unexpected financial impact of COVID-19. It is proposing four actions for firms:
1 To offer a payment freeze on loans and credit cards to customers who face financial problems as a result of COVID-19 for up to three months
2 To ensure affected customers with an arranged overdraft are charged at 0% interest for up to three months on up to £500, and customers without an arranged overdraft can request the facility
3 To make sure customers are not worse off on price compared to before the new rules come into force on 6 April 2020
4 To ensure that use of a payment freeze, or an overdraft does not affect a customer’s credit rating
The FCA is clear that these measures are not intended to replace a firm’s usual forbearance strategies and this proposal is the minimum expectation of a firm by the regulator. There is nothing to stop a firm going further in its assistance to its customers. Apart from the 0% on overdrafts, firms are still able to charge a reasonable interest rate.
The FCA expects a quick turnaround for comments, so if you offer these products, you need to have this on your agenda and reply by Monday at 9am. The FCA wants implementation by next Thursday. With just seven days, here are some questions for you to think about:
- What is a “reasonable” rate of interest?
- What are the moral and business drivers for how you respond to customers suffering financially due to COVID-19?
- What will the operational impact be on overstretched customer service teams, and can you make decisions and communicate in such a way that its alleviated?
- What is the impact on vulnerable customers?
- How will you communicate your policy to ensure it is clear, fair and doesn’t mislead customers?
It’s a lot to think about, but many firms have already taken swift action and have gone further than the proposals outlined by the FCA today. We don’t think this is the last intervention by the regulator, rather it’s just the beginning.
We have extensive experience working with lenders, frequently conducting reviews of firms' collection and arrears' practices, and have been expecting the FCA to launch such an initiative. Consequently, we are in a strong position to advise firms on how to incorporate these profound changes into their business model and help implement them operationally. Later, we can provide comfort to senior management by helping you review whether the new arrangements are actually delivering good outcomes to customers.
Through this crisis, we are committed to work quickly and flexibly with you to fix the real problems you will experience and fit in with your existing ways of working. If you would like to talk to one of our experts, please get in touch with Ali or Alex. We are ready to help.