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The Financial Conduct Authority ('FCA') is in the final stages of consulting on its proposals for a new Consumer Duty, which focuses on ensuring improved outcomes for users of financial services and products. In this briefing we consider how the proposed duty could help to address long-standing problems associated with ‘relending’ in the UK’s consumer credit markets.
The briefing reflects on problems previously identified by the FCA's review of relending practice in high cost credit markets. It highlights that whilst both lenders and borrowers can benefit from relending, the incentives of each party are not perfectly aligned and there are clear dangers relating to both affordability and sustainability. Whilst relending also reduces acquisition costs for lenders, these savings are not always passed back to borrowers.
We then examine the requirements that will be required for firms to satisfy the proposed Consumer Duty, and welcome this as a potentially important intervention. Whilst much will depend on the FCA's approach to supervision and enforcement, the new Duty could also drive improvements in the communication of affordability and sustainability assessments to borrowers; incentivise more robust consideration of alternatives to relending, and result in a fairer distribution of the reduced costs associated with relending, where this takes place.
To meet the Duty, we believe there is a need for lenders to better track and communicate their assessment of the financial health of their customers and consider at what points they will encourage alternatives to relending, as well as how they will operationalise referrals to other agencies which could help address any underlying financial problems. In our view, it would be good practice for firms to make their affordability and sustainability assessments transparent to their customers.
To reduce the incentive to relend inappropriately, and potentially foster more effective price competition for repeat borrowers, firms also need to more fairly share the cost savings associated with relending activities and could also advertise their differentiated rates.
Finally, to ensure that borrowers do not become ‘credit dependent’, lenders should also commit to, and publish, a hard stop policy concerning the total costs that they expect to charge over the lifetime of their relationships with borrowers. They should use that measure to inform their communications strategies for repeat customers -encouraging them to take action to address their financial difficulties as soon as these begin to emerge.
