Lenders in all areas of the regulated credit sector now have 12 months to finalise their compliance arrangements. Most have used the last few months to scope out projects; many are already pushing ahead with implementation. Time is short and there is much to do if lenders are to meet the key deadlines:
- 31st October 2022 – Board approval of implementation plans (all lenders);
- 30th April 2023 – provision of information to distributors (lenders in the intermediated market only); and
- 31st July 2023 – full compliance in respect of 'open products' (all lenders).
Nevertheless, the publication of the Final Rules is a moment for lenders to take stock of where they are, and where they need to be once the new regime is up and running. The FCA Feedback in PS22/9 contains perhaps the best short summary to date of their view of the Consumer Duty:
"Our rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met."
Why is this so important?
The Consumer Duty is, effectively, the latest attempt by a regulator over the last 20 years (or more) to get the FS industry to 'do the right thing' by its customers. Past experience with OFT/FSA/FCA driven compliance projects has proved over and again how easy it is for lenders to diverge from the aspirational principles set by the regulators during the (understandably difficult) process of converting them into manageable business activities.
If a lender fails to implement the Consumer Duty in time, or is unable thereafter to demonstrate full compliance on demand from the FCA, it is the Senior Managers who will now be in the direct firing line (since the introduction of the SM&CR in 2019). The Board will need to 'sign off' on compliance with the Consumer Duty in the form of an Annual Report, which will need to be based on clear evidence and discussed in detail. If asked, the Board will need to provide the FCA with copies of the report and supporting evidence, and will face difficult questions (and perhaps even enforcement activity) if they cannot demonstrate compliance.
In the circumstances, the Board needs to appreciate and authorise the level of resource that will be required for full compliance with the Consumer Duty. This is not just a question of money; the FCA expect active Board oversight, both now and in the longer term, and it is likely they will be taking steps to confirm that firms are complying with the new requirements.
How will lenders successfully implement the Consumer Duty?
Avoiding the pitfalls is easier said than done, and every lender will need to demonstrate its own distinct path to compliance. However, some high level thoughts for the CCA environment are set out in this series of three articles. Reference is made throughout to 'credit' and 'lenders, but the same concepts will apply equally to regulated hire transactions, and may also in practice need to be applied to exempt forms of lending such as 'business exempt' and/or HNW.
The Consumer Duty presents firms with a fundamental issue. Every aspect of business activity must be examined and adjusted if necessary; this will require great attention to detail. On the other hand, a regime based on acting in good faith to avoid foreseeable harm and deliver good outcomes across a range of broad themes will inevitably be highly amorphous. In such a context specific world, how will lenders demonstrate compliance, both as regards initial implementation and thereafter?
The key, as with all FCA compliance, lies with the assessment of risk. This time, however, the primary analysis needs to focus on the risks for customers, rather than those for the business. This is not the first time the FCA has sought to refocus lender risk analysis. Lending has always required the analysis of credit risk; any lender that does not think about the risk of not being repaid will soon be out of business. It is, though, only in the last few years that the FCA Creditworthiness rules have required regulated lending to incorporate analysis of the affordability risk taken on by the borrower; the risk of not being able to repay without adverse financial impact.
It took many CCA lenders some years to appreciate the shift in approach required to see things from the borrower's point of view. Now the same 'paradigm shift' (as the FCA term it) in approach needs to be applied across the entire business if an authorised firm wants to be able to demonstrate compliance with the Consumer Duty. This would suggest that any approach to compliance with the duty has to start with an analysis of the fundamental risks which borrowers face.
Adopting this approach will not only drive compliance long term, but also provide much needed focus in the struggle to control the implementation phase, by allowing lenders to identify the core elements which need to be addressed before the detailed processes are filled in. The ability to prioritise implementation according to customer risk may also assist any lender forced to inform the FCA that it will be unable to meet the July 2023 deadline.