Jonathan Davidson, executive director of supervision – retail and authorisations at the FCA, has reaffirmed the regulator’s focus on affordability, business models and culture in the consumer credit sector.
Speaking in London this week, Davidson noted that growth in the sector has slowed, increasing 6.5% over the last 12 months, according to latest figures from the Bank of England. The sector, however, remains “by far and away” the largest sector in terms of the number of firms the FCA supervises, with approximately 40,000 authorised businesses.
He also noted the uncertain economic environment facing UK businesses, but reassures firms that “while Brexit adds to this uncertainty, the one thing that is certain is that the day after Brexit will not change the way we regulate your companies”.
The FCA focus on business models formed the basis of its investigation into the motor finance industry, according to Davidson. He said the investigation “raised serious concerns about the way in which lenders in the motor finance market are choosing to reward car retailers and other credit brokers for business”, despite apparent efforts from the Finance & Leasing Association (FLA) and its members to move the industry away from questionable business models.
The relending and the guarantor loans markets have attracted the regulator’s attention with regards to affordability. The FCA has observed high levels of relending in all areas of high cost credit, while a dramatic increase has been seen in the use of guarantor loans by consumers.
“We will be doing further work to understand both the motivation for, and the impact of, relending on both consumers and firms,” said Davidson. “These levels of relending raise questions about the adequacy of creditworthiness assessments and its appropriateness for the consumer.”
Balances on guarantor loans, according to the speech, are fast approaching £1bn – more than double the figure recorded in 2016. Davidson indicated concerns surrounding affordability and “evidence that guarantors may not understand how likely it is that they will be called upon to make a payment”.
The speech also stresses the importance of a ‘healthy culture’ at businesses, encouraging companies to take note of the Senior Managers and Certification Regime (SM&CR). “Culture is a root cause driver of behaviours and outcomes in firms. Culture eats strategy for breakfast,” Davidson asserted.
SM&CR went live for insurers in December 2018, and earlier for banks and other dual-regulated firms. This will be extended to the rest of the businesses regulated by the FCA on 9 December 2019.
Davidson confirmed that the FCA will act upon firms that disregard the rules set out by SM&CR, and upon those without a compliance culture. “I see many firms who are attempting to trade off the interests of customers with those of shareholders. These aren’t yet in a great place. Overall, I sincerely hope that with the introduction of SM&CR can make a step change to a healthy culture in all firms,” he concluded.