Consumer credit: PRA looks at market whilst FCA focuses on staff incentives

Last week both the PRA and the FCA turned their attention to consumer credit. PRA regulated firms should take heed of the product specific risks highlighted in its statement, as well as its request for evidence on a range of issues. The FCA's proposals in its consultation paper CP17/20 for how consumer credit firms should manage risks related to staff pay and performance management measures will be relevant to all consumer credit firms who are not subject to the current SYSC remuneration code requirements.

PRA reviews consumer credit market

The PRA has undertaken a review of consumer credit lending, examining PRA-regulated firms' asset quality and underwriting practices across three markets – credit cards, unsecured personal loans and motor finance.

Concerns with the market

The PRA raised concerns that in the current environment of rapid growth in consumer credit, interest margins have fallen and there is evidence of weakness in some aspects of underwriting. As a result, lenders are more vulnerable to losses in difficult market conditions.

As a whole, the PRA was of the view that the resilience of consumer credit portfolios is reducing as a consequence of the combination of continued growth, lower pricing and increased lending into higher-risk segments.

Product specific risks

The PRA also called out some product specific risks for each of the markets:

  • Credit cards – over dependency on long-term 0% promotional offers and the knock-on effect of using accounting assumptions based on future customer behaviour which may prove to be incorrect, as well as the delayed recognition of credit losses for these products.
  • Unsecured personal loans – the reduction of interest rates at the fastest rate among consumer credit products, meaning lenders have less income to absorb losses.
  • Motor finance – the huge expansion in the used of Personal Contract Purchase deals and the risk exposure this creates for lenders who offer guaranteed future value, if there was a downturn in the used car market.

It remains to be seen if these areas will be explored further across the consumer credit market and if any measures would also include those firms who are not regulated by the PRA.

What do firms have to do now?

In the light of its findings, the PRA is requesting evidence from all PRA regulated firms with material exposures to consumer credit on a range of issues e.g. how firms ensure CONC is interpreted prudently in underwriting and in a consistent manner across all products.

 

FCA puts spotlight on staff incentives

The FCA has launched a consultation paper (CP17/20) which sets out its proposals for how consumer credit firms should manage risks related to staff pay and the measures they take to manage performance. It is important to note however that the changes will only impact consumer credit firms, and not those already subject to the existing remuneration codes in SYSC.

The proposals come on the back of a thematic review the FCA carried out in August 2015 and contain both new CONC provisions and "non-Handbook guidance":

Changes to CONC

The FCA proposes to introduce provisions into a new section 2.11 of CONC. This would include:

  • a new rule that requires firms to put in place adequate arrangements to detect and manage any risk of non-compliance with their regulatory obligations arising from their remuneration or performance management practices;
  • a proportionality provision which requires firms to take into account the nature, scale and complexity of their business, and the nature and range of financial services and activities undertaken in the course of that business, when deciding how to comply; and
  • guidance on the purpose of the new provisions and on examples of measures and procedures that firms may introduce (e.g. collecting MI to enable the firm to monitor and identify trends in individuals' behaviour that could be used to detect risks of non-compliance).

Non-Handbook guidance

The FCA is also consulting on what it is calling non-Handbook guidance. The aim of this guidance is to give firms a more detailed aid to help identify and appreciate the risks that their practices might pose to customer outcomes and understand what is expected of them. It also includes examples of what it considers good and poor quality practice, examples of the latter including incentives linked to the terms of the finance and staff's salaries being based on volume measures of sales.

What is not yet clear from the consultation is the status of this non-Handbook guidance. The new suggested CONC provisions make reference to the fact that firms will have to "be aware" of the finalised guidance, but what this means in practice is far from obvious. This may be one of the questions firms seek to raise when responding to the consultation.

Next steps

The consultation closes on 4 October 2017 and, depending on the nature of responses, the FCA intends to publish a policy statement in early 2018.

This will sit alongside the work the FCA is also undertaking on high-cost short-term credit and its proposals on persistent credit card debt. Take a look at our previous blog post for more on the persistent credit card debt proposals; an FCA policy statement on this is due in Q4 2017.

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