Consumer Credit firms cannot have failed to feel a tightening of the regulatory environment over the last 18 months. In April 2014 the Financial Conduct Authority (FCA) took over from the OFT as the regulator for consumer credit firms and had preceded the take over with several clear messages of intent. In October 2013 the FCA published their detailed proposals for regulating the sector (https://www.fca.org.uk/publication/consultation/cp13-10.pdf) which set out;

  • a risk based approach – focussing on areas they considered to be higher risk,
  • customer outcomes – increased weight given to the impact on the consumer,
  • increased responsibility on lenders – to ensure the product is suitable,
  • proactive reporting by firms – on key indicators to regulation adherence
  • increased fee structure – to fund a much more hands-on and proactive approach.

The overall message was clear: tighten up your compliance to the regulations or face the consequences. Most firms heeded the warnings and used the interim period to; review their policies and practices, up-skill and educate their employees and strengthen their Compliance Departments.

This is certainly commendable but thinking that the slate was wiped clean from 1st April is a mistake – and for some firms could be a costly one.

The FCA have already demonstrated that changing your practices going forward to ensure compliance, whilst welcomed, is not enough. A recent announcement (http://www.bbc.co.uk/news/business-28948518) that the RBS has been fined £14.5m for “serious failings” over mortgage sales is yet another example of the FCA’s willingness to review past practices. The RBS fine relates to practices in 2012 – 2 years before the FCA took over as the regulator.

So what’s a firm to do? The onus is on firms to not only ensure they’re processes and controls are up to scratch going forward, but to review previous practices to identify any failings. The FCA has set out 11 “Principles for Business” for firms operating under their authority;

  1. Integrity – A firm must conduct its business with integrity.
  2. Skill, care and diligence – A firm must conduct its business with due skill, care and diligence.
  3. Management and control – A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
  4. Financial prudence – A firm must maintain adequate financial resources.
  5. Market conduct – A firm must observe proper standards of market conduct.
  6. Customers’ interests – A firm must pay due regard to the interests of its customers and treat them fairly.
  7. Communications with clients – A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.
  8. Conflicts of interest – A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
  9. Customers: relationships of trust – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
  10. Clients’ assets – A firm must arrange adequate protection for clients’ assets when it is responsible for them.
  11. Relations with regulators – A firm must deal with its regulators in an open and co-operative way and must disclose to the FCA anything relating to the firm of which the FCA would reasonably expect notice.

Principle 11 provides a catch-all for anything a firm discovers about any failings in its practices or processes. If a firm does become aware of a failing, it must decide whether it is of sufficient size, scope or value for the FCA to want to know about it. There are no set limits for this but there’s no defence in down-playing the issue.

The priority will be to fix the issue going forward, if it still exists, to ensure the problem is not worsening. But even if the issue was already fixed through improved policies and practices it may still be an issue worthy of notification to the FCA under Principle 11.

The key for a firm in this position is not just to correct the problem going forward but to investigate the impact of the error on the customer. The firm should examine the customer outcomes relating to the failing and will also be expected to determine the level of customer detriment that arose as a result of that failing – in other words, did the firm’s error cause customers to be worse off than they could otherwise expected to have been? Determining customer detriment can be difficult – it relies on drawing conclusive links between a failing in a firm’s processes and an outcome for a customer.

For example – imagine a lending company discovers that an element of its historical lending decisions was not compliant. The firm investigates those loans and discovers that some fell into arrears and incurred fees. How does the firm determine whether the arrears were as a result of the lending decision, an outside factor (such as the borrower losing their job), or would have happened anyway?

Difficult as it may be, firms will be expected to go through this process and offer a level of redress to those customers it judges to have suffered as a result of the failing – a process the RBS is about to embark on by contacting 30,000 customers who may have been affected by their own failing.

So whilst firms will have been ensuring their compliance standards are high going into the new era of FCA regulation they should not ignore any past failings – there are no clean slates.

Here at Talk Loans we feel this is a fair way of dealing with past rule infractions, and creates a positive outcome for consumers both past, present and future. The FCA as promised are showing that they are willing to take much more hands on approach compared to its predecessor and it is good to see they are not allowing firms who have been detrimental to customers before April 1st disregard the damage they may have caused.