- FCA publish revised rules and guidance for assessing creditworthiness in consumer credit
The FCA published their final revised rules and guidance, in PS 18/19, on conducting creditworthiness and affordability checks for consumer credit.
The paper clarifies the twin aspects of ‘creditworthiness’ check required under the rules set out in the Consumer Credit Conduct Sourcebook (CONC) as it comprises ‘credit risk’ (to the firm) and ‘affordability’ (for the borrower). Most firms have a strong commercial incentive to assess credit risk, including the probability of default, but may have less incentive to assess the risk that the credit will impact negatively on the customer’s wider financial situation in particular where these customers will still be profitable for the firm.
The FCA are taking forward, with minor technical amendments, the majority of the proposals consulted on in CP17/27 and the key highlights of the rules and guidance on assessment of creditworthiness include:
- Assessment of creditworthiness: Creditworthiness comprises credit risk (to the firm) and affordability (for the borrower). Most firms have a strong commercial incentive to assess credit risk, including the probability of default, but may have less incentive to assess the risk that the credit will impact negatively on the customer’s wider financial situation in particular where these customers will still be profitable for the firm.
- Amendments to CONC and SYSC: The changes clarify FCA’s existing rules and guidance in CONC 5 (Responsible lending) and 6 (Post contractual requirements), and the application of the general requirements on firms in the Senior Management Arrangements, Systems and Controls sourcebook (SYSC).
- Outcomes-focused approach: FCA have used an outcomes-focused approach and stated that In following the new rules and guidance, firms should use their judgement to decide what is appropriate in the circumstances. There may be multiple ways in which firms can comply with the rules, and the FCA have allowed firms to have a reasonable degree of flexibility according to the nature of the product and customer base, provided that they can demonstrate the basis for their decisions, if challenged.
- Policies and Procedures: The rules require firms to establish, implement and maintain clear and effective policies and procedures for assessing creditworthiness, including affordability. These should set out the principal factors to be taken into account, and should be approved by the firm’s senior management. The effectiveness of the policies and procedures, and the firm’s compliance with FCA’s rules, should be reviewed periodically, with changes made to address any deficiencies. The firm should also keep a record of each transaction where credit is granted, to enable the FCA to monitor the firm’s compliance.
- Proportionality provisions: The FCA have proposed that firms would not need to establish or estimate a customer’s income where it is obvious in the circumstances that the credit is affordable. Where this is not the case, firms would have to take reasonable steps to determine the amount, or make a reasonable estimate, of the customer’s income. FCA have included in Chapter 3 of the paper some answers to common misconceptions that arose in response to the consultation, and some illustrative examples on how the proportionality provisions could be applied.
FCA have clarified that firms may use a variety of methods and processes to assess credit risk and affordability. These may be automated or manual, or a combination of these. Firms may assess credit risk and affordability together, or separately, and processes may be integrated or sequential.
- FCA to explore opportunities for a Global Financial Innovation Network
The FCA have, in collaboration with 11 financial regulators and related organisations around the world, announced on 7 August 2018 the creation of the Global Financial Innovation Network (GFIN), building on the FCA’s proposal earlier this year to create a ‘global sandbox’.
The network will seek to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas. It will also create a new framework for co-operation between financial services regulators on innovation related topics, sharing different experiences and approaches.
The collaborative effort, involving regulators from around the world, is also today launching a consultation on the role the GFIN should play in delivering its objectives, including the tools it will use.
The consultation sets out the three main functions of the GFIN:
- Act as a network of regulators to collaborate and share experience of innovation in respective markets, including emerging technologies and business models;
- Provide a forum for joint policy work and discussions; and
- Provide firms with an environment in which to trial cross-border solutions.
As part of the consultation, the group is seeking views on the mission statement for the GFIN, its proposed functions, and where it should prioritise activity. The group is also keen to hear from other interested regulators or related organisations who wish to get involved.
The announcement follows an initial consultation on the idea of a ‘global sandbox’ in February 2018 and provides an update on the next steps of the project. 50 responses were received to the earlier paper and were positive about the idea of regulators collaborating on this topic. Key themes to emerge in the feedback were:
- Regulatory co-operation: Respondents were supportive of the idea of the initiative providing a setting for regulators to collaborate on common challenges or policy questions firms face in different jurisdictions.
- Speed to market: Respondents cited one of the main advantages for the global sandbox could be reducing the time it takes to bring ideas to new international markets.
- Governance: Feedback highlighted the importance of the project being transparent and fair to those potential firms wishing to apply for cross-border testing.
- Emerging technologies/business models: A wide range of topics and subject matters were highlighted in the feedback, particularly those with notable cross-border application. Among issues highlighted were artificial intelligence, distributed ledger technology, data protection, regulation of securities and Initial Coin Offerings (ICOs), know your customer (KYC) and anti-money laundering (AML).
- Findings of FCA’s review of Complaints-Handling
The FCA have published in August 2018 findings of their recent review of how non-deposit taking mortgage lenders (NDTMLs) and Third-Party Administrators handle complaints. They have stated that their observations and suggestions made in the paper are not sector-specific and as such will apply to all relevant firms.
The FCA review was aimed at assessing:
- How firms treat their customers
- Whether their complaint handling arrangements pose any potential consumer harm
- What, if anything, firms could do to handle complaints better
FCA have observed that it wan not always clear how firms use their MI (including Root Cause Analysis) to deal with the underlying reasons for complaints. This is mainly because firms were not identifying and recording complaints consistently nor were they always recording the root cause of complaints.
Senior management and Board reports often only contained operational data and not details on symptoms of complaints, root cause and preventive actions. Also, there were no details on customer experiences and outcomes, and quality of complaints handling. Looking at firms’ policies and processes, FCA found some firms look to follow the rules with a tick-box compliance approach, while not fully appreciating the effect on customers. This approach can drive complaints operations in ways which may not be in customers’ best interests.
In some firms there is an over reliance on policies and processes. The resulting tick-box approach can limit staff’s ability to exercise judgement and put customers’ interest first leading to potential harm to customers. For example errors were made by a firm during the collection of a direct debit. A financially vulnerable customer was asked to contact their own bank to recall the direct debit, as that would be quicker than the process of the firm correcting the error and returning the funds. The firm didn’t adequately consider the impact on the vulnerable customer of having to resolve the problem themselves.
The key messages given by the FCA in the paper are:
Management Information including Root Cause Analysis (RCA)
- Ensure the MI they collect and analyse (including for RCA) is accurate and relevant to its operations as it is an important tool for firms. It helps to measure whether customers are treated fairly and identify ways improve customer outcomes.
- Have robust RCA capabilities to identify and remedy any recurring systemic problems. Effective RCA should allow firms to find and tackle the root causes of problems (through a process change or improvement).
- Have appropriate governance and processes in place to make sure RCA provides strategic purpose, accurately identifying recurring or systemic problems.
Complaint handling policies and procedures
- Establish and maintain effective and transparent procedures for the reasonable and prompt handling of complaints. Firms should also make sure they reduce the risk of over reliance on policies and procedures. Firms should consider, for each complaint, whether the customers’ outcome and experience shows the firm has put the customers interests first. Inadequate application of good judgement – and the principle of treating customers fairly – may lead to poor outcomes.
- Make sure they assess complaints fairly, consistently and promptly.
- Record complaints accurately. Weaknesses and failures in recording complaints may result in poor customer experiences and outcomes, and affect firms’ ability to put things right.
- Make sure their internal systems and controls allow staff to identify and record complaints correctly.
- Have processes in place to make sure the data in its FCA annual or biannual complaints return is accurate.
- FCA change rules to make it easier for customers to compare account features
Starting from 15 August 2018, following action by the FCA and the Competition and Markets Authority (CMA), consumers and small businesses will have better information about the services offered by current account providers. This is designed to help them to find the right service for them, to get the most out of it, and to get help if things go wrong.
The FCA have implemented the new rules in BCOBS sourcebook to enable customers to be able to easily find standard information on providers’ websites about:
- How and when services and helplines are available
- Contact details for help, including for 24 hour helplines
- How often the firm has had to report major operational and security incidents
- The published level of complaints made against the firm
Providers must publish the information on their websites in a consistent format and the large banks must also make this information available electronically via online Application Programming Interfaces (APIs). As facilitated by the ‘Open Banking’ initiative, APIs are an important route through which third parties can access current account service information.
Larger banks must publish information on how likely people would be to recommend their bank, as well its online and mobile banking, branch and overdraft services, to friends, relatives or other businesses.
- Regulation of the European Crowdfunding Service Providers (ECSP) for Business
The European Parliament published a draft report on the proposal for regulating the Crowdfunding Service Providers for small businesses.
Crowdfunding is increasingly an established form of alternative finance for small and medium enterprises (SMEs) at an early stage of company growth, typically relying on small investments. Crowdfunding represents a new type of intermediation where a crowdfunding service provider operates a digital platform open to the public in order to match or facilitate the matching of prospective investors or lenders with businesses that seek funding, irrespective of whether that funding leads to a loan agreement, to an equity stake or to another transferable security based stake, without the crowdfunding service provider taking on own risk.
The paper confirms that it is appropriate to include in the scope of this Regulation both lending-based crowdfunding and investment-based crowdfunding.
In addition to providing an alternative source of financing, including venture capital, crowdfunding can offer other benefits to firms. It can provide concept and idea validation to the project owner, give access to a large number of people providing the entrepreneur with insights and information and be a marketing tool.
Given the risks associated with crowdfunding investments, the paper says that it is appropriate, in the interest of the effective protection of investors, to impose a threshold for a maximum consideration for each crowdfunding offer. That threshold should be set at EUR 8 million, which is the maximum threshold up to which Member States can exempt offers of securities to the public from the obligation to publish a prospectus in accordance with Article 3 Regulation (EU) 2017/1129 of the European Parliament and of the Council. Notwithstanding the high standard of investor protection needed, this threshold should be set in accordance with practices on national markets to make the European platform attractive for cross-border business funding.
The Regulation aims to facilitate direct investment and to avoid creating regulatory arbitrage opportunities for financial intermediaries regulated under other legislation, in particular the rules governing asset managers. The use of legal structures, including special purpose vehicles, to interpose between the crowdfunding project or business and investors, should therefore be strictly regulated and permitted only where it is justified.