As prices rise, households are turning to credit cards to meet everyday expenses.

Household finances, stressed during the pandemic, are now facing the uncertainty of rapid inflation, rising prices and stagnant wages.

The cost of fuel, food and shelter are causing new pressures on the average household’s finances.

Many non-fixed mortgage holders, car finance credit and credit card consumers are seeing payments rise as a result of rising interest rates and there are no payment holidays to relieve the pressure.

This has caused the FCA to write to the CEOs of banks and lenders, setting the scene and reminding them of its expectations.

“While the headline average inflation rate is at 9% and rising, the Institute of Fiscal Studies estimates that the poorest households may face average inflation rates as high as 14%,” writes the FCA.

“This is in the context of a quarter (27%) of the population having low financial resilience, a figure likely to increase over the coming months.”

The regulator says it expects a higher demand for credit despite that becoming unaffordable for some, while others in financial difficulty will struggle to pay their debts, meaning firms need to remain alert to the changing situation of their customers and target their efforts in response.

The regulator’s key points are:

• The stress on repaying bills will take a toll on mental health. Firms’ frontline services will have to deal with a wider range of vulnerable and complex circumstances.
• Firms must treat existing and new borrowers fairly. It reminds firms of the rules in its Principles and Rules: MCOB 13,CONC 6, 7 and CONC 5D.
• The FCA’s coronavirus Tailored Support Guidance for mortgages, consumer credit and overdrafts can still apply during the cost-of-living crisis. Additionally, the Vulnerable Customer Guidance is still relevant for firms, said the regulator.

As the pressure grows on borrowers, as a minimum the regulator expects lender conduct to:

• Provide customers with appropriate care and support
• Give borrowers in financial difficulty appropriate tailored forbearance that is in their interest and takes account of their circumstances
• Support borrowers showing signs of financial difficulty or struggling with debt with access to money guidance or free debt advice
• Fees and charges on those in financial difficulties do no more than cover costs
  Adjust approach to taking on new borrowers based on the financial pressure and impact on their spending
• Encourage mortgage holders to switch to cheaper deals
• Help consumers to avoid falling victim to scams or illegal money lending

Lender Compliance

David Strachan, Head of Deloitte’s EMEA Centre for Regulatory Strategy told ICAEW that the FCA’s expectations regarding the fair treatment of vulnerable customers are well established.

“But even so, it’s clear from the letter that some lenders aren’t meeting them consistently. Lenders are going to need to revisit their customer communications and forbearance processes to ensure they’re giving struggling and vulnerable customers the individual support they need.

“The FCA has also been encouraging firms to undertake testing of customer outcomes and firms which haven’t introduced this sort of quality assurance should think about doing so.”

The regulator also touches on BNPL, which is yet unregulated, after reports that credit card debt was being used to pay off BNPL purchases.

“The decision to send the letter to buy now, pay later (BNPL) firms is also interesting,” said Strachan.

“Even though BNPL won’t be regulated until 2023 at the earliest, the FCA is making its expectations of this sector clear. If it sees harm arising in the sector, even in advance of formal regulation, firms should expect the FCA to influence them to change their approach voluntarily,” said Strachan.

In addition to the Dear CEO letter, the Government subsequently announced significant reform to consumer credit legislation, chiefly set out in 1974’s Consumer Credit Act, which is expected to modernise consumer lending legislation for the challenges of the post-pandemic economy and cost of living issues.

“The review of the Consumer Credit Act (CCA) is likely to be welcomed by firms, many of which feel the Act hasn’t kept pace with innovation in the unsecured credit sector,” said Deloitte’s David Strachan.

“We won’t know the exact scope of the review until HMT releases its consultation later in the year, but it has confirmed that the pre-contractual information requirements in the CCA will form a major part of the review.

“We also expect HMT will want to keep certain consumer protections – for example, those under Section 75 of the CCA which sets out the liability of a creditor for contract breaches or misrepresentation by a supplier – in place. It will need to consider if, and how, these are transferred to the FCA.”