In October, Jonathan Davidson, Director of Supervision, Retail and Authorisations at the FCA, took the unusual step of issuing a letter to CEO’s urging them to check whether they were compliant with new ‘Affordability’ requirements that came into effect on 1 November (as detailed in PS18/19). In it, he called for lenders of high-cost short-term (HCST) credit to make provision for remediation and to be proactive in reimbursing customers – even if they hadn’t complained.
What this means for lenders is they must be able to demonstrate affordability not just for new customers, but for their current customers too, effectively requiring them to retrospectively remediate. In some cases, Davidson cautioned that businesses may have to “cease lending until any contraventions are remedied”: a statement that understandably caused alarm within the HCST industry who must have felt tempted to pen their own ‘Dear Jon’ letter in response…
Good for business
Yet the affordability requirements themselves are not onerous. The challenge as ever with complaints is to “to demonstrate compliance if challenged” and when combined with a credit risk assessment, help prove the credit worthiness of the applicant. The requirements largely formalise the concept of responsible lending which is already enshrined in the FCA’s TCF principles.
More to the point, the affordability criteria helps protect not just borrowers but businesses too.
As Davidson pointed out in a recent speech, the consumer credit sector needs to think “strategically about the issues facing your customers” and to consider whether “this is the right thing to do, not only for your customers but for the future of your businesses”.
It’s certainly true that the HCST sector, while enjoying significant growth, has suffered from customer complaints. CashEuroNet UK, through the brands QuickQuid and Pounds to Pocket, is now the largest payday lender in the country and had 4,692 complaints referred to the Financial Ombudsman Service (FOS) during the first half of 2018. At £550 per compliant charge levied by the FOS, CashEuroNet UK was faced with a bill for £2.5 million in FOS Fees alone. The costs of managing the complaints, together with the customer compensation added to that will see CashEuroNet UK facing a bill for millions.
And for evidence of just how detrimental customer complaints can be, one need look no further than the Wonga debacle. Complaints against Wonga multiplied by a staggering 3378 percent over a four year period before the company succumbed, quite literally penning a ‘Dear John’ letter when it filed for administration in August.
The beleaguered pay day lender’s troubles began in 2014 when the FCA ruled that Wonga had mis-sold loans. Wonga was ordered to pay £2.6 million in compensation to 45,000 customers, forcing the firm to write-off £220 million worth of debt. A £10 million cash injection secured from shareholders simply saw a further onslaught of compensation claims.
Clamping down on creditors
Complaints against CashEuroNet UK were upheld in 69 percent of cases, well above the industry average of 30 percent according to reports, while Wonga was deemed irresponsible for offering loans with excessive interest rates of up to 5,853 percent. (The FCA has since capped the level of interest that can be charged by lenders.)
Davidson’s instructions for HCST providers to get their houses in order by conducting these assessments now on behalf of existing and future customers, should therefore be welcomed. It presents an opportunity to recalibrate the industry and could potentially head-off the type of multi-million pound compensation claims we’ve seen with CashEuroNet UK and Wonga.
Proactive redress can also provide a positive message to customers that the lender is prepared to act responsibly and is taking measures to do so. Taking the time to remediate and reach out will ultimately create “greater sustainability”, says Davidson, with businesses that are more in tune with customer needs. This will see complaints reduced together with the “costly interventions” the FCA has been compelled to make in the past.
To achieve this, affordability needs to be not just a matter of compliance but part of the company culture so that it permeates every aspect of the business. Retrospective remediation is the first step in a fundamental realignment of the sector which will also see five conduct rules – integrity, diligence, openness, customer care and conduct – adopted by financial service employees to improve transparency, resulting in a more empathetic industry.
So perhaps, in a departure from the usual ‘Dear John’ letter, a response to Davidson’s letter should acknowledge the gains of retrospective remediation with the caveat that this will take time.
What HCSTs now need is support to help them apply these regulations and create sustainable business models. Only then can we hope to eradicate the boom and bust associated with HCST businesses to date.