TFS Loans FCA enforcement: Practical actions for consumer credit firms
In a rare move for the consumer credit sector, the FCA has issued a final notice imposing a financial penalty and redress scheme on guarantor lender TFS Loans Limited. This relates to the Firm’s failure to conduct adequate affordability assessments on guarantors.
I have a unique insight into this case from a historic piece of work I did and whilst it is positive to see the case conclude, the work begins now for other firms in the consumer credit sector.
Credit firms take note
The notice provides insight into the regulator’s expectations on areas where the rules are traditionally silent or less prescriptive. It highlights common shortcomings across the sector, that can increase the risk of poor customer outcomes. Given the regulatory focus in this area, and as we move towards the Consumer Duty and a switch to outcomes-based regulation, we have provided our thoughts on what firm’s need to do:
1. Ensure affordability and creditworthiness assessments are sufficiently robust and based on sufficient information
The core issue in this final notice was the failure to conduct an adequate creditworthiness assessment based on sufficient information. The key areas where TFS fell short include the failure to:
A: Request sufficient information on financial circumstances
Although the CONC rules do not dictate the exact information Firms must obtain; the notice provides insight into the regulatory expectations. The FCA specifically mention that TFS ‘failed to consider essential information’ naming ‘other expenses such as food, clothing, energy, childcare costs, or medical expenses.’ Reading between the lines as an absolute minimum, assessments should consider information on income, credit commitments, and essential expenditure (e.g., mortgage or rent payments, food, transport, utilities, and childcare costs). In the absence of this, an assessment is unlikely to be considered sufficient. Firms should review their current minimum information requirements to ensure they are appropriate.
B: Make use of all available information
The notice confirms TFS had information available to it, that it failed to make use of. For example, regular payments shown on credit reports, or information provided by customers during telephone interactions. The customer file review examples illustrate how the failure to consider available information such as overtime and weekly items of expenditure contributed towards the customer’s issues making repayments. Firms should review current practices to ensure they are making use of all data sources they have available (e.g., bank statements), and that advisers are adequately trained to recognise and manage inconsistencies appropriately.
C: Mitigate the risk of formulaic approaches and assumptions
It’s not uncommon for Firms to use an approach that is formulaic or based on predetermined assumptions. However, the regulator is clear such approaches need to be supported by quality information. Firms should be taking additional steps to mitigate risks resulting from this. For example, assumptions should be based on actual data where possible (e.g., the customer’s age, marital status and geographical location) or benchmarked against recognised statistical data (e.g., ONS statistics). Additionally, Firms should consider implementing additional measures such as income and expenditure buffers.
The regulator has likened the creditworthiness assessment to a ‘screening mechanism’ which can be used ‘to avoid issuing unaffordable loans.’ Firms need to ensure that this extends further than just another tick box exercise, as customers should be sufficiently questioned and probed in line with the perceived level of risk. We also remind Firms of the need to consider sustainability and the customer’s ability to make payments throughout the life of the agreement.
2. Consider the application and impact of arrears management fees
The notice also contains important messaging around the application of arrears management fees, and how they may exacerbate the circumstances of customers in arrears. Whilst there are no hard and fast rules on fee application in these circumstances, Firms are reminded of the CONC guidance to consider ‘suspending, reducing, waiving or cancelling’ fees when offering forbearance. Firms should ensure that consideration is given to the amount outstanding on the credit agreement, customers circumstances (e.g., vulnerability or arrears on priority bills) and the number of consecutive fees charged (to ensure this is not excessive). Firms should also review any fee amounts and ensure that there is justification that this is based on the ‘typical costs that a firm would incur’.
3. Regularly update associated policy and procedures
When investigating a firm or an issue, the regulator often considers the governance arrangements place and the Senior Managers responsible for that area. In light of the regulator’s findings, we suggest that Firms should perform a review of any associated policies and procedures (e.g., those in relation to creditworthiness or responsible lending) to ensure they have been updated considering any recent changes. For example, certain Firms should have reviewed and/or updated these procedures in relation to the temporary support guidance, and all Firms should be considering changes in line with the Consumer Duty.
It would also be worth considering whether there is a need to further document the approach when dealing with higher risk customers (e.g., those with vulnerabilities or poor credit). Firms should ensure there is clear guidance on how to identify and manage such customers and take extra care to promote positive outcomes.
Get expert advice and support
The regulator has confirmed that it will continue its focus on the credit industry. They expect you to read, assess and take action on publications such as this.
Avyse Partners can work with you to ensure that your processes are sufficiently robust. We have extensive experience working with credit firms, particularly when subject to regulatory scrutiny or enforcement action. And my unique experience in this particular case sets our advice apart from our peers. Get in touch to discuss how we can help.
Shaneca
