Written by Richard Lane, Director of External Affairs and Operating Subsidiaries at StepChange Debt Charity
The Consumer Duty sets higher standards and will require more of firms — we explain why the changes the Duty brings are vital for people affected by problem debt.
Credit is, in the right circumstances, socially and economically useful. But credit products can also cause harm and poor outcomes. At StepChange, we see first-hand what can happen when things go wrong.
Our work in Falling behind to keep up shows how credit offered to people struggling to keep up with essential costs and credit repayments often exacerbates their difficulties. Of over four million people using credit this way in 2022, 65% were keeping up with repayments by missing household bills, further borrowing or cutting back to the point of hardship. 71% reported negative impacts of credit on their health, relationships or ability to work — five times the proportion among others using credit products.
And our Mixed Messages research described how when people struggling with financial difficulty reach out for help, creditor engagement strategies and communications can put barriers in their way, leading to poor outcomes through longer and deeper financial difficulty.
It’s not just us. In recent years, the FCA has often needed to intervene to address high profile conduct failures at a firm or sector level, from the payday loan price cap to the ban on unauthorised overdraft fees and new rules to deal with persistent credit card debt. The FCA’s recent research into the experiences of borrowers in financial difficulty found that half of the firms surveyed needed to make ‘material and significant changes’ to improve their practices.
During this same period, understanding of the links between consumer vulnerability, behavioural bias and poor outcomes has increased, and wider evidence has reinforced the role of financial difficulty as a social determinant of health and life outcomes.
The FCA’s long-term consideration of a potential duty of care culminated in its decision in 2021 to introduce the Consumer Duty. The FCA says it wants the Duty to drive a ‘paradigm shift’ in standards and prevent harms arising in financial services before they become entrenched. In Parliament, ministers spoke in support of the FCA’s work to develop the Duty.
How the Consumer Duty can address longstanding issues in consumer credit
Harmful safety net borrowing and poor financial difficulties journeys are examples of entrenched, complex problems that the Consumer Duty can help address.
The Consumer Duty introduces a new principle that requires firms to seek to achieve good outcomes for their customers. How firms should meet this principle is articulated in three ‘cross-cutting rules’ that oblige firms to act in good faith, avoid causing foreseeable harm and enable and support customers to pursue their financial objectives¹.
Alongside supporting rules that require firms to monitor and report, at board level, on the delivery of good outcomes across their products and services, this means that lenders whose customers are experiencing poor outcomes will be forced to diagnose why and respond.
That is potentially transformational for issues like harmful distress ‘safety net’ borrowing, where firms can trace problems to their source and respond, for example with adjusted lending assessments, safer product design, clearer communications and earlier, more effective interventions for customers who are struggling.
The Consumer Duty forms a significant package of new and enhanced regulatory standards that will require significant investment and change from firms. The context of rising cost of living pressures could make implementation more challenging for firms supporting customers in financial difficulty. But that context also makes the Consumer Duty, and its focus on delivering good outcomes, more relevant than ever: the work is challenging but we believe is worth it for people like our clients.
The Consumer Duty and financial inclusion
There is one area where more action is still needed from the regulator and government.
There is no doubt the Consumer Duty will place new demands on firms to evidence the suitability of the outcomes they deliver, but we have heard concerns that this might, in turn, lead to a tightening of lending appetite or increases in the cost of borrowing and drive financial exclusion.
Firms should feel safe to lend to creditworthy customers who can afford to repay. We would nevertheless expect some changes to lending patterns as products are redesigned to address issues that have led to poor outcomes. We would also expect the Duty to support firms to innovate and develop new products to better meet the needs of their customers. We know that the FCA will have the impact of the Duty on the credit market under close review.
Responsible conduct from firms, supported by a proactive and effective approach from the regulator is, however, only part of the answer. The Consumer Duty makes the connection between regulation and social policy more obvious and urgent.
Financially vulnerable consumers whose needs cannot be safely or sustainably met by the market need better alternatives. We welcomed the recent announcement that the government will continue to invest dormant assets funding in financial inclusion via Fair4All Finance. But the government and industry will ultimately have to find a way to leverage investment at greater scale to address gaps in the supply of credit alternatives.
Diversion from desperation borrowing by those who fall behind on bills through well designed support from creditors like local authorities and utility suppliers is also part of the answer, alongside the important role that a well-functioning social safety net must play in supporting incomes and helping struggling households cope with lumpy expenses.
These solutions fall outside the perimeter of the FCA, but its data and insight into the needs of consumers is vital in shaping coherent cross-government financial inclusion policies.
Embracing the Consumer Duty
As well as campaigning in support of the Consumer Duty, StepChange itself is subject to the Duty as an FCA-authorised firm. The charity is reviewing all its products and services and setting up improved processes to monitor its own outcomes. We welcome the higher expectations and opportunities the Duty brings.
There must be no going back to a regulatory environment that allows bad actors to undermine standards and thrive while putting consumers in harm’s way.
It goes without saying we are very happy to talk these issues through with industry partners and work together to reduce problem debt and improve support for people in financial difficulty.
¹ Four outcomes also set out detailed expectations in key areas across product design, price and value, communications and customer support.