Which sectors are covered in the third batch of letters?

The FCA has now published portfolio letters on the following sectors:

• credit brokers;
• credit unions;
• mortgage intermediaries;
• motor finance providers; and
• retail finance providers.

What do the letters cover?

The letters take the same approach as the previous letters, by including a reminder to firms of the implementation timelines, key elements of the Consumer Duty and how it applies to firms in each portfolio, as well as the FCA's expectations of how firms should embed the Consumer Duty in their businesses.

Feedback from the FCA's recent review of firms' implementation plans, which it published in January 2023​, is also included along with an outline of the FCA's approach to supervising the Consumer Duty in the portfolio and planned next steps. For more on the FCA’s review of implementation plans, take a look at our Engage article 'Implementing UK Consumer Duty: Prioritisation, delivering real change, and teamwork are key'.

The impact of the cost of living crisis remains a recurring theme in the letters. The FCA emphasises that whilst its Consumer Duty policy work pre-dates the rising cost of living, the crisis underlines the importance of the standards and outcomes it expects under the Duty and provides further opportunity for the sectors to build public trust. Likewise in relation to vulnerable customers, where the FCA points out that the Duty makes clear firms must provide support that meets the needs of customers, including those with characteristics of vulnerability, throughout the life of the product or service.

What should credit brokers be focusing on?​

The portfolio letter sets out the areas in which the FCA intends to focus its credit broker supervisory work, including:

• Commission models and disclosure - including performance management policies, procedures and practices: In the context of the products and services Consumer Duty outcome, the FCA has identified certain commission models which may cause consumer harm without appropriate oversight in place and cause potential conflicts of interests for sales staff or agents. Of particular interest here is the situation where sales take place in consumers’ homes (domestic premises suppliers (DPS)). The FCA reminds firms of the relevant regulatory requirements and expects firms to take these requirements into account in relation to the remuneration models they operate and if necessary make changes to any current model which does not comply with its rules. Compliance by both lenders and credit brokers (including motor dealers) with the ban on discretionary commission models in motor finance and amendments to commission disclosure (as outlined in FCA policy statement PS 20/8) is also an area of attention for the FCA.

• Financial promotions: In relation to the consumer understanding outcome under the Consumer Duty, the FCA reminds firms of its May 2022 Dear CEO letter to credit brokers and firms providing high-cost lending products highlighting the most commonly breached financial promotions rules and its requirements under CONC. The letter also asked firms to consider conducting a review of their processes and systems and
  controls and to retain evidence of having done so. In addition, in February 2023 the FCA warned about credit brokers and lenders offering high-cost short-term
  credit without giving any warning of the potential risks of taking out these types of loans.

• Use of regulated status: Also under the consumer understanding umbrella, the FCA points out that it has taken action against regulated firms using their regulated status as a ‘Halo’ effect to suggest that their non-regulated activities may be less risky or lead customers to incorrectly believe they have recourse to the FOS or the FSCS. Additionally, some firms remain authorised despite no longer conducting regulated
  activities. Here the FCA makes it clear that firms should review whether the permissions held are still required and remove those which are no longer needed or cancel the firm’s Part 4A permission completely if regulated activities are
  not being conducted.

• Appointed Representatives (AR) regime: The FCA highlights its new rules to strengthen the oversight of ARs by principals, which came into force on 8 December 2022. It describes the changes it’s making to the AR regime as going ‘hand-in-hand with [the] Duty’. Principal firms should ensure that they have appropriate controls in place to effectively oversee their ARs’ activities and ensure that ARs comply with the Duty. Principals should also read the FCA’s updated rules and expectations and take necessary steps to comply with the changes. For more on the recent changes to the AR regime, see our Engage article 'Appointed Representatives: FCA confirms changes to increase responsibilities of principal firms.

• Change of legal status: The FCA has seen cases of credit brokers changing their legal status, for example a sole trader becoming a limited company, without first submitting a new authorisation application. There is a reminder that the FCA website provides details of when a firm should cancel its existing authorisation and submit a new application.

What should credit unions be focusing on?​

The FCA refers to its Portfolio Strategy letter for Credit Unions from March 2022, which outlined several key risks of harm that remain relevant when considering Consumer Duty implementation. In this current letter, the FCA has selected some issues to highlight for particular attention by credit unions, including:

• Impact of pending changes to Credit Unions Act 1979: The FCA references the Financial Services and Markets Bill 2022-23 which will amend the Credit Unions Act 1979 to allow credit unions to offer a wider range of products. These new products could potentially present new risks to members, as well as benefits, and consequently credit unions must ensure new products are designed to meet the needs of consumers and deliver fair outcomes.​
• Proportionality: The FCA recognises that credit unions have a diverse set of business models and sizes, so it expects a range of different approaches to implementation. What is proportionate, in terms of approach, will differ across the sector. It refers to some specific paragraphs of its non-handbook Guidance, which may help credit unions to decide on a proportionate approach.

What should mortgage intermediaries be focusing on? ​

The letter follows on from the October 2020 portfolio letter to mortgage intermediaries, and sets out an updated view of the key issues for firms to be looking at, including:

• Unsuitable advice: Issues relating to unsuitable advice are highlighted in the context of the products and services outcome under the Consumer Duty. In the current economic environment, some consumers may struggle to obtain mortgages, leading to an increased risk of being sold products which are unsuitable or unaffordable. The FCA specifically notes that it is currently reviewing the advice provided by lifetime mortgage intermediaries. ​
• Excessive fees and charges: Relevant to the price and value outcome, the FCA emphasises that firms need to ensure they are providing consumers with the information they need to make informed choices and understand the costs involved. They also need to consider their fees and charges in the context of the Duty and consider what steps they may need to take to make sure that their services and pricing offer customers fair value. There is specific reference to both lifetime mortgage products and second charge mortgage products, which can have a significantly different pricing structure to standard mortgage products and different connected advice costs.
• Mortgage fraud: Mortgage intermediaries are reminded that they are expected to have appropriate controls in place to protect them from being used for financial crime. This also extends to having effective protection for their systems and customer data.
• Appointed Representatives (AR) regime: As for credit brokers (see above), mortgage intermediaries which are principal firms should ensure that they have appropriate controls in place to effectively oversee their ARs’ activities and ensure that ARs comply with the Duty. Principals should also read the FCA’s recently updated rules and expectations and take necessary steps to comply with the changes.

What should motor finance providers be focusing on?​

Key focus areas for motor finance providers include:

• Affordability: The FCA makes the point that the complexity of motor finance products can result in consumers not being able to understand how they work and put more focus on weekly or monthly costs instead of the total amount payable. This could result in consumers being unable to adequately compare products and understand whether they are suitable for their circumstances. In the context of the products and services outcome, firms need to ensure that the product design meets the needs of the consumer and that they are given adequate information so that they can understand the benefits and risks of an agreement and make informed decisions.
• Financing Alternative Fuel Vehicles (AFVs): Also under the product and services outcome, the FCA flags that business models and product offerings are currently evolving to support the type of financing required for AFVs. However, the FCA is concerned that the increased complexity of providing bundled products (which may include funding of charging points and other ancillary services as well as the vehicle) could cause significant confusion for consumers about their rights and protections as a result of the types of agreements required. Product design and customer support will be key to ensuring that products meet customers’ needs and that they do not face unreasonable barriers to ending such agreements, given the different methods available.
• Commission models and disclosure: As mentioned in relation to credit brokers (see above), compliance by both lenders and credit brokers - including motor dealers - with the ban on discretionary commission models in motor finance and amendments to commission disclosure (as outlined in FCA policy statement PS 20/8) is an area of attention for the FCA. Firms will need to ensure that the lending product provides fair value to retail customers, eg being able to demonstrate that any fees for exceeding mileage limits and wear and tear are suitable and that consumers are not unfairly penalised for early termination of Personal Contract Hire agreements.
• Control over dealer networks and oversight of these by the lender: On consumer understanding, the FCA makes it clear that motor finance providers need to have adequate oversight of dealer/broker networks (adjusted, where necessary, for the move from in-person to digital based sales), and monitor point of sale compliance with its CONC rules.
• Evolving business models, strategies, and digitalisation of the customer journey: Also on consumer understanding, with the shift from ownership to usership
  models the FCA emphasises that firms should have clear agreement terms which help the customer to understand the risks and benefits of the product. The rights and responsibilities of customers under different types of agreement and the protections available to them also need to be clear. Firms should take note of the impact of an increased digitalisation of the motor industry in recent times. There is the potential for harm to arise from the customer journey moving online, which could result in consumers not understanding the product and whether it is suitable.

What should retail finance providers be focusing on?

Issues for retail finance providers to be aware of include:

• New and evolving business models and changes to the regulatory perimeter: The FCA is aware of a range of new business models and products in the retail finance market, including some new products being offered to customers for the purchase of essentials in the context of the rising cost of living. It is increasingly seeing Buy-Now Pay-Later (BNPL, or ‘Deferred Payment Credit’) products being used in this context. The development of these new product offerings needs to take account of responsible lending requirements and the suitability of product designs in the context of the whole customer journey. The FCA also refers in the letter to its on-going work with HM Treasury on the regulation of buy-now pay-later (BNPL) products. In the meantime, the FCA reiterates that where it sees harm, it will act using its existing powers and its non-FSMA consumer protection powers. For more on the latest HMT consultation on BNPL, take a look at our Engage article ‘Buy-Now Pay-Later: UK government consults on draft legislation’.
• Incentives and commission models: The FCA will be looking at retail finance firms' incentive models to ensure that these are compliant with its rules and principles, and do not lead to harm to consumers.
• Financial promotions: The FCA sees the way in which retail finance products are advertised and, in particular, the need to provide a balanced picture to customers which is clear and transparent as a priority, particularly in the context of the rising cost of living. It emphasises that misleading or inaccurate financial promotions that are not clear or fair can lead to consumers making uninformed decisions, eg where disproportionate prominence is given to weekly/monthly payments or an initial 0% interest rate and the total cost of a product isn’t readily apparent or disclosed at all. It will be monitoring financial promotions and will take action where it sees problems. The FCA also highlights that sales journeys that seek to exploit consumers’ behavioural
  biases can disproportionately impact those with low financial capability.
• Forbearance: Regarding the consumer support outcome under the Consumer Duty, the FCA’s Borrowers in Financial Difficulty (BiFD) review found that firms could do more to encourage customers to engage, particularly when payment issues start to arise. Adequacy of systems and controls to back up forbearance policies is an area for firms to consider here. In addition, the BiFD review found that most firms informed customers about sources of debt advice and guidance through their written and/or online communications but opportunities were missed to highlight the benefit of these services in telephone conversations. The FCA encourages firms to help customers understand what types of debt help or money guidance are available and to tell customers that they can get guidance or not-for-profit debt advice through both digital and telephone services. For more on the FCA’s findings from its BiFD review, see our Engage article ‘FCA Report on the review of borrowers in financial difficulty following COVID-19’.

Next steps

The FCA will continue its work to support the embedding activities of firms in the run-up to the July 2023 implementation deadline for new and existing products or services that are open to sale or renewal. Its programme of communications on the Duty will continue, with further events and updates to its dedicated webpages. The FCA is working with an external research agency that will soon be sending a short survey to a sample of firms. This anonymised survey will help it to understand the progress firms are making in implementing the Duty and will inform its ongoing communications to firms.

The FCA is also hosting a series of in-person events for mortgage firms across the UK between February and June 2023.

If you would like to know more about the Hogan Lovells Financial Services team and how we can help you deliver or implement your plans, please visit our Consumer Duty hub.

Authored by Virginia Montgomery and Nick Oxley.