Consumer duty: Four key harms that lenders should avoid
The Financial Conduct Authority (FCA) has outlined the four key harms that every lender should avoid in order to “nail” the new consumer duty requirements.
During a webinar hosted by the regulator, an FCA spokesperson said that the new consumer duty represents “a significant shift” both for lenders and the regulator. However, it will also present an opportunity to build trust in financial services and move to a more flexile regulatory framework.
The new consumer duty was introduced on 27 July, and requires all financial services firms, including peer-to-peer lenders, to set higher standards and put consumer protection first.
Boards were given until 31 October 2022 to agree their implementation plans.
Speaking at an industry-wide webinar on 1 November 2022, the FCA outlined the four key harms that it will be looking at particularly closely.
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“If you can nail these harms as a firm then you’re addressing the vast majority of the problems that we’re seeing in the consumer credit market,” said an FCA spokesperson.
These four harms are:
- Affordability
The FCA told lenders that they must ensure that they are charging fair fees to borrowers, no matter how small the loan value may be. Firms must act to avoid pushing vulnerable borrowers into “life changing” debt.
- Forbearance
This was one of the FCA’s biggest worries during the pandemic, and it has remained a high priority. “Our regulatory expectation is that firms treat customers as individuals,” said an FCA spokesperson. The regulator recommended that lenders speak with defaulting borrowers to understand their specific circumstances and come up with a solution that works for them.
- Unfair charges
This includes charging excessive penalties, or adding surprise charges and hidden fees. The FCA warned particularly about unfair charges which may be hidden within the organic customer journey. For instance, when customers make an administrative slip and get hit by a big charge.
- Quality debt advice
Lenders should not resort to a single solution, as there is no single solution to debt, the FCA said. Instead, firms have been urged to offer bespoke debt solutions where needed, and to ensure that all customers are told about any potential collections activity, so that they can make informed decisions.
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