The Financial Conduct Authority has found that the majority of consumer credit firms and non-bank mortgage lenders could improve their approach to risk governance and risk manage ment.
During the second half of 2023 and the first half of 2024, the FCA conducted a multi firm review of a sample of consumer credit firms and non-bank mortgage lenders.
The purpose was to assess their approach to financial resilience, as well as the potential for consumer harm arising from weaknesses in financial resilience.
According to the FCA review: “We saw margins squeezed, profits reduced and some potential liquidity issues. We found some firms were not adequately prepared for this changing economic environment.
“Our overall finding is that the majority of firms could improve their approach to risk governance and risk management.”
The FCA highlighted that a number of non-bank mortgage lenders operated in niche markets and focused on specific products and customers, such as second charge loans and buy-to-let mortgages. The authority said it expected firms to monitor wider economic conditions and understand the impact of interest rate changes. It said some firms saw arrears levels increase and were also adversely impacted by external issues such as pressure from funding providers or group-wide issues.
Many firms, including principal firms with ARs, did not have a clearly articulated view of what level of financial resource they considered to be adequate and at which points they would become concerned.
Without this, the FCA argued, it would be difficult to create an effective risk management framework or ensure that corrective actions were taken at the right time.
Some firms relied only on more basic financial statements and discussing these at committee meetings to make decisions. And some companies focused on the level of sales and arrears levels but had limited financial data to identify any strain on the balance sheet.
FCA observed that stress testing was often limited and did not cover the firm’s risk profile. Some firms stressed a fall in lending but did not have scenarios for rising arrears or interest rates. The regulator said it expected firms to use stress scenarios that were severe but plausible and relevant to their circumstances.
In conclusion the FCA said: “We expect firms to review their arrangements against these findings and make any improvements that may be necessary. We will continue to consider firms’ approaches to managing financial resilience and the risk of harm to consumers as part of our ongoing supervisory work.”
