UK Financial Conduct Authority Multi-Firm Review of Consumer Credit Firms and Non-Bank Mortgage Lenders

The U.K. Financial Conduct Authority has published its review of consumer credit firms and other non-bank lenders as the latest chapter in its ongoing supervisory focus on financial resilience. While the review specifically considered financial resilience, it is interesting to note that, where shortcomings were identified, they stem from common systemic issues that can impact a firm’s whole business model, in particular failure to effectively:

• Identify all of the risks to the business;
• Set risk appetite and establish appropriate systems and controls; and
• Undertake adequate stress testing and establish a proper wind down plan.

The FCA has split its observations between those firms it classified as consumer credit firms (those offering credit including premium finance, finance for goods and services and student loans) and non-bank mortgage lenders (typically those offering second charge loans and buy-to-let mortgages). As one might expect, given the secured nature of the facilities, the non-bank mortgage lenders appear to be better positioned but the overall message is that the majority of lenders could improve their approach to risk governance and risk management. In the FCA’s view, “most” firms had an underdeveloped approach to identifying, assessing, monitoring and managing risks, i.e., their risk management framework was not fully developed.
 
Firms that took part in the review have been given individual feedback and the FCA will follow up with them through its usual supervisory activities. Other lenders should take this as a timely nudge to consider the findings against their own business models to identify potential shortcomings and, where identified, take action to address those. A robust financial resilience and risk framework is critical to avoiding consumer harm, meeting regulatory expectations and, not least, ensuring the financial stability of the business in a changing, not to say challenging, economic landscape.
 
Boards of regulated (and indeed soon-to-be regulated) lenders should therefore be asking themselves the following questions:

• Has the business identified all of the potential risks that could impact the business? This isn’t just credit risk—what about interest rate risk, liquidity risk, external funding risk? What are the other external factors specific to the target demographic and product set?
• Having identified those risks, how is the firm’s risk appetite set? Is it clearly articulated? What metrics is it based on and how are those monitored?
• Are the systems and controls adequate for the size, scale, and complexity of the business? Is the management information sufficiently robust so that there is sufficiently early warning of trigger events or the nearing of buffers?
• Does the strategic business plan take into account realistic capital and financial risk assessments? Do the forecast financial statements factor in the risks and report against those?
• Are the stress-testing metrics the right ones, bearing in mind the economic forecast both current and future? Is the business robust enough to withstand increasing interest rates and a significant increase in borrower arrears?
• Is there an effective wind-down plan in place? How is its efficacy measured?
• For firms with Appointed Representatives, what methodologies are in place to quantify the risk associated with those representatives?

The FCA confirmed in the 2024/25 Business Plan that financial resilience remains a priority and therefore lenders should take the publication of the survey findings as a strong prompt to confirm that their business models and risk governance frameworks are appropriate, effective, and stand up to regulatory or other independent scrutiny.

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