Setting the tone
The FCA has been busy recently, as they seem to have been looking at every part of what they do.
One of many consultations has been on their authorisation process. With this and the fourth anniversary of them taking responsibility for consumer credit, it has stirred up sector discussions about the journey many firms went through and what we all learned.
I would argue that authorisation was crucial for the members I represent, and that it is important that the FCA continues to give this process the priority it requires in the future. This should never be just a technical process, it is an opportunity to get things right from the start of a relationship.
If you can cast your mind back, firms came into the FCA with interim permission and most had just less than a year to craft their full application.
With little in the way of precedent, some bought in support from those that had helped the banks and other financial services firms. It was expensive and occasionally delivered insights that didn’t really make sense in our sector.
When it worked well it took us into discussions about the very basics of our businesses. It asked some deep questions as to the customer firms had identified, the strategy to deliver and the business model required to deliver that strategy. With important questions about what controls a firm had to ensure things didn’t go off track.
What we hope the FCA learns
In our consultation response on authorisation, we relayed back some of our experience of the process. The experience differed across our member companies, but there are certainly improvements that could be made to communicating progress.
We also found that we seemed to be going over the same ground, information that had been included in the application was being asked for again.
It is vitally important that case officers are familiar with the sector that an authorisation application relates to, or at least understand the customer need.
On too many occasions across the regulatory and political worlds, there has been a lack of understanding as to why a £250 loan can be an important tool for customers. Or the application of prime-lending thinking to sub-prime markets.
The importance of authorisation
When I speak to stakeholders outside of the sector, say politicians or journalists, they will often ask about the impact of the price cap on HCSTC introduced in January 2015. It is sometimes seen as the catalyst for change. Of course, the price cap did introduce a commercial restriction, certain lending decisions were no longer viable.
However, I would argue that authorisation, rather than the price cap was responsible for the changes we saw. Business models were changed, new leaders joined firms and the market started to adapt.
In terms of the changes we saw, authorisation asked lenders to really explore areas like affordability. As a result, today affordability checks for a short-term loan can be some of the most robust.
More importantly we came through a period of intense scrutiny with a better recognition of what good culture looks like. It had been a small world, with similar models replicated across the sector. That all started to change, and the culture started to shift.
Get the relationship right
Our experience suggests that authorisation is a key step in a firm’s relationship with the regulator. The FCA has obviously learned some lessons from consumer credit authorisations, and this is reflected in their consultation document, but there is more that can be done.
It is a great opportunity on both sides.
For the FCA there is the chance to better understand the market they are regulating. An opportunity to potentially challenge their perceptions of what financial services should look like, and who can access these services.
For the firms it is their chance to challenge themselves. To ask those most basic of questions around their business model and how they deliver good outcomes for customers.
We would say that this process turned around our sector and it is important that the FCA continues to get this process right.