The FCA recently unveiled new consumer protection guidelines that signal a major shift in credit data management. These rules require financial services firms not only to meet formal compliance standards but also to proactively consider customer interests and welfare.

In addition, the FCA simultaneously signaled that crowdfunding and peer-to-peer lending platforms—critical elements of the FS ecosystem—could face additional scrutiny around adhering to these heightened accountability standards.  

These developments have significant implications for how the financial sector manages consumer credit data and assesses lending risk profiles. At their core, the new guidelines aim to strengthen safeguards for borrowers and reshape perspectives on credit provision.

With this in mind, we’ll dedicate this blog to what the next generation of consumer credit might look like.

Let’s dive in. 👇

You can skip the next section if you don’t need a recap on the introduction of the FCA’s Consumer Duty. ⏩️

Navigating the FCA's consumer protection mandate

The new Consumer Duty rules demand that credit providers consistently prioritise consumers across all operations—from product development to customer engagement. It means credit providers are having to re-evaluate legacy processes impacting credit data management and lending risk considerations.

Central to the directive is intensified scrutiny of credit data utilisation. The FCA states that all collection, processing, and leverage of consumer credit data must uphold principles of transparency, fairness, and consumer welfare. The implications are twofold: 

●      🛡️First, firms must surpass basic data governance compliance to proactively leverage insights in a manner that protects and empowers clients.

●      🛡️Second, lending risk models must integrate enhanced safeguards against inherent biases that could violate revised standards.

In practice, adherence requires rigorous audits of existing credit data practices. As the regulatory environment evolves, demonstrating a commitment to the ethical deployment of customer insights, particularly for credit risk decisioning, will prove essential. And by focusing on client-centric data practices, credit providers can align innovation with positive consumer outcomes.

The central role of credit data in safeguarding consumers

Comprehensive consumer credit histories empower more informed product access and pricing decisions, driving financial inclusion and managing consumer welfare. However, positive outcomes hinge on data integrity.

As you know, determining risk profiles relies on accurate information on borrower histories, levels of indebtedness, and overall reliability. Flawed or incomplete insights open the door to unfavourable loan terms and indebtedness. As such, upholding credit data quality and transparency is essential to ethical lending.

A win-win for credit providers and consumers. 👇

Additionally, empowering consumers and providers with clear visibility into credit positions allows for better joint decision-making. Responsible firms can offer guidance tailored to borrowers, while consumers can make more informed choices around financial needs and capabilities. 

Ultimately, credit data holds unique potential to bridge information gaps and power win-win solutions. However, flawed data can severely undermine market fairness and stability. 

The bottom line: Put simply, credit data systems must centre around principles of access, transparency, and accountability.

So, what now?

What’s new: FCA in January 2024

The overarching message? Firms that did not complete implementation of the Consumer Duty ahead of the 31 July 2023 deadline face pressure to rapidly finalise preparations. The FCA has signalled that those who have not achieved this may undergo tailored evaluations based on their progress so far.

Ultimately, all lagging institutions will soon need to prove adherence to the full Duty framework, across operations. And those that have progressed? The “not once and done” mantra emphasises the need to always be on it with Consumer Duty – reviewing existing product offerings, through to innovation. 

Keen to learn more? Here are several key takeaways from the FCA’s latest review: 

1. Frameworks and methodologies: In the retail banking review, the FCA found that firms took various approaches to assess products and services against the Duty's standards. Effective frameworks were directly mapped to sections of the FCA's finalised guidance, ensuring accuracy and consistency across different products and services. The best practices included frameworks that outlined the end-to-end customer journey, guiding reviewers to answer key questions and provide evidence justifying their answers.

2. Understanding and implementing fair value: The FCA's review of assessment frameworks showed that many firms had a clear understanding of fair value principles and their application across products. However, some firms relied on high-level arguments without sufficient evidence. Firms need to assess the costs and benefits consumers can expect to receive, including non-financial costs and potential distribution costs. The review highlighted the need for firms to collect and monitor evidence that products and services represent fair value and to have clear oversight and accountability for remedial actions if they do not provide fairness.

3. Review of closed products and services: The FCA's guidance on closed products and services under the Duty includes ensuring products continue to offer fair value and meet the consumer understanding and support outcomes. Firms are advised to prioritise reviewing products or services with a higher risk of consumer harm and incorporate Duty elements into existing review processes. 

4. Governance, culture, and data strategies: The FCA found that some firms' plans lacked evidence of scrutiny by governing bodies and clear timings for meeting milestones. There was also a lack of detail on how the Consumer Duty would be embedded in firms' culture. Moreover, not all plans clearly explained the data required to monitor compliance with the Consumer Duty. The FCA suggested focusing on effective prioritisation, embedding substantive requirements, and working collaboratively with other firms in the distribution chain.

The bottom line? All these findings highlight the importance of a comprehensive approach to the implementation of Consumer Duty… One that focuses on fair value, effective frameworks, governance, and data strategies to ensure good outcomes for customers.

Spotlight: Peer-to-peer lending 🔍

The FCA has also raised concerns about peer-to-peer (P2P) lending. These centre around adherence to regulations that protect retail customers' interests when it comes to credit risk decisioning and appropriate financial promotions.

Here’s a quick summary of the findings:

●      Risk exposure concerns: Given that P2P platforms facilitate loans without traditional financial intermediaries, the risk assessment and creditworthiness evaluation processes are crucial. The FCA is focused on ensuring these platforms use robust and transparent risk assessment criteria to protect investors from undue credit risks.

●      Compliance: The FCA requires P2Ps to provide clear, fair, and not misleading terms – ensuring that consumers fully understand the risks involved. This is particularly relevant where the risk-return can be complex and may not be easily understood by the average retail investor.

●      Accurate and comprehensive risk information: The FCA expects these platforms to have effective systems and controls that ensure the credit data they use and provide to investors is reliable and reflects the true risk profiles of borrowers. It means continuously monitoring loan performance and being transparent with investors about the credit risk associated with each loan or pool of loans. It also involves being proactive in identifying and addressing potential financial distress among borrowers to mitigate default risks.

Ultimately, for P2P lending platforms, adhering to the FCA's Consumer Duty rules requires a delicate balance between offering attractive investment opportunities and ensuring that these opportunities do not expose retail customers to undue financial risks. It requires a strategic overhaul in how these platforms assess, manage, and communicate credit risks—aligning operations to the ethos of consumer protection and financial responsibility.

The next generation of consumer credit

The FCA's updated Consumer Duty guidelines signal a turning point for financial services firms—now is the time to re-evaluate credit data management and lending practices with a focus on consumer interests and ethical standards.

All financial services, including emerging P2P lending platforms, must realign operations to prioritise transparency, accountability, and responsible innovation. As regulations continue to evolve, proactive self-governance and consumer welfare must become the cornerstones for trust and sustainability across the industry.