Now leading a philosophical discussion on the Financial Conduct Authority’s mission, Andrew Bailey admits that taking on the regulation of consumer credit has been “a lot more than what was envisaged” for the regulator.
In a Q&A with Credit Strategy covering debt collection, remuneration and retail credit, he sets out what the industry can expect, including his own mission. Standing up to greet Credit Strategy from a fairly modest desk, on an open-plan floor in the regulator’s Canary Wharf offices, there’s no sense of hubris.
As the interview unfolds – we eventually wind our way through payday lending, commercial debt management, remuneration for debt collection and overdrafts – he answers questions philosophically. Everything is considered in wider, temperate terms. It’s a stark contrast to the “shoot first, ask questions later” regime of former chief executive Martin Wheatley.
In a Q&A with Marcel Le Gouais and Amber Ainsley Pritchard, the sense is that, if anything, it’s a case of ‘ask questions now, you’ll know why we’ve acted later’.
MLG: The interesting thing for the retail financial service audience is the mention of weighing up consumer responsibility as well as protection, in the FCA’s Mission consultation. This concept feeding into decision-making is new for the FCA. What emphasis on consumer responsibility can the industry expect in future, when the FCA makes decisions on enforcement?
AB: “There are a number of reasons for the mission documents, but the overarching reason is because the FCA has got broad objectives, it operates on a big landscape.
“We have to make choices about where we put our emphasis and how we interpret our objectives. We have to be as transparent as possible about how we make those choices and what thinking lies behind them. One; so that we can explain to the world at large and secondly, so we can explain to our own staff.
“Thirdly, when we started thinking about those questions (in the Mission consultation), it led very quickly to another set of questions, such as the one you point out. Do we interpret our consumer objective broadly in equal amounts and style for all consumers, or do we say some consumers are better able to carry out their own duty? It’s about how we interpret this interaction between consumers’ duty and our consumer objective.”
MLG: Another relevant piece of work for our sector was the early arrears thematic review in unsecured lending. There was a mixed picture; lots of examples of good practice, with also room for improvement. Since the FCA’s report in December, have there been further steps to improve conduct?
AB: “I would agree with you. The message that came back was progress made, more to do. An important aspect of this review was to say that, when firms approach arrears management, are they approaching it mechanically or are they thinking about the objectives and context?
“The firms making more progress were setting policies towards managing arrears more in the context of, how do we manage customers to an acceptable outcome, consistent not just with the firm’s financial objectives, but with broader policy objectives?
“We want to use that piece of work to give more attention and transparency to what we’re trying to achieve. This is a yardstick to say: ‘This is where we’re seeking to go to.’”
MLG: One point within that review is that the worst practises were found in retail finance and online personal loan providers. Can we expect more FCA work in retail finance?
AB: “That’s a good question. If you put it in the context of all the work we’ve done on consumer credit, it’s interesting. Taking on consumer credit was a major piece of work for us. What that entailed has been a lot bigger than what was envisaged, if you went back to the discussions when (the consumer credit division) was being set up. But I think that’s a good outcome, it represents a stronger digging into what’s going on.
“To your question about retail credit, it’s a whole broad range so you can’t generalise, but we found pockets of practice. This was, in a sense, firms not thinking about the broader objectives about what is safe credit practice, what is good credit practice and what isn’t. It was about understanding customers’ needs and capacities and tailoring the process to that, as opposed to a more mechanical treatment of customers.”
MLG: Moving to debt collection; a broad issue at the moment is the remuneration model between largely banks and the debt collection agencies they outsource to. While lenders are starting to change the commission model, those suppliers are still broadly speaking remunerated on commission on the amount collected. The regulatory framework has moved on, and that remuneration model isn’t precisely aligned with a TCF culture. What’s the FCA’s view on that?
AB: “I think you’re right. The debt management element in consumer credit and the nature of the work involved in this whole task of regulation; that’s another thing that has been a lot more than what was envisaged.
“You pose a really interesting question. The commission-driven model is one we’ve lent against heavily. I would say with all remuneration, it’s down to the incentives it creates. We’re not in the business of regulating levels of remuneration. I’m not interested in that at all. We’re interested in the incentives created by a structure of remuneration and obviously sales commission.
“In this world it’s not selling in that traditional sense, but it has the same prospects. So we are doing and will be doing more work on that. The starting point is always to understand what incentives do these structures create and what incentives do we want them to create. You have to set out by thinking what objectives do you and the firm want there to be. Then you can answer the question of how we can structure remuneration incentives to achieve that. It’s sometimes not easy.
“Going back to the traditional banking world, we’ve worked a lot with banks to develop methods structuring the measurements of variable remuneration. I readily admit the challenges we face, and some of the things we want embedded, are not easy to observe.”
MLG: Are you still considering a thematic review of remuneration?
AB: “We haven’t taken any decisions on that but that would be a natural tool we’d use, so that’s quite possible. If you go to the end of the chain, we want these companies to help people to get onto sustainable debt management and repayment plans. If you define the outcome as sustainable debt management and repayment plans, you obviously want the remuneration to be to get to that point, you don’t want the remuneration to be ‘let’s just get money in’.”
MLG: When contractual obligations imposed by banks on debt collection agencies/law firms/BPO providers adversely impact how TCF outcomes are provided for customers, would this be a concern for the FCA? Or is this deemed a matter between two firms?
AB: “All authorised firms are subject to our Principles, including Treating Customers Fairly, and the same rules apply to lenders and specialist debt collectors when collecting debts. As such, if contractual arrangements between lenders and debt collectors or debt purchasers do not conflict with our principles and do not breach any rules, we would almost certainly see it as an issue for firms to resolve between themselves.”
The full interview with Andrew Bailey can be viewed in the April issue of Credit Strategy.