The Financial Conduct Authority has found that the majority of consumer finance companies and non-bank mortgage providers could improve their approach to risk management and management.
During the second half of 2023 and the first half of 2024, the FCA conducted a multi-company survey of a sample of consumer finance companies and non-bank mortgage lenders.
The aim was to assess their approach to financial resilience, as well as the potential for consumer harm due to weaknesses in financial resilience.
According to the FCA research: “We saw margins under pressure, profits down and there were some potential liquidity issues. We discovered that some companies were not sufficiently prepared for this changing economic environment.
“Our overall finding is that the majority of companies could improve their approach to risk management and risk management.”
The FCA highlighted that a number of non-bank mortgage providers were operating in niche markets and targeting specific products and customers, such as second-tier loans and buy-to-let mortgages. The authority said it expected businesses to monitor broader economic conditions and understand the impact of interest rate changes. Some companies saw payment arrears increase and were also negatively affected by external issues, such as pressure from financing providers or group-wide problems.
Many companies, including the leading companies with ARs, did not have a clearly articulated view of the level of financial resources they considered adequate and the areas of concern.
Without this, the FCA argued, it would be difficult to create an effective risk management framework or ensure corrective action is taken at the right time.
Some companies relied only on more basic financial statements and discussed them at committee meetings to make decisions. And some companies focused on the level of sales and amounts of delinquencies, but had limited financial data to identify any tensions on the balance sheet.
FCA noted that stress testing was often limited and did not cover the risk profile of the company. Some companies highlighted a decline in lending but did not have scenarios for rising delinquencies or interest rates. The regulator said it expected companies to use stress scenarios that were severe but plausible and relevant to their circumstances.
In conclusion, the FCA said: “We expect firms to assess their arrangements against these findings and make any improvements that may be necessary. We will continue to consider companies’ approaches to managing financial resilience and the risk of harm to consumers as part of our ongoing supervisory work.”