The FCA decision to impose a financial penalty of £72.9m, “were it not for Amigo’s financial position” and “the risk to the planned customer redress scheme” should be a stark warning to all lenders. We hear some lenders say “We don’t operate in that market”, but that’s not the point.
The FCA has always made it clear that all regulated firms should learn from its enforcement notices and the Amigo decision is no exception. In this case the FCA found that several affordability policies were weak, and that governance and oversight was poor. We believe firms need to consider two main implications:
Consumer Credit Sourcebook – The overall aim of CONC is to ensure that firms undertake adequate creditworthiness assessments when deciding whether a particular loan is affordable. Proportionate and appropriate affordability assessments are key to avoiding harm, and firms should ensure that they consider the customer’s individual circumstances. If poor customer outcomes are to be avoided, such assessments should be robust.
Oversight – the effectiveness of lines of defence is the subject of harsh criticism in the Amigo example. The regulator was critical of the blurring of responsibilities between the first and second lines, highlighting that “there was no independent checking by the second line of defence.” It also had concerns about the robustness of the quality assurance exercise. The FCA clearly expects more than just narrow checks. It is looking for more objective and independent assessments of consumer outcomes, which will become more intensive with Consumer Duty implementation looming.
So, once again the lack of independent thinking within QA functions has proven to be costly. Effective three lines of defence models should be well established in firms, but clearly they aren’t. Often this is because each line relies on colleagues in the other lines with the third line becoming part of general process. This risks neutralising its independent and objective oversight. Forward looking businesses seek the security of a third line that provides a truly independent view; not influenced by corporate thinking or objections. This trend is likely to continue as firms recognise that they must improve to protect their reputation and balance sheets.
The FCA messaging couldn’t be clearer; give us a call to see how we can help.