On 23 October 2024, the FCA published its findings following a multi-firm review of consumer credit firms and non-bank mortgage lenders (collectively firms).

During the latter half of 2023 and the first half of 2024, the FCA undertook a review of various firms to evaluate their financial resilience and the potential consumer harm that could arise from any weaknesses in this area. The review encompassed firms with diverse business models and operating under different prudential regimes and regulatory frameworks.

The review revealed that most firms need to enhance their risk governance and management practices. Specifically, many firms were found lacking in effectively identifying and monitoring risks and financial metrics, which are crucial for understanding the challenges they face.

Key findings from the FCA include:

• Risk Identification: Some firms had inadequate processes for identifying business-relevant risks, neglecting significant external risks like credit, counterparty, liquidity and funding, operational, and market risks.
• Risk Appetite and Control Systems: The majority of firms had not fully developed their approach to identifying, assessing, monitoring, and managing risks. The FCA expects firms to develop risk management frameworks suited to their business's size and scale, allowing management clear visibility of potential issues. This includes implementing early warning mechanisms and relevant performance measures that trigger specific actions.
• Stress Testing and Wind-Down Planning: There was a noticeable lack of sufficient wind-down planning among firms. The FCA advises firms to consider financial stress scenarios, explore recovery options, and plan for an orderly business wind-down to mitigate failure impacts.

What should firms do in light of these findings?

Consumer credit firms and non-bank mortgage lenders are required by Principle 4 and the Threshold Conditions in the FCA Handbook to maintain adequate financial resources at all times. The FCA expects all firms in these portfolios to consider these findings when working to improve their governance and risk management framework.

In light of the FCA's findings, consumer credit firms should consider the following to review their risk governance and management practices:

• Identifying risks relevant to the business:
  • Setting their own financial risk metrics for adequate levels of capital and liquidity.
  • Making sure credit risk is considered together with other risks, such as interest rate risk or liquidity risks.
  • Developing methodologies to quantify the risk associated with oversight of Appointed Representative risk if the firm is acting as a principal firm.
• Setting risk appetite and establishing appropriate systems and controls:
  • Setting a clear risk appetite, outlining their desired risk profile and the types of risks the firm is willing to accept.
  • Forming a firm view of the level of financial resource they consider to be adequate (and at which points they would become concerned), by undertaking robust business planning and producing forecast financial statements that clearly show their regulatory capital position.
  • Mandating financial monitoring and reporting not just at group level but also at an individual firm level to ensure visibility of individual entities’ financial positions.
• Undertaking stress testing and considering wind down planning:
  • Undertaking scenario-based stress testing, which focuses on all the risks that are relevant to their business.
  • Putting in place a robust framework to identify their future funding needs or identify when they could come under liquidity stress.
  • Implementing an adequate wind down plan against the risk of a disorderly failure.

The report sets out similar findings in relation to examples of good practices and areas for improvement for non-bank mortgage lenders portfolio.

The FCA intends to continue assessing firms' financial resilience and the risk of consumer harm as part of its regular supervisory activities.