The U.K. Financial Conduct Authority (FCA) warned banks that they should provide better service to small and medium-sized enterprises (SMEs) that are struggling with debt, or they will face more severe regulatory actions.
In a letter addressed to the CEOs of the main retail banks in the U.K. published on Tuesday (July 12), FCA Executive Director Sheldon Mills said the agency was “disappointed to find repeated instances of poor customer outcomes and failures to treat customers fairly” during its review of customer files.
Given the rising cost of living and the challenges for many SMEs after the pandemic to repay their loans, the regulator decided to work with 11 banks to ensure they were offering struggling SME customers adequate support and that these banks were respecting the rules covering borrower protection. For this purpose, the FCA reviewed the banks’ systems, controls and processes for the collection and recovery of SME debt. The regulator also conducted interviews with senior managers and considered whether “firms’ overall treatment had delivered fair outcomes for customers.”
“It is firms’ responsibility to ensure they are fully compliant and can demonstrate that all customers entitled to protection under our rules receive fair outcomes,” Mills wrote in the letter.
The report found some common behavior across the sector that in view of the regulator, drives poor customer outcomes. These include inadequate training for the staff, gaps in policies and procedures, poor record-keeping and insufficient consideration of possible vulnerable customers.
The FCA provided individual feedback to the 11 banks assessed, although they aren’t named in the report. Additionally, the FCA is requiring to all the other retail banks with SME customers in the U.K. to make sure they address these concerns if these occur in their banks and tell the regulator how they are planning to fix any issues identified or the regulator “will use supervisory and enforcement powers to take further action if necessary.”
But not everything was negative in the report. The FCA also found good practices in the sector. For instance, many firms extended regulated credit agreement protections to all SME customers or a significant portion with “unregulated” SME customer borrowing. Also, many firms only took recovery action when it was clear all other suitable avenues had been exhausted. Some banks also increased headcount in collections and recoveries to address the increased demand from customers to support them.
Alex Veitch, director of policy and public affairs at the British Chambers of Commerce, said SMEs faced a “tsunami of costs” and the FCA’s findings should act as a “wake-up call” for banks.
This warning seems to be part of the FCA’s plan to help individuals and businesses to deal with the cost-of-living crisis. In June, the regulator issued a similar warning to lenders to ensure that they treat retail customers fairly. In that occasion, the regulator raised concerns about the banks’ practices to use data to identify the most vulnerable customers.
The FCA’s letters fall short of recommending specific actions or imposing new regulatory obligations, but this soft approach may change soon. In the last letter sent yesterday, Mills announced that the regulator is working on new rules in relation to the New Customer Duty, and it expects to finalize these new rules later this year. But in the meantime, the regulator warned banks that it expects them to improve consumer outcomes before the Duty comes in.
Read also: UK FCA Will Fight Fraud by Canceling Permissions in 28 Days
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