A few weeks ago, when Wonga went into administration, I wrote that it might be a precursor, a large one, to a perfect storm of regulatory pressure for the High Cost Short Term Credit (HCSTC) sector. This Dear CEO letter (see link), together with the broader economic context, reinforces that argument.

One consequence of the FCA’s operating model, in contrast to the more integrated PRA equivalent, is that the basic functions of regulation – authorisation, policy, supervision and enforcement –operate semi-independently of each other. This isn’t itself a bad idea – for one thing, it can be a useful counter to Group think. But it’s compounded by the structures of these functions, which don’t always interface well, and, in the case of HCSTC (and consumer credit generally), there are signs that coordination is a challenge. Add in the FOS’ independent role, reinforced in this letter, and the complexity on the ground is clear.

This isn’t a surprise. Taking on consumer credit regulation was inevitably going to stretch any regulator’s operating model, particularly in the prevailing economic environment. The IFS has recently drawn a stark picture of the extent to which per capita GDP has fallen in the decade since the crisis, and the corresponding rise of household debt is a clear consequence. Sitting in the midst of this, HCSTC firms were always going to be difficult for their management to steer and for regulators to regulate. Coming off the back of OFT regulation – less resource, fewer powers – didn’t help either party.

The resulting situation creates three broad problems for the FCA, and this letter can be viewed as a first step towards a future solution, one that attempts to re-base expectations post Wonga’s administration:

1. What does good look like for HCST firms? To some extent the FCA would say it has done this with its work on affordability. But it’s not yet evident how well this fits with the environment of low incomes and high household debt, or that there is a profitable business model HCSTC firms could follow in the absence of wider economic improvement.

2. Assuming there is such a business model currently, how do firms get there? The rump of FOS cases that pre-date FCA regulation is likely to be significant for most HCSTC firms, and may be a significant barrier to successful transition to any new status quo, even one involving other types of organisation.

3. How does the FCA exercise its powers consistently without either the HCSTC market shrinking significantly, or setting uncomfortable precedents that will create future risks? If the HCST market does shrink further, the waterbed effect I’ve written about before is likely to become stronger, possibly creating additional problems around e.g. unauthorised overdrafts and credit card borrowing.

Next year, the FCA also takes on the regulation of Claims Management Companies (CMCs), which have been partially responsible for bringing that rump of historical cases through to the FOS. Without going into the detail, it’s obvious that how the FCA supervises these firms will be both complicated and sensitive.

There will be more twists and turns in this story, which will become greatly exaggerated should the economy take a downturn, and HCST firms will need to be able to navigate carefully as the FCA’s searches for the best way ahead. Meanwhile, the FCA will have to find a way to both deploy and coordinate sufficient resources across its operating model to design and then execute a new, broader strategy. Either way, the next period will be a serious test for the FCA’s Mission.