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As the consumer credit industry transitions to FCA regulation in April, how fairly firms treat customers in arrears will be high on the regulatory agenda. Discussing arrears with their firm is a telling touch point for customers and customers are often distressed or vulnerable. Evidencing good customer outcomes for customers in arrears to internal stakeholders and the regulator must be a key aim for consumer credit firms.
Arrears and forbearance
Extending forbearance to customers experiencing difficulty is not new to consumer credit firms. It forms a major part of the Office of Fair Trading’s (OFT) Irresponsible Lending Guidance, and Debt Collection Guidance (DCG). This guidance is transposed into the FCA’s draft rules.
The financial conduct regulator continues to be concerned that customers who fall into arrears on their mortgage are treated fairly. “Lenders need to be in no doubt of their obligations to customers who fall behind with payments and must realise that such circumstances are not an opportunity to create further profits.”
Business models
The FCA is keen to supervise holistically. Its approach to supervision is to ensure that firms’ business models are set up to achieve good customer outcomes. In some cases, high-cost short-term loan providers have been deemed to present loan roll-overs as a benefit to customers, relying on the associated fees and interest income within their business model. Where this is the case, firms can expect the FCA to act.
To combat poor practice in this area, the FCA has proposed three new policies:
1) The number of rollovers for any loan to be capped at two and firms must only refinance a loan at the customer’s request and where the firm believes it is in the customer’s best interest to do so
2) Where a firm is planning to roll-over a loan, the following warning and information about access to free debt advice should be included to alert customers:
- High-cost short-term loans
- Missing your payment deadline
- Not paying back your loan on time will significantly add to the cost and may continue to grow; here is some important information to help you.
3) The FCA believes that firms have used the continuous payment authority (CPA) as a collections tool: attempting to seize funds on an ongoing basis. From 1July 2014 there will be a limit of two unsuccessful CPA attempts for the duration of any single loan agreement for high-cost short-term credit (for the purpose of this rule, rolled over loans are considered part of the original agreement)
Taking part payment through CPA will be banned on the basis that this money is likely to be all the customer has in their account. Going forward, firms will be expected to view a failed attempt to take payment through CPA as a sign that a customer is experiencing difficulty, and forbearance should be extended.
Consumer credit thematic review
The FCA’s judgement and forward-looking approach includes using thematic reviews, which are carried out industry-wide on a particular theme, to identify problems and ensure that no new problems are emerging. Your firm may be asked to participate, gather and report evidence and data in the future.
The FCA has suggested that it may review fees and charges which firms apply when customers experience financial difficulty or fall into arrears. The FCA’s approach to thematic reviews and non-compliance is very pragmatic. It will use enforcement where non-compliance is found. This is a call to action to review your approach to arrears handling and ensure it functions in practice with the spirit of regulation.
The core regulatory approach to arrears charging is whether the fees can be justified. Key questions to consider:
What have you done to justify the fees charged of arrears customers?
Are the fees simply to recoup costs incurred, or are they in any way punitive?
Can you break down the costs of the activities that go into the collections process to prove the appropriateness of the fees charged?
Have you independently verified those costs to establish robust justification?
Your firm may already be addressing internal processes, systems and training to get compliance right. However, in light of the FCA’s approach to collections and arrears customers, this is a key business area to review:
Is the customer at the centre of your collections activity?
How customer-centric are your forbearance tools?
Is your charges regime punitive or simply to recoup costs incurred?
Consumer protection
Consumer protection is a Financial Conduct Authority operational objective; making sure consumers get financial services and products they need from firms they trust is a broad outcome the FCA wants to achieve.
In CP13/10, this approach has been firmly applied to the consumer credit market. Under CONC 2.3.3 R “a firm must monitor a customer’s repayment record during the course of a regulated credit agreement, offering assistance where a customer appears to be experiencing difficulty”.
Given this requirement, the regulator will expect to see evidence that firms are measuring and achieving these good outcomes for customers through robust systems, controls, policies and procedures which are reviewed. Firms, and especially senior management, must be in a position to spot warning signs in customers’ behaviours and to act appropriately.
It is in this context that we ask: how flexible are your forbearance options for customers? Are the options targeted and appropriate to the customer’s situation? Do employees engage in collections activity and understand their responsibilities? It is vital that your processes, polices and training support your staff to use the appropriate forbearance tools for your customers.