“…for a significant minority debt can be a burden, and when things go wrong, meeting debt repayments can exacerbate financial hardship and distress.” (FCA Thematic Review on early arrears management in unsecured lending - TR16 / 10).
The key message arising from last year’s Thematic Review is that firms need to do more culturally to identify vulnerable customers and deliver fair outcomes.
Of course, credit allows consumers greater levels of financial freedom and flexibility. But with access to credit being widespread (not to mention the sheer variety of customers’ individual circumstances and reasons for seeking it), the risk of customer detriment is also very real. How firms handle customers in arrears has always been a sensitive area in terms of customer outcomes, but has recently been attracting greater regulatory focus.
As well as firms recognising instances where a customer can traditionally be seen as vulnerable (for example, through bereavement or long-term disability), firms must also recognise that all consumers moving towards an arrears situation can be considered to be in a vulnerable situation.
So how can firms ensure they are balancing the need to recognise when customers might be experiencing vulnerability with the need to ensure they recover outstanding amounts owed and maintain a commercially successful business model? How can they ensure effective arrears management comes with tangible commercial benefits?
Setting the right tone
We believe there are five key factors to get right to ensure effective early arrears management:
1. Staff training awareness
Awareness of the issues around customers in arrears should be firm-wide, covering not only customer-facing staff but operational management and quality assurance staff – this aligns everyone to the same need and helps the identification of consumers who might be about to fall into arrears.
From there, training should be proportionately tailored to staff members’ roles and should reinforce processes and the right general approach. It should also show how early engagement with potential arrears customers can allow you to manage their experience and establish any special arrangements that might be required in order to help them pay.
Although arrears handling is clearly important when considering vulnerability, it should also be factored in to all aspects of the customer journey, e.g. marketing, product design, sales and servicing.
2. Performance management
Staff members’ ability to identify customers falling into arrears, discern vulnerability and treat all customers fairly should have some role to play in the view of their individual performance.
Matching suitable products to consumers’ circumstances and monitoring staff to ensure they are continuously delivering on this requirement can prevent detriment from crystallising in the customer base. As well as this, incentives for identification of customers experiencing difficulties will allow for earlier intervention and lead to better outcomes.
3. Engaging with customers and early warning signs
Firms should not wait for the customer to contact them about issues they are experiencing, but proactively contact the customer via their channel of choice (for example by phone, letter, email or social media) to ensure that vulnerability is quickly identified and the customer’s issues dealt with. This increases the options around forbearance and improves their effectiveness.
There should also be an explicit message that customers are themselves welcome to engage the firm if they begin to experience financial difficulty. If this message is promoted effectively (and of course, the firm helps those customers work through the difficulties they are experiencing) it will help to build customer trust and show them that engaging in this way will not jeopardise their relationship with your firm and the service they are receiving.
The FCA’s Occasional Paper 20 provides some commentary around indicators of financial distress, and firms should review this document to discern whether they are being proactive in their approach. Where the firm has reason to believe the customer may have difficulty understanding their options, they should be given the option of a personal representative being present to act on their behalf.
4. Assessing customer individual circumstances
Under CONC 7.3.4R, firms must treat customers in default or in arrears difficulties with due consideration.
When assessing customer circumstances, your firm’s policies and processes should be designed to identify the following triggers:
- The customer’s state of mind and their ability to understand key product features and risks as a result, and their ability to make informed decisions both in relation to new applications and the suitability of existing products held
- The customer’s finances, focusing on their ability to manage existing commitments, and the impact the situation may have on current and future income, household expenditure, and the customer’s ability to maintain contractual repayments
Applying both these factors will help firms identify customers who are financially or circumstantially vulnerable.
5. Forbearance options
Forbearance options should be outlined in an easily accessible forbearance policy.
Firms must explain to customers a full range of forbearance options, including, but not limited to:
- Deferred payment of arrears
- Breathing space
- Interest and charges concessions
- Repayments plans of varying duration
At the point of applying forbearance options, staff should re-perform an affordability assessment, referencing information from the customer’s credit file to help. Rather than recommending a forbearance option, the adviser should explain the features and downsides of each forbearance option, so the customer is in an informed position and can select the option that’s best for them.
Staff should clearly explain important information about the selected forbearance option, including the financial commitment of the customer and consequences of exercising a particular option, for example, the accrual of interest or impact on their credit score.
Gaining A COMPETITIVE advantage through customer advocacy
By effectively implementing the elements of good arrears management above, firms can achieve a few very important commercial advantages:
- Reputational benefits – approaching vulnerability correctly will resonate not just with vulnerable customers, but their carers, friends and families. Ensuring you offer a fair experience to vulnerable customers can generate benefits that go much wider than the individual opinions of customers
- A reduction in bad-debt write-offs – enforcing contractual rights to payment arrears may offer short-term gains, but in the long-term it may lead to an increase in bad-debt write-offs. It is also likely to cause significant upheaval for vulnerable customers, and could even create vulnerable consumers. Of course, firms must recover monies owed if possible, but can certain methods lead to a loss of trust, especially given the power of word-of-mouth as mentioned above?
- Adherence to the Senior Managers and Certification Regime (SM&CR) – the ability to articulate and evidence customer-centric policies and justify commercial decisions will be a key element of SM&CR when it does transition over to the consumer credit sector. As a result it is important for senior management to have a clearer view of performance and feel more assured of a culture of compliance that treats vulnerable customers fairly
Test outcomes for continuous improvement
Activities like outcomes testing and root cause analysis are central to firms’ compliance in the areas of vulnerability and the fair treatment of customers. These activities delve deeply into the real outcomes being delivered and can allow firms to take an ‘iterative approach’ to their products and processes in a way that simple customer satisfaction surveys cannot. Outcomes testing can more easily identify exactly how vulnerability affects the customer’s experience of your products or your firm, and allows you to make more focused improvements, for example, in how forbearance options are offered and what they look like.
A proportional, risk-based approach to outcomes testing will need to be developed within firms in order to focus on those areas that present the highest degrees of risk. Essentially, available resource should be focused where the greatest risk to customers exists, and these areas should be re-assessed over time.
An increased focus on arrears management
At the very least, those firms involved in collecting consumer debts should currently be considering their approach to arrears in light of the regulator’s recent thematic review.
In particular, firms should be considering how their approach to assessing customer circumstances enables them to identify vulnerability and deliver fair outcomes for all customers.
Getting it right makes good commercial sense in the long term, as the costs of further developing policies and procedures and introducing more activity around arrears management can be offset by higher levels of consumer trust, greater brand advocacy and fewer business losses in the form of writing off bad debts.
As well as this, it has to be remembered that staff dealing with customers in arrears have a tough job and must regularly deal with sensitive situations that can naturally cause customers stress – businesses who look to be proactive in their dealings with customers falling into arrears can also create a more rewarding environment for their staff.