Consumer Duty for Credit Firms: Your role in the cost-of-living crisis
In the UK, most of us will be aware of what has been coined the ‘cost-of-living crisis’ as a result of the biggest rise in inflation over the past 30 years. This has revealed itself in the form of increased fuel and energy bill prices, resulting in people across the country frantically trying to submit meter readings ahead of the hike. But what does this mean for consumer credit firms?
In line with the new Consumer Duty, Senior Managers should be thinking ahead about the impact that their products and services may have, and the support that they can provide to ensure customers continue to receive positive outcomes.
Many customers will be seeking credit products and/or services to alleviate the added financial strain or pressure from the crisis. As such, now more than ever, there is a need to ensure that processes are sufficiently robust, so that access to credit is only granted to those who can afford to repay it. Additionally, extra precaution will be required when handling customers in arrears, to avoid exacerbating the circumstances of those who are struggling financially.
In a recent speech, the FCA confirmed it will be closely monitoring the situation with a focus on ensuring that credit firms are:
delivering the right outcomes for customers (Consumer Duty)
providing the right support to those who are experiencing (or have the potential to experience) financial difficulty
lending responsibly to those with limited borrowing options in a manner that avoids detriment or harm.
Below we have outlined our thoughts on some of the key processes that may require review.
Creditworthiness assessments – things to consider
To ensure creditworthiness assessments remain fit for purpose given the rising cost of living, consideration should be given to whether you:
Use sufficient income and expenditure information when conducting assessments
The rules in CONC are not prescriptive, which means it is up to firms to determine the level of detail to request. However, over the years, we have found (and seen the FCA comment on) issues with assessments as they are often too high-level to provide an adequate reflection of a customer’s circumstances. For example, many firms request information in grouped categories (e.g. one cost for all bills in total rather than splitting this into individual bills) which can result in omitted costs.
In addition, some firms fail to make use of all the data sources available such as bank statements when determining income and expenditure, or previous repayment history when increasing borrowing or relending which are often more accurate sources. The regulator is clear that firms should make use of all available information when conducting assessments, and as such, now would be a good time to review whether you are falling foul of these common mistakes.
Have reviewed the use of automated decision making and/or statistical data e.g. Office of National Statistics (ONS) / Standard Financial Statement (SFS)
Due to the changes in the economic backdrop, it is likely that the algorithms or information that sits behind any automated decision making, or statistical data sources may need to be updated and/or reviewed. For example, to ensure that data fields (e.g. energy bill payments) are being correctly analysed. Or, that statistical data remains current.
The SFS and ONS will be publishing new information as the situation continues to unfold, with the SFS having recently updated its spending benchmark figures which are in force from this month. As such, firms should be taking steps to remain appraised of these changes when they occur. Extra care should also be taken to avoid using data that is outdated. Firms may also wish to take additional steps or precautions where statistical data is the sole source relied upon. For example, factoring in a buffer or increasing the amount of the buffer used to account for this.
Have ensured staff are adequately trained to identify vulnerability and ensure questioning techniques provide sufficient challenge
The Financial Lives 2020 Survey: the impact of coronavirus highlights an overall increase in customer vulnerability during the pandemic with around 53% of adults demonstrating characteristics of this (27m). This in conjunction with the FCA’s vulnerability guidance, suggest now would be a good time to roll out additional training to ensure staff are well equipped to spot indications of vulnerability. Staff may also need refresher training on their questioning/probing techniques as elements like sick pay, and the costs of energy or fuel may require additional probing to ensure the amount being recorded is correct.
Arrears Handling – how can you best support customers in arrears?
Over recent years the FCA have been consistently interested in the forbearance practices of firms within the industry. Firms are being encouraged to provide sustainable solutions that are tailored to individual customer needs (including vulnerability). In order to achieve this, we recommend considering the following:
Do we conduct affordability assessments before offering forbearance to ensure arrangements are affordable and sustainable?
Whilst this may not be appropriate in all instances, assessing affordability is a key stage when dealing with customers in arrears. All too often firms apply a “finger in the air” approach to plan payments, and place customers on arrangements without assessing the affordability and sustainability of the plan. In some cases, this occurs despite several previous failed plans. In addition, many firms continue to apply fees and interest charges during periods of arrears, which exacerbate an already deteriorating position. We would suggest practices are reviewed as increases in the cost of living will have a significant impact on essential expenditure which may need to be prioritised over credit payments.
Are any updates required to our policies and procedures?
The regulator has confirmed that its temporary support guidance remains in place, and as such Firms should have taken steps to implement this into their current procedures and practices. Firms may wish to review the implementation of this guidance to ensure all adequate steps have been embedded. In addition, now would be a good time to review the suite of forbearance options on offer to ensure they remain both suitable and sustainable for different customer needs given that it is likely that there will be more customers facing long term arrears, who require new exit strategies. The FCA’s guidance suggests forbearance practices such as:
suspending, waiving, cancelling interest/charges
deferral of payment of arrears’
accepting token payments
We would recommend that current practices are reviewed against this list, to ensure that tailored solutions can be provided.
Does your monitoring pick up those with the potential to enter arrears?
Arrears practices should not only aim to assist those who are experiencing difficulty, but also those who have the potential to enter arrears. Firms should have in place measures to monitor customer account records to pick up any indications of this. Alternatively, firms may wish to use their own initiative to contact customers and make them aware of the support available should they need assistance. This will help assist the customers who are under financial pressure and/or concerned that they may fall behind. Especially those who have never been in arrears, who may be reluctant or embarrassed to reach out.
What you need to do
The last few years has brought about many unexpected challenges such as Brexit, Coronavirus and now the cost-of-living crisis. This has underscored to the finance industry the importance of preparing for and handling unexpected challenges. As firms move towards a more forward-looking approach, Senior Managers should be asking:
Is the management information I am receiving fit for purpose, providing the information that I need? In line with the new Consumer Duty, you should be switching to a more outcomes focused approach.
Are risks getting appropriate coverage at senior management committees?
Have I implemented any learnings from historical arrears data, Ombudsman decisions or regulatory publications (either at a firm, sector, or industry level) and where necessary embedded any improvements into the process?
Avyse Partners can work with you to ensure that your processes are sufficiently robust. We have extensive experience working with credit firms, particularly when subject to regulatory scrutiny or enforcement action. Get in touch to discuss how we can help.
Shaneca
