New borrowers in financial difficulty rules published
The FCA have published details of the latest policy change aimed at improving outcomes for customers who find themselves in financial difficulty. PS 24/2 updates existing rules and guidance to increase protections for mortgage, consumer credit and overdraft customers and incorporates parts of the coronavirus Tailored Support Guidance into the Handbook. The non-Handbook guidance for mortgage borrowers remains a separate but updated document (FG24/2).
This publication forms part of the regulator’s work on borrowers in financial difficulty which is a wide ranging project aimed at improving outcomes for customers. Born out of the coronavirus period and the ongoing cost of living crisis many are experiencing, this work is pushing lenders to change and improve their collections practices. It is also closely linked to the consumer duty with a particular focus on vulnerability, so we expect this to remain a regulatory priority for the foreseeable future.
What’s changed?
There are a lot of different topics covered so firms will need to take the time to read the policy statement carefully. In relation to consumer credit firms, there are a couple of things which caught our eye:
Escalating balances
The TSG guidance on escalating balances will be moved into the Handbook as a Rule. This says that if there is a sustainable repayment plan in place, and the customer is keeping to the plan, a firm must ensure it suspends, reduces, waives or cancels any interest or charges as necessary to ensure the level of debt under the arrangement does not increase during that period. Whilst the FCA recognises a firm’s contractually legal right to apply interest and charges, they take the view that the new rule is justified in terms of delivering a better outcome for customers by increasing their chances of keeping to the payment plan and reducing their arrears.
The effect is that as long as the customer is meeting the terms of the payment plan, and for the period of that plan, firms must ensure interest and charges do not increase the level of debt.
Guidance has also been provided in relation to how fees and charges could vary over the term of an arrangement if a customer’s circumstances change and they want to pay larger amounts.
Income and expenditure assessments
Current guidance in CONC states that, where appropriate, firms should have regard to the provisions in the Common Financial Statement or equivalent guidance when undertaking income and expenditure assessments. The FCA is changing this to state that when a firm does assess income and expenditure they must do so in an objective manner, for example by reference to the SFS or equivalent tool. This is a subtly different emphasis. The FCA also confirms that firms are not required to undertake income and expenditure assessments, but when they do so they must do so objectively. Firms will need to determine for themselves whether their assessments are objective and evidence this.
One further change to note here is that where firms are able to, they should make records of the income and expenditure assessment available for customers. This will allow customers to share their record with other lenders. This also means that lenders can choose to use an assessment completed by another firm where it is appropriate to do so.
Lastly, a new rule is also being bought in which will require firms to ensure the effectiveness of their collections policies and procedures and their compliance with them at ‘appropriate’ intervals. The FCA has not defined what that time period should be but they have been clear in stating that they want firms to take an outcomes focused approach which very much ties in with the consumer duty requirements.
Outside of these two topics, there are lots of other changes for firms to consider including in relation to:
Supporting customers at risk of payment difficulty - expanding the rules and guidance to cover customers who are approaching arrears.
Vulnerable customers – incorporating the vulnerable customer guidance into the Handbook.
Forbearance options – expanding the list and introducing further examples and guidance.
Transparency and accessibility of forbearance options – particularly through engaging with customers through a range of channels taking into account vulnerability needs.
Money guidance and debt advice – strengthening the guidance on helping customers better understand how debt advice and guidance can help them, how to use any relevant tools and how to access support.
Providing information – helping customers better understand their financial position in relation to the debt, the potential impact of any forbearance options on the overall balance and the implications for their credit file.
Charges – guidance to help firms work out what are necessary and reasonable costs when setting fees and charges.
Sustainable arrangements – new rule requiring firms to take reasonable steps to ensure arrangements are sustainable and supporting guidance.
Reviewing forbearance measures – new rule to ensure firms must take reasonable steps to ensure any forbearance measures remain appropriate.
Repossessions and voluntary terminations – new rule and guidance that firms must not start or continue repossession action as long as the customer is meeting the agreed forbearance plan.
How long have firms got to make changes?
The new rules come into effect on 4 November 2024.
What’s the challenge?
Whilst there aren’t any huge new requirements being bought in, it is still important that firms take the time to understand the new rules and make the necessary changes. Now is not the time to be complacent. The regulator certainly isn’t going to now put BiFID on the back burner just because they have published new rules and the outlook for customers is still looking very difficult.
This provides a really good opportunity for firms to look at their collections practices with a fresh pair of eyes. It’s time to think hard about how things are being done, or not done, and whether this actually reduces harm for customers who are in financial difficulty.
We’ve got a great team with lots of experience of helping lending firms, particularly in relation to remediation projects and in arrears and collections. Get in touch for a chat.