Customers with existing credit (whether loans, credit cards or hire purchase deals) are frequently targeted with tempting promotions for 0% introductory deals or personal loans with lower APRs than they currently pay. Debt consolidation solutions can be hugely beneficial to some customers who struggle with their monthly debt repayments, a situation likely to worsen if the pressures on the cost-of-living increase. However, whilst consolidating debts can make monthly budgeting easier or may mean a customer pays lower APRs, these are often accompanied by a significant increase in the overall amount the customer repays.

It’s not unreasonable to assume, particularly as the regulatory landscape continues to evolve, that the FCA may expect improvements in customer journeys and increased clarity in the information presented to customers. This not only includes the monetary benefits of consolidation, such as a lower monthly repayment or a lower APR, but also the salient disadvantage of how much larger a customer’s overall indebtedness may become.
It would not be ‘disclosure for disclosure’s sake’, but an evolving step in helping the customer work out whether any proposed consolidation may be in their best interests. At first glance, it would be easy to assume this is a straightforward decision for a customer in problem-debt. However, they might benefit more from seeking debt-advice rather than simply re-borrowing.

If the FCA’s expectations do evolve in this area, the crux is likely to be on achieving balance at all stages of the customer journey. This includes ensuring the customer is aware of the risks of consolidation whilst not being actively discouraged from something which has the potential to make monthly budgeting easier.

APPROACHING LENDERS

If a customer approaches a lender directly, for example when seeking an unsecured personal loan from their current account provider, it should be a reasonable expectation that the lender sets out an individual, tailored quotation, including the overall cost of servicing any new debt which the customer may enter, and how the overall cost of the new borrowing compares with the customer’s existing debt.

Doing this will never be straightforward, as the lender would have to make a series of assumptions, including on the stability of future repayments a customer may make on their existing borrowing, and on the stability of future interest rates in any existing variable-rate credit products.

This information, even if only illustrative, would help the customer make an informed choice about whether to enter the new borrowing to repay existing credit, retain their existing debt, or seek alternative debt-solutions. The provision of information at this level could be a future expectation from the regulator, and one which firms should consider now.

Frequently, customers do not make a direct approach to a lender – at least not without having first used price-comparison platforms, eligibility-checking services, or other more traditional forms of credit brokers. By the time a customer submits a ‘final’ application (i.e. a hard-credit search in the anticipation of entering into a specific regulated credit agreement), they could have already gone through a series of steps such as:

1. being declined by a lender
2. approaching a broker to benefit from eligibility-checking services before applying to further lenders
3. being declined again and proceeding to another credit broker where the journey may start again.

This means that a lot of brokers and lenders may have involvement in the chain of events leading to a customer shopping around for credit before entering into a regulated credit agreement. Further complications can arise where one of the solutions presented to a customer is a debt-consolidation loan to be secured on their home by way of second charge, when the customer was initially seeking unsecured credit. Whilst this will be subject to advice and recommendation under the FCA’s mortgage suitability rules, the customer should be in no doubt that they are securing previously unsecured debt, particularly important when the product they initially sought was likely to have been unsecured.

STEPS FOR FIRMS TO FOLLOW

Considering the evolving regulatory landscape, firms would benefit from reviewing the following elements:

• the customer journeys they are part of
• their inflows and outflows of customer data up and down the broker-to-lender journey
• what disclosures and messaging their customers have received, and are yet to receive, as they move along the journey towards making the final decision whether to borrow.

Simply making or receiving an introduction, depending on whether you are a broker or a lender, without a detailed understanding of the customer’s journey and experience may no longer be considered a sufficient duty of care for the customer’s information needs.