NAVIGATING THE ISSUES
CONSUMER DUTY, FORBEARANCE AND GOOD OUTCOMES IN CONSUMER CREDIT
ARMALYTIX
Features
WHAT REGULATATIONS HAVE CHANGED FOR CONSUMER CREDIT FIRMS?
Making smart financial decisions in an uncertain economic climate can be challenging for some borrowers and in its 2022 to 2025 strategy, the FCA recognised this challenge, stating:
“Combined with greater vulnerability among consumers due to the pandemic, this (the rising cost of living) may drive greater demand for a range of credit products. Consumers will also increasingly look for new ways to manage and make more of their money.”
Consumer credit firms across the UK are facing new regulations and increased responsibility that mean they must do more to ensure that borrowers are offered the right products that offer fair value. Additionally, consumer credit firms must ensure that during the process of forbearance, when borrowers are unable to repay, that greater efforts are made to understand the borrower’s real financial situation and find a fair solution for both parties.
These new Consumer Duty regulations, which apply to products and services across the sector, have established higher and clearer consumer protection standards across consumer credit and the wider financial services sector. They seek to ensure that borrowers receive ‘good outcomes’ and that firms provide evidence that these outcomes are being met. Essentially, it requires firms to put their borrowers’ needs first and be aware of any vulnerability and affordability issues at every stage of the borrowing journey.
WHY IS THIS IMPORTANT TO CONSUMER CREDIT FIRMS?
Protecting borrowers from losing life-changing amounts of money and making sure clients can afford their financial commitments must be a priority. Not least because the FCA is threatening “severe penalties” for firms that are non-compliant:
‘Firms which don’t meet our minimum standards put consumers at risk. They also undermine trust in financial services and markets. We will act faster, challenging ourselves and testing the limits of our powers, to remove these firms from the market. Doing this will support us in reducing and preventing harm, creating a better functioning market.’
Consumer Duty has significant loan forbearance implications for consumer credit firms. This is considered particularly important to the regulators, with the Bank of England’s financial policy committee (FPC) reporting an increase in borrowers falling into arrears, and the number of borrowers falling behind on their debts expected to increase.
To mitigate this, the FCA has emphasised the importance of lenders providing appropriate support – treating borrowers in financial trouble with extra care to ensure that those who are already vulnerable do not get a worse outcome.
According to one FCA report:
- over half of borrowers have suffered a negative life event through no fault of their own and were facing financial difficulties as a result
- a significant proportion also had physical or mental health issues, which needed to be taken into consideration when seeking support on their financial difficulties
- 59% of borrowers in financial distress had missed one or more payments on credit products (including mortgages) in the last six months
- 40% of borrowers in financial difficulty had a negative or indifferent experience with their lender.
SO, WHAT DO FIRMS NEED TO DO?
It’s worth taking a moment to consider the aim here to ensure borrowers receive ‘good outcomes’. The specific meaning of these outcomes can vary from case to case but essentially are to not make the borrower’s life significantly worse because of the loan – unsustainable debt, unmeetable repayments, homelessness and other negative results.
To achieve these good outcomes, firms must have processes in place to identify vulnerable individuals and proactively offer appropriate forbearance options to financially distressed borrowers. These processes include:
- regular monitoring and review of borrower arrangements
- having an accurate and current understanding of the borrowers’ finances and circumstances
- training staff to identify vulnerability characteristics
- providing practical options beyond standard repayment plans and debt collection
- ensuring borrowers can contact them when they are in financial difficulty.
Regulators will look for evidence that these outcomes are monitored and that any issues are identified and addressed.
Some of these processes may be in place anyway but to achieve the others, consumer credit firms are going to have to understand the borrower’s real financial position. This may involve new tools and intelligent Open Banking technology that is already in use across the legal, accounting, gaming and other financial sectors. This Open Banking technology will enable consumer credit firms to get accurate transaction, income and other financial data direct from the borrowers’ banks and will automatically provide analysis and potential red flags to allow informed and effective decisions to meet the Consumer Duty requirements.
The new regulations, whilst important, have placed an extra burden on consumer credit firms. The right processes, technology and tools will not only lessen this burden but also ensure the costs of compliance are lower than the financial and reputational risks.
