Features | 20/07/21

Through our proactive support of firms and our work as a Skilled Person, we have seen a substantial volume of activity arising from the FCA’s thematic focus within specific sectors of financial services. One recent area of focus has been the payday sector, with the FCA focusing largely on responsible lending and complaint handling.

Firms in this sector, as in any other, wish to ensure good outcomes are provided to customers, as per the mission and values they lay down as their reason for doing business. If the desire to consistently improve customer outcomes is the premier consideration, there is certainly also a place on firms’ agendas for operating a technically compliant business – after all, this is essentially what is meant by ‘operating to the letter and the spirit of regulation’.

We have recently seen the FCA starting to focus on other sectors of financial services such as guarantor lenders, home collected credit and pawnbrokers, even some initial activity around the motor sector. The focus of attention is still very much on responsible lending and complaint handling, but in addition we are starting to see relending and arrears and collections being an increasing focus.

For firms in this sector, who have operated under the jurisdiction of the FCA for a number of years now, there can still be challenges in ensuring that they are sufficiently focused on the outcomes they are providing, rather than looking at compliance from a ‘technical’ perspective. How do firms ensure they are looking at their customers’ outcomes holistically to inform technical compliance, and not the other way round?

There is no such thing as no attention from the FCA, and neither would we suggest we would want this as an industry. During the early stages of COVID, we witnessed fantastic collaboration between firms and the FCA at the start of an emerging problem. During these early stages, we saw firms proactively influencing the FCA’s decision making through the recounting of their joint experiences, and it ultimately led to good – and consistent – support for customers in a difficult time for many.

Proactivity comes into play quite nicely when looking at this issue, as being proactive is an effective means of avoiding unnecessary issues crystallising within your customer base. Being able to demonstrate your proactive approach to looking at customer outcomes can be an effective means of preventing matters from escalating if an unanticipated issue does affect your customer base and attract the attention of the regulator. We look at three areas where firms can do this right now.

Responsible lending was already a major area of concern for the FCA and regularly landed in the FCA’s risk outlook prior to the Coronavirus pandemic. As a result, the FCA clarified and updated its affordability requirements in 2018. The regulator has been unequivocal in its requirements in regards to responsible lending practices.

When investigating why poor practice can occur, it is important to look at the guidance currently available to lenders. The challenge with compliance, however, is that the handbook leaves many rules open to interpretation, and this is compounded as the FCA have formulated their expectations over the years.

Our recommendation here is for firms to review the FCA published material such as consultation / finalised guidance papers (e.g. FCA PS18/19) and Dear CEO letters (e.g. 15 October 2018), then benchmark their own approach to those of FCA expectations, making changes where gaps are identified. But as alluded to above, there are unwritten expectations that must be known and considered, and this is where the CCTA and its members come into play, as they will be able to share their insight and experience and guide firms with current FCA expectations.  ­

The FCA published its vulnerable customer guidance towards the end of February. It is a great read as it provides insight and many examples of good practice. However, the message from the FCA is very clear, in that it expects firms to read the guidance, assess this against their current approach, make changes where needed, and continually monitor and adapt based on learnings.

You cannot help but recognise a tougher tone compared to previous papers from the FCA on vulnerable customers. To summarise, the guidance says that if no action is taken following the paper, or if the FCA deem action taken to be insufficient, expect this to lead to supervisory action and potential enforcement.

So, our recommendation is simple; review the paper as an absolute priority, undertake a gap analysis and implement changes where required and keep monitoring and adapting. Oh, and as always, keep thorough records to show progress ready for when this is requested – which it will be at some point in time.

Another area of continual focus should be on complaint handling. This is a fascinating area, as it is one of the few (if only) areas that is visible to everyone due to the regular reporting to both FCA and FOS which, as we know, is published at frequent intervals.

We know from experience that FCA decisions are made using this data. We even use this data ourselves as it seems to be quite predictive of what we will find not just when supporting firms with complaints, but in other areas of a business’s operation. It is fair to say that negative outliers within this data are susceptible to attention, so understanding how rules and expectations must manifest themselves as actions for firms is vital here.

Using the complaints data, there are a few obvious areas where attention is to be expected, be that from the FCA or media. For example:

1. Highest complaint volumes compared to peers
2. Firms that have a low uphold rate (FCA) and high overturn rate (FOS)
3. Firms that have low uphold rate (FCA) when comparing two or more similar firms to each other
4. Similarly, firms which have high overturn rates (FOS) when comparing two or more similar firms to each other

It is also worth highlighting that CMCs have, in the past, alluded to using this data to assess whether it is worth sending cases to FOS. For firms that have a high FOS overturn rate, the success rate appears that much higher and therefore ‘worthwhile pursuing’.

Again, be proactive and review your complaints function to ensure it is as effective and efficient as it can be at getting the right customer outcome in the first instance. Consider these four areas:

Communication – As we found in our Complaints Outlook 2021 report, customers want it to be easy when making a complaint and want to be kept informed throughout the process. This can be achieved by acknowledging receipt of complaints promptly and clearly and, if delays are likely, providing an estimate of when the customer is likely to have a resolution. Also, you should send regular communications throughout the process to keep customers informed of progress.

Resource – Ensure the complaints team is adequately resourced and trained to handle complaints in line with existing regulatory requirements. Where this is not possible at a given point in time, focus the resource on priority customers such as those in vulnerable circumstances.

Outcomes – Fair customer outcomes are of paramount importance. They keep customers and the regulator happy and reduce the likelihood of extra costs and resources required when customers choose to escalate to the Ombudsman. Quality assurance pays dividends at this current time and is an important role in evidencing outcomes and learning from mistakes.

Root cause analysis – learnings from complaints should continue to be driven by root cause analysis that is fed into the firm’s senior management and appropriate actions should be taken by the business in a timely manner to prevent future reoccurrence of issues.

The final point on complaints is related to the FOS. An ideal scenario for firms would be to reduce the number of customer complaints that arise in the first place and, from that, the number that proceed to the ombudsman stage. We recognise that for many of you this is a perfect world scenario and perhaps one where most complaints are not about matters that occurred years ago. In other words, irresponsible lending complaints.

Therefore, the importance of good complaint handling is further elevated, because whilst it will not prevent complaints being received, it can lead to fewer referrals to the FOS which, in turn, reduces overall operational costs and keeps customers happy. Firms which have complaints escalated to the FOS should reflect on and evaluate whether they are satisfied with their processes:

Have complaints been dealt with fairly and correctly by the customer service team?
Could anything have been done differently to avoid escalation to the FOS?
Were there any common sticking points that reduce the likelihood of resolving complaints?

Equally, firms can stand to benefit from learning from the experiences of competitors, while also looking at existing case studies available through the FOS to inform and improve complaints handling policies and processes.

There will be some challenging times ahead for the consumer finance sector, perennially motivated by the desire to ensure a safe, fair and reputable market for consumers.

However, there are exciting times ahead. The value this sector offers customers is phenomenal, if sometimes misunderstood, and customer demand for the services offered have done nothing other than increase. Those firms that operate responsibly, proactively engage and do the right thing by their customers and the regulator, are those likely to thrive and prosper.

Richard Brown
Technical Advisor