Ahead of the pack
Ensuring five star complaint handling excellence

Published 20 June 2022

Today, most financial organisations have a robust complaint management process in place, but will this be enough for tomorrow? The past couple of years in particular have resulted in not only a rise in complaint numbers but an increase in customer expectations too, creating a perfect storm of complaints for financial services organisations to manage. As well, the complaints we’re seeing escalated to the Financial Ombudsman Service (FOS), a figure that has risen 58% year-on-year, are indicative of past practices, the impact of older decisions playing out in today’s complaints. In a similar vein, what we see tomorrow, will be a reflection of the practices of today. So, with all this in mind, if you’re looking to go beyond a tick in the compliance box, fulfilling compliance obligations whilst focussing on customer experience and operational excellence, what steps do you need to take to ensure that all-important five-star complaint handling is not just for today but for the foreseeable future? REDUCING FOS REFERRAL RATES To achieve quality outcomes, mitigating against referrals to the FOS, you need to instil quality right across your complaints processes. However, defining a one-size-fits-all standard for quality is nigh-on impossible, dependent on so many different factors, many of which will be personal to your business. But that’s not to say that making some changes won’t have a dramatic impact on quality, reducing FOS referral rates in the process. Take customer communications for example. Many complaints and escalations in particular can be avoided by higher quality customer communications. Better management of customer expectations builds trust and nurtures patience in the place of frustration. Similarly, if you focus on individual customer circumstances, ensuring a more nuanced, personalised approach, monitoring interactions and making necessary corrections, quality outcomes are far more likely. NAVIGAING FIRST POINT OF CONTACT RESOLUTION We all know that speed doesn’t always equate to quality outcomes, but it’s an undeniable fact that in many cases, first point of contact (FPOC) resolutions are preferable. Research shows that 75% of customers will remain as customers if you achieve a resolution within a week. Stretch this to three-to-four weeks and there’s a 50-50 chance your customers will go elsewhere. What’s standing in the way of FPOC resolutions is a combination of factors, none of which are insurmountable. A culture of empowerment and engagement is a must if you’re to have a team of case handlers who are capable of achieving FPOC resolutions, a culture that can be built with the right training programme, not to mention the hiring of employees for behaviours and not just previous complaint handling experience. The right tools and information are crucial, such as equipping case handlers with the systems and templates (where appropriate) needed to underpin swift resolutions. Finding the right balance between speed and quality is what counts. IMPROVING RESOLUTION TIMEFRAMES Not unrelated to the issue of FPOC resolutions is how you can optimise resolution timeframes. Just because the FCA calls for complaints to be resolved within eight weeks doesn’t mean that you need …

The art and the science
Part 36 offers explained

Published 20 June 2022

Litigation is expensive for everyone involved. It’s unsurprising, then, that the Civil Procedure Rules (CPR), which underpin litigation in England and Wales, contain extensive provisions encouraging and facilitating settlement, both before and after proceedings are issued. One such provision is the unique and self-contained settlement procedure contained in CPR Part 36. Settlement offers made pursuant to this part are, inventively, called “Part 36 offers”. A well-judged Part 36 offer is a powerful tool in ongoing (or prospective) litigation. However, there is both an art, and a science, behind their effective use. PART 36 OFFERS – THE DRAW The primary benefit of Part 36 offers, which can be made by both Claimants and Defendants, is the cost consequences which follow. Where a Part 36 offer is accepted within the relevant period (21 days from service), the Claimant will be entitled to their costs (including recoverable pre-action costs) up to the date of acceptance. However, if a Part 36 offer is not accepted, the costs consequences can be significantly tougher. Where a Claimant doesn’t accept a Defendant’s Part 36 offer, and obtains a less advantageous judgment, the Claimant is liable to pay the Defendant’s costs plus interest from the date that the relevant period expired. Where a Defendant doesn’t accept a Claimant’s Part 36 offer, and judgment against the Defendant is at least as advantageous to the Claimant, the Claimant will be entitled to: interest on the whole or part of any sum of money (excluding interest) awarded, at a rate not exceeding 10% above base rate for some or all of the period, starting with the date on which the relevant period expired; costs (including any recoverable pre-action costs) on the indemnity basis from the date on which the relevant period expired; interest on those costs at a rate not exceeding 10% above base rate; and an additional amount, which shall not exceed £75,000, and which is calculated as a percentage of the sum awarded (10% up to £500,000). For Claimants at least, then, the potential benefits of a well-judged Part 36 offer can be substantially in excess of any costs order they might hope to achieve at trial. THE ART In order for the consequences of a Claimant’s Part 36 offer to engage, the offer must be one which the Claimant subsequently matches or betters at trial. However, pitch an offer too low and it may be snapped up by the Defendant before you realise that you’ve agreed to halve the value of your claim and throw in a fruit basket for good measure. There is no magic formula for making a successful, and well-placed, Part 36 offer. Generally, though, this writer would suggest beginning your calculations with a figure marginally below the minimum that you would expect to receive at trial, factoring in a discount for litigation risk (i.e. the unpredictability of human behaviour – unreliable witnesses, grumpy judges, et cetera). THE SCIENCE Tactics aside, in order to be valid, a Part 36 offer must meet the strict requirements …

Moving to the cloud
Horizon scanning for financial services firms

Published 20 June 2022

Use of cloud technology in streamlining processes and enhancing the customer journey in the sale and maintenance of financial services products offers businesses obvious benefits, with the Bank of England (BoE) stating that “using the cloud allows businesses to work in a more agile way…from file sharing to managing fraud”. However, a changing regulatory compliance landscape, as well as cybersecurity and data privacy concerns, represent major hurdles for large-scale cloud technology adoption in the financial services sector. There has been widely reported examples of large financial services companies experiencing significant delays in adopting cloud technology transformation projects because of concerns related to managing customer information and operational resilience. At the heart of the challenge here is that, although technology and software companies offering cloud based solutions generally offer high degrees of resilience for services, such resilience is premised on a clear distinction of ‘provider versus customer responsibility’; customers bearing the responsibility for taking appropriate security measures with regards to data and system security obligations. In addition, when engaging with providers it can often feel like customers are “pushing uphill” when seeking to negotiate away from key risk positions in the provider’s “standard terms”; liability limits, service levels regimes and remedies for breach can often appear “set in stone”, and there is a resistance from providers to offer bespoke regulatory compliance warranties, audit rights or information security standards, arguing that their “hands are tied” because of the standardised nature of the services they provide in a multi-tenanted environment. From a wider market perspective, regulators have noted the significant concentration in the market for cloud providers, with only a handful of providers able to offer suitably scalable and efficient solutions for many financial service companies. Consequently, there is concern that should any of these providers fail, financial stability of financial institutions and service firms could be put at risk. Additionally, the ever present concern of management, maintenance and security of customer data continues to represent a key focus for regulators (and customers) in the financial services sector, with regulators grappling with the challenge of customer retention being based upon the level of customer data controlled by a firm. It is in this context that we can expect to see further developments in the move to adopt further regulation on the use of cloud service providers by financial services firms. Consistent with its previous initiatives on operational resilience, we eagerly await the release of the Financial Policy Committee (FPC), the BoE Prudential Regulatory Authority (PRA) and Financial Conduct Authority’s (FCA) joint discussion paper later this year, which will outline suggested plans on how to mitigate the impact of over reliance on cloud service providers for the performance of critical functions. So what does that mean for financial services firms in the meantime, especially when adoption of cloud technologies is almost a necessity in retaining efficiency of service? When using or moving to cloud based solutions here are a few issues to bear in mind: Undertake your own due diligence on data security, control …

Earning arrestment
It’s done differently in Scotland

Published 20 June 2022

This series looks at the enforcement options available to creditors to recover sums due by a debtor in Scotland. In a previous edition we looked at Inhibition which is similar to a Charging Order in England. In this edition, we now turn to look at how Earnings Arrestment operates in Scotland. Earnings Arrestment in Scotland is a form of diligence (enforcement) which can be used by a creditor to recover sums due from a debtor. If an Earnings Arrestment is in place the debtor’s employer must deduct sums from the debtor’s salary/wages on a daily, weekly or monthly basis, depending how often he is paid and pay it over towards the debt. A Scottish Earnings Arrestment is similar to an Attachment of Earnings in England and Wales but with one particularly significant difference. In Scotland the deductions from a debtors salary/wages are not calculated based on the debtor’s income and expenditure. Scottish deductions are calculated based on fixed amounts set out in statutory tables. This entails that an earnings arrestment in Scotland is not restricted to arresting or attaching the amount which the debtor can actually afford but will arrest or attach an amount fixed by statute. Earnings Arrestment: some key points A creditor must have firstly obtained a court decree (judgment) or have an equivalent document (e.g. Summary Warrant or registered document of debt). The debtor must have been served with a Debt Advice and Information Pack (DAIP) and a Charge for Payment (a final formal demand for payment). At least fourteen days must then have passed since the Charge for Payment was served without the debt having been satisfied. Sheriff officers can then be instructed to serve an Earnings Arrestment Schedule on the employer of the debtor. The Earnings Arrestment Schedule orders the employer to make deductions from the debtors salary/wages every week, month or day, as appropriate whilst he is employed or until the sums are fully repaid. There are consequences for the employer if it fails to comply and make the deductions, including the employer being found liable to make payment of the sums which should have been paid. If an Earnings Arrestment is already in place and another creditor wants to recover monies from the same debtor from his wages/salary then a Conjoined Arrestment Order application can be made via the court. If granted the court then collects the deductions and pays them out to each creditor. The Debtors (Scotland) Act 1987 sets out how amounts to be deducted are calculated, which includes a minimum level of income which is protected. The current statutory tables of deductions applicable to weekly and daily earnings, as well as monthly earnings, are available within The Diligence against earnings (Variation) (Scotland) Regulations 2021. Whilst the deductions are set at a statutory amount, if a debtor engages following implementation of an Earnings Arrestment and/or a creditor has concerns about the affordability and sustainability of the deductions then, in practical terms, an informal payment arrangement is often reached with the debtor …

Fair and square??
Regulated and exempt loan agreements

Published 20 June 2022

ANALYSIS OF A RECENT CASE BROUGHT ON THE BASIS OF ‘UNFAIR RELATIONSHIP’ Liverpool, the location of the 2022 CCTA conference, is also the backdrop for a recent decision on the boundary between regulated and exempt agreements, and on the ‘unfair relationship’ question. A couple (since divorced) wanted to borrow £250,000, secured by a second charge over their home, with interest rolled up for six months. They declared the capital was to repay business debts, but not whose ‘business’ this was. Using the ‘business purposes’ exemption, the lender advanced £250,000. Evidence later showed the husband had a business partner and the loan was to pay that partnership’s debts. The wife subsequently brought a case against the lender claiming the relationship was unfair. BORROWING FOR BUSINESS PURPOSES The loan was taken out in 2014, when borrowing above £25,000 for business purposes was exempt from regulation. However, declaring a business purpose in the agreement was not enough if evidence showed the lender knew, or reasonably suspected, the loan was not to be used by a business run by the borrowers. The court held that a debtor (in this case the wife) must prove a loan agreement is regulated and that the business exemption does not operate. Holding that business exemption can only apply if the loan was taken for a business run by all borrowers, the court decided this loan was to repay existing borrowings of a business run by the husband and his business partner, not his wife. As the lender knew this, the business exemption did not apply. Accordingly, the loan agreement was regulated – and being improperly executed, could not be enforced without court order. UNFAIR RELATIONSHIP The issue was whether the loan was unfair if the wife was not borrowing to benefit her own business. The wife complained her relationship with the lender was unfair to her, as the lender: knew she was inexperienced in obtaining loans did not carry out affordability checks knew her marital difficulties and concern about losing her home did not advise her to obtain independent legal advice appointed receivers who conducted a ‘restricted marketing campaign’ colluded with her ex-husband to seize and develop the home for its benefit. DECISION Where a debtor alleges an unfair relationship, the lender has to disprove it, but the debtor must still identify facts supporting that allegation so the lender can respond. Here, had the money not been made available, the bank would have repossessed and sold the matrimonial home, with no surplus being available. Dismissing the wife’s complaints, the judge also noted the funding allowed the borrowers a breathing space in which to try to sell the property. In summary, the court decided the wife had signed the ‘business purpose’ declaration despite realising she was not borrowing to support any business of her own, because this was the only way of getting funding which might preserve her matrimonial home from imminent repossession by the bank and a forced sale. While the court found the loan agreement to be …

CCTA 2022 Conference
Write-up

Published 20 June 2022

MORNING SESSIONS We held our first conference since before the pandemic, on the 27th April in Liverpool. Here we pick up on some of the themes and discussions from the speeches and panel sessions that made up the agenda. After our Chief Executive Jason Wassell opened the conference, we began our first panel session, A mile in their shoes: understanding the alternative lending customer, sponsored by Lantern. The purpose of this panel was to look at customers and understand how they manage their finances. Panellists told how the pandemic had different impacts on different segments of consumers. It had also driven change in how customers want to interact. Customer engagement is therefore increasingly important via digital channels, but there are some that still prefer face-to-face interaction. After our morning break which included a visit to the exhibition area for many, the keynote session of the day was delivered by Brian Corr, Interim Director of Retail Lending at the FCA. We are very grateful that Brian was able to attend the entire conference and dinner to hear from members. In his speech Brian talked about the role alternative credit can play within the wider market. He also referred to the regulator’s three year strategy document which sets out the importance of reducing and preventing harm, while promoting competition and positive change. Access to credit was also cited as borrowers need to have access to affordable products which meet their needs. Lastly, Brian talked about how the Consumer Duty measures are expected to allow the FCA and lenders to become more adaptive in delivering good customer outcomes. We then moved on to a panel session that looked in more detail at some of the regulatory measures, sponsored by Themis Consultancy. There was a general consensus among the panelists that the financial services industry had reacted quickly during the pandemic and became part of the front line approach. The Consumer Duty was described as the biggest challenge for lenders moving forward and it was suggested that firms would benefit from starting to prepare now. This could include asking ‘do we understand our target market’, reviewing the customer journey and conducting a gap analysis. AFTERNOON SESSIONS After lunch, the third session of the day commenced with a presentation from the Illegal Money Lending Team, delivered by Cath Wohlers. Cath updated the conference on the current state of illegal lending, talking about loan sharks that are increasingly operating online using social media to entice and exploit new victims. She also mentioned the recent report from the Centre of Social Justice that highlighted that one million people are believed to owe money to an illegal lender. It was then time for a panel on technology, looking at new innovations in lending, kindly sponsored by Aryza. While ‘a well-regulated successful credit industry can only be a good thing’, the provision of open banking and digital customer communication have provided more options to the credit industry to explore as part of the customer journey. We heard that the …

Empowering consumers
The use of credit technology

Published 20 June 2022

For UK consumers, the current economic climate continues to create challenges. As the cost of living increase continues to intensify, many are concerned that they will no longer be able to keep up with their regular monthly outgoings. In fact, the Office for Budget Responsibility, predicted that UK household real income in 2022 would contract at the sharpest rate since records began in the 1950s. Recently UK consumer price inflation has risen sharply and significantly impacted the price of food, durables, consumer goods, fuel, and energy. Fuel costs are recognised as one of the biggest contributors to this rising inflation, with average petrol prices increasing by 12.6p per litre between February and March, the largest monthly increase since records began in 1990. The war in Ukraine is also contributing to this uncertainty. For lenders, these unpredictable times are a cause for concern, significantly impacting the consumer’s ability to pay back credit. Creditors are looking for ways to not only mitigate risk, but also support their customers. Before businesses can support struggling consumers, they need to identify them. According to one study, almost a third of businesses admit that they are ineffective at identifying at-risk consumers, while an inability to spot ‘early warning signs’ was a critical challenge for 27 per cent of respondents. By running far more sophisticated affordability checks that factor in a range of credit, open banking and transactional data, lenders will benefit from greater insight around a person’s true financial position, allowing action to be taken immediately. Should any at-risk factors be flagged, lenders then need to be able to proactively monitor these cases on an ongoing basis, regularly engaging with the individual to understand if their circumstances have changed and then taking the most appropriate action. This has been a long-standing challenge for those reliant on legacy technology or manual processes, especially as case volumes increase. Specialist systems can digitally guide consumers through their money management journey, explaining their options in an easy to understand and step by step format. By utilising open banking data and smart software, these systems connect customer accounts, cards, debts, and assets, identifying the most appropriate and helpful offers available. These tools can be applied at all stages from acquisition through to recovery and should provide early warning of a customer struggling with their situation. With the cost of living continuing to spiral, it’s crucial that banks and lenders are taking action to ensure positive financial outcomes for consumers and prevent a tidal wave of debt. For the consumer, knowing that they won’t have to have a difficult conversation over the phone or in-branch will also remove a hurdle that might previously have delayed them from seeking help. To find out more about Aryza’s solutions visit www.aryza.com.

Dear CEO
Are you doing enough?

Published 20 June 2022

A ‘Dear CEO’ letter is fast becoming the choice instrument of communicating with regulated firms. Such letters serve to focus the attention of a firms’ CEO and accountable senior managers on crucial issues for the FCA. On this occasion, the FCA issued a Dear CEO letter on 6th May 2022 to consumer credit firms demanding immediate action to ensure firms’ financial promotions are clear, fair and not misleading. While this letter was aimed specifically at credit brokers and firms providing high-cost lending products, this warning letter should also be a reminder to regulated consumer credit firms of the FCA’s expectations in respect of financial promotions. ENVIRONMENTAL CONTEXT Driven by the cost-of-living crisis, the FCA expects an increased consumer demand for such products and does not want to see regulated firms exploiting this economic environment by promoting and subsequently advancing unsuitable, unaffordable and unsustainable loans. It has committed to keep the sector under close review by carrying out proactive surveillance and monitoring online credit advertising to check that firms are complying. What firms need to do in response to this Dear CEO letter: REVISIT THE REQUIREMENTS Ensure all relevant staff involved understand the regulatory requirements, including what constitutes a financial promotion, and the basic rules set out in CONC, the Advertising Standards Authority’s Cap Code and associated advice, the Consumer Protection from Unfair Trading Regulations and the relevant data protection regulations governing the provision of opt-out. IMMEDIATE REVIEW Undertake a risk-based review of your financial promotions in use and re-assess against the CONC and CAP Code requirements, prioritising those that drive the highest proportion of customers to apply for credit through your firm; ASSESSMENT OF SYSC Assess your systems and controls around the design and approval of financial promotions are fit for purpose, including but not limited to a financial promotions policy and procedure, staff training, financial promotions register, an approval form, first and second line of defence checks, etc. BOARD AWARENESS Ensure your Board is aware of this letter and the actions to be taken so that sufficient challenge can be raised, and evidence documented. CONSEQUENCES OF IGNORING THIS LETTER In the event the FCA identifies shortcomings in a firm’s financial promotion(s), they will consider what further action may be appropriate to take. They have the power under section 137S of FSMA to direct a firm to withdraw an advert (or its approval of an advert), or to prevent it from being used in the first place. More broadly, non-compliant financial promotions can quite often prompt the regulator to apply more scrutiny to firms, as shortcomings in financial promotions may serve as an indicator of wider deficiencies such as a lack of effective systems and controls, poor governance and/or a weakness in staff competency, capability and sufficient knowledge of the regulatory requirements. Furthermore, the imminent Consumer Duty will bring an added dimension, resulting in a greater expectation on firms to demonstrate their communications enable customers to fully understand the features, benefits and limitations of the products and services they offer.

Navigating the maze
The importance of credit and the Consumer Duty

Published 20 June 2022

Inflation is biting. Food, petrol and energy bills – the essentials for many are rising at rates not seen for a generation. Many households are struggling and will continue to have to make some difficult choices through these challenging times. The demand for credit is therefore likely to rise, as is the support that existing borrowers are likely to require. As a result, the focus on the consumer credit sector from the FCA will be a key priority. This was the key message from Brian Corr, Interim Director of Retail Lending at his recent speech at the Credit Summit 2022, where he emphasised the focus of the FCA on ensuring firms are delivering the right outcomes for consumers who use credit products and ensuring that borrowers get the right help and support from their providers when they get into financial difficulty. As a result, the regulator is focusing on key outcomes and raising the bar through the implementation of the new Consumer Duty. As part of this article, we will look at the key read across to the sector for the Consumer Duty. WHAT IS THE NEW CONSUMER DUTY? The new duty is a package of measures that consists of a new principle, rules, and guidance. There are three key elements which underpin the proposed duty, which are as follows: 1. THE CONSUMER PRINCIPLE This is designed to improve overall standards of behaviour and the current wording which is under consultation is as follows: ‘a firm must act in the best interests of retail clients’ or ‘a firm must act to deliver good outcomes for retail clients’. 2. EVIDENCING SPECIFIC BEHAVIOURS The regulator wishes to see three key behaviours from firms: a. taking all reasonable steps to avoid foreseeable harm to customers b. taking all reasonable steps to enable customers to pursue their financial objectives c. and to act in good faith; 3. FOCUS ON FOUR OUTCOMES The duty is expected to set more detailed expectations around four specific outcomes: communications, products and services, customer service and price and value. In brief, under these proposals, firms will have a duty to make sure their customers are receiving fair value and fair products, that they understand how to use their products/services and receive the support they need to do so. Firms will have to consider the needs of their customers (including those in vulnerable circumstance) and how they behave, at every stage of the product/service life cycle, extending their focus beyond ensuring narrow compliance with specific rules, to also focus on delivering good outcomes for customers. Whilst some firms may already be meeting some or all of the expectations above, a key challenge for many firms ahead of any rules being finalised will be how to evidence the steps taken. The broad nature of the consumer principle alongside a requirement to evidence ‘outcomes’ will put further emphasis on the firm’s culture, governance, management information and recording keeping. FCA EXPECTATION OF FIRMS The FCA has consulted twice on the proposals and expects …

CCTA Comment on FOS future funding discussion paper

Published 16 June 2022

On Tuesday the Financial Ombudsman Service (FOS) released its long-awaited discussion paper on its future funding model. For some time, we have been engaging with the FOS on its funding model and the burden it places on the alternative lending sector. We have been clear that the organisation needs a more sustainable model moving forward. We have seen a series of case fee rises in recent times and a reduction in the number of free cases which have all had an impact on firms, particularly medium and small businesses. This needs to be considered as part of the future model. This is an even worse position when you realise that the FOS has only got the figures to make some sense by dipping into its reserve funds. The paper contains some of the ideas we have already put to the FOS such as the need for Claims Management Companies (CMCs) to pay a fee to bring a case to the FOS to ensure a higher quality of claims. However, while we have forced them to consider this idea, I think it is clear that they are not overly keen. So, we will be working with other organisations to keep the pressure on. I am sure we will be discussing our views on the FOS’s suggestions within this paper at the upcoming Consumer Credit Trade Forum which brings together trade associations and the FOS senior leadership.

CCTA response to the Financial Ombudsman Service (FOS) final plans and budget for 2022/23

Published 30 March 2022

“We are disappointed that the FOS has decided to implement the proposals it consulted on earlier this year, despite the feedback it has received. “For some time, we have been talking about the financial pressure our members are under from the current fee structure of the FOS. “The free threshold has been reduced from 25 to just three cases. This will mean that around 20 per cent more firms will now have to pay case fees, which will disproportionately affect smaller businesses. That alone represents a cost of over £16,000 to a firm with 25 cases. “Today’s publication also means a large rise in the compulsory jurisdiction levy paid by firms will go ahead. “There remains little explanation of why the organisation’s cost base will rise by over £40 million for the coming year and is an example of the wider concerns we have had about the financial model of the FOS in recent years. “We need to look in more detail at how the FOS will be sustainably funded in the future. We will be discussing this with the FOS in the coming weeks to outline the industry’s position. We need to ensure the organisation delivers value for money for consumers and firms alike.”  

CCTA comment on CSJ report on tackling illegal money lending in England

Published 21 March 2022

We welcome this new report and this study into the scale of illegal money lending. Even before the current cost of living crisis, we have talked about the increasing problem of loan sharks and the real pain they cause to families across the UK. It is now estimated that over one million people are relying on illegal lenders. The CCTA has highlighted the sharp decline in the supply of regulated credit in recent years and what this will mean for a group of individuals that struggle to borrow elsewhere. While we agree that Credit Unions and other community schemes need support, experience shows they can’t fill the space left by commercial lenders leaving. Families need access to a blend of commercial and not-for-profit lenders providing financial products that meet their needs. Without this, there will be a growing number of these horror stories of illegal lending.