FCA proposes stronger protections for borrowers in financial difficulty: consumer credit focus
Financial Conduct Authority Consultation Paper CP23/13 – Strengthening Protections for Borrowers in Financial Difficulty: Consumer Credit and Mortgages
Publication date: 25 May 2023 | Consultation closes: 13 July 2023 | Final policy: H2 2023 | Expected entry into force: H1 2024 | Source: https://www.fca.org.uk/publication/consultation/cp23-13.pdf
Braithwate summary
In-line with the FCA’s focus on ensuring the financial services sector supports consumers experiencing cost of living challenges, this new consultation sets out permanent handbook rules on how consumer credit and mortgage firms should handle customers facing financial difficulty, building on guidance introduced during the Covid-19 pandemic.
While these new rules represent a ratcheting up of the FCA’s expectations of how firms support customers in financial difficulty, many firms are already working on enhancements to their arrears and vulnerable customer processes to address the imminent arrival of the FCA’s Consumer Duty (effective 31 July 2023) and the 2021 guidance on the treatment of vulnerable customers.
This blog extracts the key aspects of the FCA’s proposals, from the perspective of a consumer credit firm.
Likely impacts for consumer credit firms
Forbearance policy and procedures will need to be reviewed – and most likely fleshed out with additional detail to meet the prescriptive requirements of the proposed rules:
FinTech lenders who employ Open Banking to access borrowers’ personal current account transaction history already have a good idea of the customer’s overall financial condition in near to real-time; this puts them in an better position to identify and assist customers facing financial difficulties. Under the new rules, lenders will be required to act if they are able to proactively identify and reach out to customers who are experiencing difficulties before the customer reaches out to the firm. This will require new policy choices and operational processes.
A key challenge will be to design “individually tailored” forbearance programmes; FinTech lenders will want to automate this process as far as possible, but it’s clear the FCA expects a tailored response to customers’ individual circumstances.
One option the FCA suggests considering is “transferring the overdraft debt to an alternative credit product on more favourable terms (refinancing)” – for some firms, this may present an opportunity to introduce additional, longer-term lending products.
Information on debt advice / counselling – many firms will need to enhance the prominence of debt advice information provided to consumers, especially those facing difficulties.
Income and expenditure assessments – some fintech lenders already conduct these assessments automatically; these firms will need to ensure the assessment and its output is recorded and made available to share with customers. Other firms will need to standardise their assessment process and ensure it is documented and made available.
Firms adopting the Standard Financial Statement format will have an advantage here.
Charges during arrears - it may be necessary to adjust the firm’s charges to customers in arrears if they do not meet the FCA’s requirement that they are “no higher than necessary to cover the reasonable costs of the firm”.
The consultation provides guidance on what are considered reasonable costs.
Key excerpts from the consultation paper
Background
1.2 During the coronavirus pandemic we introduced our Tailored Support Guidance (TSG) to make clear how firms could support customers in financial difficulty. These were last updated in 2021 for Consumer Credit and Mortgages.
1.3 This consultation sets out how we plan to incorporate aspects of the TSG into our Consumer Credit (CONC) and Mortgages and Home Finance: Conduct of Business (MCOB) sourcebooks and withdraw the TSG. We also propose targeted additional changes to support consumers in financial difficulty
Key proposals
1.8 Chapter 3 outlines further details on all the aspects of the TSG which we propose to incorporate into the Handbook. Key proposals include:
broadening the scope of relevant consumer credit and mortgage chapters to make clear to firms that appropriate support should be provided to customers in or at risk of payment difficulty
enhancing our expectations around customer engagement and providing information including on money guidance and debt advice
expecting firms to consider a range of forbearance options and take reasonable steps to ensure arrangements remain appropriate
for consumer credit, expecting firms to take into account the customer’s individual circumstances when providing forbearance (which is already expected for mortgage firms)
1.9 We also propose targeted additional changes, separate to the TSG, to support consumers in financial difficulty. For consumer credit firms, we propose an additional change beyond the TSG to:
introduce guidance to help firms determine their necessary and reasonable costs in setting fees and charges
2.2 Some of the harms identified arise from firms:
not providing forbearance to customers at risk of payment difficulties before they miss a payment
not effectively engaging with customers including about money guidance and debt advice
not tailoring forbearance options to individual circumstances
Policy details
Credit
3.4 We propose to extend relevant CONC rules and guidance to require that firms should provide appropriate support to customers approaching arrears where the customer indicates to the firm that they are at risk of not meeting one or more repayments when they fall due. These proposals build on our existing requirements for firms to monitor a customer’s repayment record and take appropriate action where there are signs of actual or possible repayment difficulties (CONC 6.7.2R and CONC 6.7.3AR) and should help to ensure that customers are provided with appropriate support at an earlier stage.
3.5 For overdraft customers we propose to amend CONC 5D to reflect the expectations set out in our Overdrafts Finalised Guidance that firms should identify customers who are showing a pattern of repeat use as early as possible, taking account of any relevant information held by the firm including information provided by the customer and information from the customer’s personal current account in respect of which the overdraft is provided.
Reviewing the effectiveness of policies and procedures
3.10 The TSG highlighted the importance of having policies and procedures that are fit for purpose and that can respond to changes in the external environment. Our supervisory work highlights the equal importance of responding to findings from internal reviews, such as findings from front-line quality assurance. We are therefore consulting on adding a new rule to both CONC 7 and MCOB 13 to require firms to ensure the effectiveness of any policies and procedures put in place for customers in or at risk of payment difficulty, and the firm’s ongoing compliance with them, is reviewed at appropriate intervals.
Customers in vulnerable circumstances
3.13 Many customers in financial difficulty will display characteristics of vulnerability. The TSG emphasised the need for firms to ensure they respond to the needs of customers with vulnerable characteristics who may be at the greatest risk of harm. It noted the importance of adapting communication methods to consider customer needs and preferences, as well as the need to tailor forbearance to take account of their individual circumstances. c.f. FG21/1 Guidance for firms on the fair treatment of vulnerable customers (https://www.fca.org.uk/publication/finalised-guidance/fg21-1.pdf)
3.16 We propose to replace the narrowly drawn expectations on vulnerability in CONC 7 and MCOB 13 with new guidance. We propose that this reminds firms that they should have regard to the expectations set out in FG21/1 on the fair treatment of vulnerable customers, including when developing policies and procedures for customers who have, or may have, payment difficulties. Firms will need to use their judgement to consider what each section of the Vulnerable Customer Guidance means for them and what they should do to make sure they treat customers fairly.
Forbearance options
3.17 It is important that firms are flexible when dealing with customers who have or may have payment difficulties. We expect firms to consider a range of forbearance options and take account of customers’ individual circumstances when determining and providing the appropriate support.
Credit
3.18 We propose adding examples of forbearance and due consideration that may be appropriate to the individual circumstances of the customer to the existing examples set out in CONC 7.3.5G so that they include:
suspending, reducing, waiving or cancelling any further interest and charges
allowing deferment of payment of arrears
accepting no payments, reduced payments or token payments for a reasonable period of time
agreeing a sustainable repayment arrangement with the customer that allows the customer a reasonable period of time to repay the debt
transferring the debt to an alternative credit agreement (refinancing) to help the customer reduce the debt over a reasonable period of time in such a way that does not adversely affect the customer's financial situation
for articles in pawn under a regulated credit agreement, considering extending redemption periods and delaying intention to sell where appropriate
3.19 We also propose clarifying that these examples are not exhaustive.
Overdrafts
3.20 Forbearance options and other support appropriate to the individual circumstances of the customer proposed to be included in CONC include:
reducing or waiving interest
transferring the overdraft debt to an alternative credit product on more favourable terms (refinancing)
agreeing staged reductions in the overdraft limit and balance (agreeing a repayment plan)
Transparency and accessibility of forbearance options
3.25 In the TSG, we set out how we expected firms to engage with customers and how they should be transparent about the range of options they can consider. This notes that some customers can become disengaged where they are required to complete detailed forms with little help or may not have the capability and understanding to assess their needs without support. Some customers, including those with characteristics of vulnerability, may find it more difficult to interact offline and may prefer to complete as many steps as possible online. Others may not have access to online channels or find digital interactions difficult.
3.26 We propose to add guidance to MCOB 13 and CONC 5 & 7 that firms should:
offer to engage with customers through a range of channels, changing the channel if necessary to enable the customer to engage with the firm effectively; and
be transparent with customers about the range of options the firm will consider and the communication channels available:
– For overdrafts, we propose that firms should set out on their websites in a prominent location the range of options that can be considered when an overdraft borrower is facing financial difficulties to enable customers and those advising them to understand and evaluate the options. Where the firm offers refinance loans, firms should provide indications of the eligibility criteria, interest rate and term.
This proposal is in line with our Overdrafts Finalised Guidance (September 2020) https://www.fca.org.uk/publication/finalised-guidance/finalised-guidance-overdrafts-coronavirus-additional-guidance-firms.pdf
Money guidance and debt advice
Credit (including overdrafts)
3.31 CONC 7.3.4R currently sets out the requirement that firms treat customers in default or arrears difficulties with forbearance and due consideration. Supporting guidance outlines steps a firm should take to inform and direct customers to appropriate help and support. We propose to supplement this guidance with further provisions including that firms should, where appropriate:
inform the customer that money guidance and debt advice is available and can be accessed through a range of delivery channels, including digital tools
effectively communicate to customers the potential benefits of money guidance or free and impartial debt advice from not-for-profit debt advice bodies
consider whether the customer would benefit from specialist sources of debt advice, such as making a self-employed customer aware of business debt advice providers
have regard to the Money and Pensions Service Strategic Toolkit when considering how to provide appropriate help and support to customers
3.32 We are also proposing that this guidance should apply to overdrafts. Where a firm identifies that a customer has a pattern of repeat use, and there are signs of actual or potential financial difficulties, we are proposing that they should also take steps to inform and direct customers to appropriate help and support.
Providing information to customers
3.35 The TSG set out our expectations that firms give customers appropriate information before providing forbearance to help them to understand their financial position, their options, and the implications of any arrangements. For example, some customers may feel they are making uninformed decisions where the potential implications of the arrangement, including for their credit file, are not made clear. When presented with the relevant information, customers can make informed choices about what action to take. We are proposing to build on the TSG by incorporating this into our Handbook and clarifying our expectations around the information that should be provided to customers.
3.38 For overdraft borrowers, we are mindful of the reluctance of customers to engage with lenders as they are unsure of what support they will be offered, and fear that overdraft limits will be reduced or removed.
3.39 We propose to restate in our updates to CONC 5D that firms should not suspend or remove overdraft facilities or reduce credit limits if this will cause financial hardship to the customer. We also propose to clarify what is meant by the term “financial hardship” in CONC 5D, which firms should refer to when reading our guidance on when firms should consider the suspension or removal of an overdraft facility or a reduction in the credit limit.
Charges
3.51 CONC 7.7.5R states a firm must not impose charges on customers in default or arrears difficulties unless the charges are no higher than necessary to cover the reasonable costs of the firm.
3.52 Our BiFD report and other supervisory work has found that similar firms are charging materially different fees and charges amounts for the same activity. While we recognise that firms have different cost bases, this indicates that some charges may not always be limited to being cost-reflective. To address this, we propose supplementing CONC 7.7.5R with guidance to help firms determine their necessary and reasonable costs in setting fees and charges applied to customers in payment difficulties. These proposals support our price and value outcome under Principle 12 (Consumer Duty).
Income and expenditure assessments
3.58 Our current guidance in CONC on income and expenditure assessments sets out that, where appropriate, firms should have regard to the provisions in the Common Financial Statement or equivalent guidance. We propose a new rule, currently reflected in the TSG, that where a firm assesses income and expenditure it must do so in an objective manner, for example by reference to the spending guidelines in the Standard Financial Statement or equivalent guidance.
3.59 We are also proposing further guidance which sets out our expectation that firms have clear written policies setting how, and in what circumstances, they conduct income and expenditure assessments. Where a firm carries out an income and expenditure assessment for the purposes of forbearance, it should be to assess whether the proposed arrangements are appropriate and sustainable for the customer. In addition, we propose guidance that firms make available to the customer a record of any income and expenditure assessment that the firm has made to enable the customer to share the record with other lenders and debt advice providers.
