Customer forbearance and good outcomes in consumer credit – how to navigate this
Amidst rapid technological and social changes, the UK consumer credit sector is constantly evolving. One of the biggest recent shake-ups to regulation of the sector has been the introduction of the Financial Conduct Authority’s (FCA) Consumer Duty regulations.
These Consumer Duty regulations, which apply to products and services across the sector, seek to ensure that customers receive ‘good outcomes’ and that firms provide evidence that these outcomes are being met.
Why is this important for consumer credit firms?
One area where Consumer Duty has significant implications for consumer credit firms is with loan forbearance. This is considered particularly important to the regulators with the central bank’s financial policy committee (FPC) reporting an increase in borrowers falling into arrears, and the number of customers falling behind on their debts expected to increase.
To mitigate this, the FCA has emphasised the importance of lenders providing forbearance and 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.
- The majority of borrowers in financial distress, (59%), had missed one or more payments on credit products (including mortgages) in the last six months.
- 40% of borrowers in financial difficulty had either a negative or indifferent experience with their lender.
So, what do consumer credit firms need to do?
It’s worth taking a moment to consider the aim here to ensure customer receive ‘good outcomes’. The specific meaning of these outcomes can vary from case to case but essentially are not to make the customers life significantly worse as a result the rest 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 customer arrangements.
- Having an accurate and current understanding of the customers’ financial situation and circumstances.
- Training staff to identify the characteristics of vulnerability.
- Providing practical options beyond standard repayment plans and debt collection.
- Ensuring customers can contact and communicate with them when they are in financial difficulty.
Regulators will look for evidence that customer outcomes are monitored and that any issues are identified and addressed.
Some of these processes are internal and may be in place anyway, but to understand the customer’s real financial position to offer practical options may require new tools and processes. Through intelligent Open Banking technology, Armalytix delivers accurate customer financial data, analysis and potential red flags that enable consumer credit firms to make informed and effective decisions to meet the Consumer Duty requirements.
Get in touch today to find out how we can provide your business with the data, answers and evidence you need to make the right decisions and spot the financially vulnerable.