Mon, May 18, 2020

Forbearance – What Does the “New Normal” Look Like for Consumer Credit Firms?

The Financial Conduct Authority (FCA) recently issued guidance on the measures that consumer credit firms should undertake to ease customers’ financial difficulties during COVID-19. Read the full statement here

The FCA’s COVID-19 guidance generally relates to payment holidays/payment freezes of up to three months. Firms cannot charge fees on the payments during this period, but interest can continue to be applied to the account except for high-cost, short-term (HCST) loans.

The overall effect of the FCA’s temporary measure in the consumer lending sector is to ensure firms can offer effective forbearance during these unprecedented times, and that customers do not unduly suffer and are treated fairly during what is hoped will be a relatively short-term situation. 

What Actions Should Firms Take?

To ensure their customers are treated fairly and FCA expectations are met, firms may need to adapt and amend relevant processes and policies, as well as consider the supporting oversight, governance and system/IT arrangements in place. 

Key areas for consideration: 

Revisit Existing Collection Practices and Vulnerability Policy

Areas to consider include:

  • Does your firm’s collections policy need amendment for the period of immediate stress or for the period of extended stress likely to be at least until the end of 2020?
  • Does your firm’s vulnerability policy remain valid in today’s environment?
  • Should a specialist team be established to manage your most vulnerable customers, such as identifying those who may have recently become vulnerable, including those whose mental health has suffered?
  • Should existing management information be adapted to ensure it remains “fit for purpose” for the current environment?

Review Collection Practices

Areas to consider include:

  • Have relevant employees in your firm been trained on new practices and are they well versed in the “new normal” for collection practices? Training should also be extended to employees who have direct contact with customers as well as compliance, risk and audit staff.
  • Have renumeration policies and employee incentives been reviewed to ensure that these do not conflict with the intention of the revised collection practices, and thereby give rise to potential conduct risks? Renumeration remains a key focus area for the FCA as it can often be a lens on the management of conduct risks within firms.
    • Has the level of monitoring/control for collection practices been assessed for what can be realistically undertaken during remote working? Consider alternative monitoring practices that could be undertaken where needed; for example, if a sample of live calls were previously monitored but now this is no longer possible. 
  • Have conduct risk and other compliance reporting measures been reviewed? Should these measures be adjusted to reflect new risks and associated controls and practices?
  • Does information provided to credit rating agencies need adapting given any new arrangements now in place? A payment holiday may not be considered as an arrear’s situation, however, what happens if a customer is unable to make payments in the fourth month? This requires a discussion with the relevant credit reference agencies.
  • Do customer communications make it clear to the customer the consequences of their actions and the measures the firms are intending to take? The FCA has re-iterated the need to ensure customers are clear with regards to the actions to be taken—and the consequences of these actions. Firms must pay attention to the need to communicate clearly and fairly. One method of ensuring clear communications is to “test” the proposed communication with staff who are not involved with the collection process; e.g. facilities or complaints staff.

Ensure Practical Changes Are Aligned to Requirements Within the Consumer Credit Legislation

Areas to consider include:

  • Vulnerable customers: Have any customers that were reassessed and identified as vulnerable been contacted and their agreement terms revised in line with the TCF policy? 
  • Contract variations for payment holidays: Do individual consumer credit agreements and Terms of Conditions need to be varied, particularly if interest will be charged during the period? If yes, could this interest potentially put the customer into further debt, which might not be sustainable and therefore is not in the best interests of the customer?
  • Extension of term: If the credit agreement term is to be extended, does this potentially bring a previously unregulated agreement into the remit of regulated agreements?
  • Consolidation of loans/debt management: If this is a potential response to assist customers during the pandemic, does your firm have the correct FCA permissions for this activity?
  • Notice of Sums in Arrears (NOSIA): How does your firm respond to the “new normal” impact on the issuing of NOSIAs? This is potentially a legally technical area as well as a systems and process issue.
  • Systems updates for charges: During the payment holiday, have your firm’s systems been amended to ensure any normal applicable charges (such as late payment fees) are not automatically applied to the customer’s account?

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