How does The Consumer Duty apply to borrowers in financial difficulty?

This is our sixth article in the BDO Consumer Duty Series, where we focus on how firms can apply the new standards to their approach to borrowers in financial difficulty.

While final rules are still to be published, the FCA is already referencing Consumer Duty requirements in communications to lenders about how to treat borrowers in financial difficulty. The recent Dear CEO letter from the FCA to 3,500 lenders and unregulated BNPL firms reminds them of their obligations; to lend affordably, show forbearance with consumers who fall behind, and develop sustainable repayment plans based on individual circumstances. The communication highlights updated guidance that firms should now be taking extra care to ensure people with a vulnerability do not get a worse outcome. The Regulator has also set the expectation that while firms have until April 2023 (now extended to July 2023) to implement the consumer duty, they should be looking at this area of their business sooner rather than later.

Foreseeing potential harm

One of the proposed Consumer Duty cross cutting rules requires firms to avoid foreseeable harm to retail consumers. With living costs rising it is foreseeable that demand will increase as consumers have questions about their borrowing or seek help to manage their finances. Firms need to be thinking about their ability to ensure good outcomes for an increased number of customers in difficulty. Updating call scripts and websites to signpost helpful information or creating online debt management tools will both help to effectively manage higher volumes. Making provision for resource augmentation may also be prudent, so customer operations can respond more quickly to variable demand. Other potential sources of harm should be explored and those that are ‘reasonably’ foreseeable should be planned for.

What is the latest insight from the FCA?

A recently published research paper commissioned by the FCA, gives insight to consumer experience, including the barriers that get in the way of achieving good outcomes. It is a valuable resource for firms in assessing their own performance.

The research found that whilst a majority (60%) of borrowers in financial difficulty had a positive experience of their contact with their lender, 40% had either a negative or indifferent experience. This was often based on the capability of the individuals they spoke to. Ratings were higher from participants who were assisted by staff who they felt were well equipped and trained to support vulnerable customers. To meet the requirements of The Consumer Duty firms should be looking at their processes and skillsets for identifying vulnerability and making sure customers are treated in respect of their needs.

Another finding was that consumers are reticent to contact a lender because of perceived repercussions such as a negative credit score. Firms need to make customers feel safe, particularly when they may already be in a state of anxiety.

‘Sludge’ and ‘friction’ also needs to be rooted out. Hard to find contact details, long wait times and complicated online forms can all impede customers achieving good outcomes. Firms need to be analysing the customer journey to determine where these might exist and conducting outcome testing to ensure such practices do not exploit inertia.

What should firms be considering?

In response to these findings firms should consider the following:

• Do our customer journeys best support customers to achieve good outcomes at times of crisis or vulnerability?
• Do we provide clear information at all stages that can be easily accessed and understood by all customers?
• Do our processes enable us to identify specific vulnerabilities and determine treatment appropriate to different needs?
• Do we deal with our customers with empathy and when needed, an extra level of care to enable them to achieve good outcomes?

What is the regulatory response?

The FCA will expect firms to undertake remediation and pay redress where there has been customer detriment. The regulator has said that they are already in contact with 44 firms who have been assessed as falling short of expected standards. It is reasonable to foresee a strong supervisory focus here, with the lending and credit sectors prioritised in the forthcoming months.