14Aug

FCA says only exceptional circumstances should stop firms failing to complete complaints investigations within eight weeks

The Financial Conduct Authority says “firms have now had enough time to embed new ways of working” and that only in exceptional circumstances should the coronavirus pandemic be used an excuse for failing to conclude an investigation into a customer complaint within the usual eight-week period.

The FCA updated its complaints guidance for firms on July 31. Back on May 1, when you could have said Covid-19 was at its peak, the regulator recognised that the pandemic could have posed a number of operational challenges for firms and that the length of time it took to resolve customer complaints could have been affected by these challenges. Now, the FCA has toughened its stance, and expects firms to conclude complaints investigations within eight weeks in all but “exceptional circumstances”.

The FCA’s update reads:

“When we first published this statement on 1 May 2020, we recognised that operational challenges could result in some firms finding it more difficult to meet certain requirements in DISP 1.6. In particular, the requirement to provide a final response to complaints within 8 weeks of receipt (15 business days rather than 8 weeks for payment services or e-money complaints), or a holding response explaining why they’ve been unable to provide a final response within the timeframe.

“We consider that firms have now had enough time to embed new ways of working, and, accordingly, a failure to comply with DISP 1.6, or other complaint handling requirements, should only arise in exceptional circumstances connected to the impact of Covid-19.”

Any firm that is still experiencing difficulty meeting the eight-week deadline in some cases is expected to inform the FCA – via their usual supervisory contact if they have one, or via an email to the Firm Queries email address if they do not. When making contact, the firm should inform the FCA of the steps it is taking to address the problem.

Where a firm’s complaint handling capacity remains stretched as a result of coronavirus, the FCA expects them to give priority to:

  • The payment of redress from upheld complaints, whether these are cases upheld by the firm or by the Financial Ombudsman Service
  • Complaints from vulnerable customers
  • Complaints from micro-enterprises and small businesses who are likely to face serious financial difficulties if their complaint is not resolved promptly and fairly

The FCA has identified four key drivers which may increase the risk of vulnerability. These are:

  • Poor health, mental or physical health
  • Low levels of financial or emotional resilience
  • Experiencing adverse life events such as bereavement or divorce
  • Low capability – this is a very wide-ranging definition that could encompass poor communication skills (including a limited ability to communicate and transact online), limited language or cognitive skills, or low financial capability

The pandemic could itself have exacerbated vulnerability in certain individuals, or even caused new vulnerabilities, for example:

  • Loss of income from losing employment or being furloughed
  • The impact of isolation on mental and physical health and people’s ability to work and care for others
  • Particularly in the case of some key workers, the impact of extremely demanding working conditions and greater exposure to the virus itself

The FCA also stresses that it expects firms to maintain the same quality of complaint handling. Firms are still expected to:

  • Inform customers of their complaint procedures and those of the Financial Ombudsman Service
  • Enable consumers to submit complaints via a variety of methods, although here the FCA recognises it may be necessary to give certain customers priority when it comes to the use of telephone lines, for example, customers who find it difficult to use digital communication channels
  • Acknowledge receipt of complaints
  • Co-operate fully with the FOS

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

 

14Aug

Adviser trade body holds podcast on protecting firms’ reputations during Covid 

Some firms may be conscious of the direct commercial impact the coronavirus pandemic could have. Fewer will have considered the reputational risk posed by the current health emergency.

The Personal Investment Management and Financial Advice Association (PIMFA) recently held a podcast examining how firms can manage, protect and enhance their reputations during the period of coronavirus disruption. The special guest on the podcast was Alex Just of Montfort Communications, a barrister who has advised a number of firms and public organisations on reputational issues when they have been faced with disputes and other issues.

Mr Just urged firms to consider not just their communications to clients but also their internal communications, saying it was vitally important that staff understood both their responsibilities and how the firm was adapting to Covid-19. It may also be important to ensure messages are communicated swiftly to investors, regulators or other parties in a reputational damage situation. The alternative could be more damaging if information leaks out before the firm has had a chance to give their official version of events.

Some of his key requirements for a firm at the present time are:

  • Resilient – the firm is able to react to things it did not necessarily expect to happen
  • Robust – the firm can continue to operate, and its supply chain and communication channels remain operational

Mr Just remarked on a recent trend for individual executives of larger financial firms to be required to appear before parliamentary committees, and when this occurs, reputational damage can obviously follow.

The speaker asked Mr Just how the Senior Managers & Certification Regime had affected reputational risk, and Mr Just agreed that this had been a ‘game changer’. When reporting a conduct rule breach to the FCA, the way the conduct was described, as well as the conduct itself, could have an impact on the firm’s reputation.

Mr Just said a “crisis” was just “an event that had been handled badly”, and in these circumstances, the quality of the response is vital. He said that the current circumstances may require some smaller firms to seek external help, especially if they lack experience of communications management or of dealing with the media.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

14Aug

Credit union issues data showing who is the typical furloughed employee 

t is no exaggeration to say that, just a few months ago, very few people knew what ‘furlough’ meant. Now of course things are very different, and an estimated 8.9 million UK workers have been furloughed by their employer.

A new report by credit reference agency TransUnion looks at who the typical furloughed employee is, and what impact being furloughed might have on someone’s finances.

The case study used in the report is for an individual with the following circumstances:

  • Married, but responsible for all household bills
  • Receiving healthy net income per month from employment of £3,732 (pre-lockdown)
  • Monthly expenditure is £3,602, so with so little surplus each month, the family typically use savings for big-ticket spending and emergencies
  • However, the individual in question works as a senior hotel manager and so was placed on furlough earlier this year. His income reduced to around 60% of its normal level (the Government was paying 80% of the first £2,500 of monthly earnings, and his employer did not top up the remainder)
  • In spite of his apparently high income, he was forced to pause his mortgage and credit card repayments
  • Although he is now working again, his company is struggling, and he is worried about his long-term job security and is considering options such as releasing equity from his home

The report also acknowledges that 45% of respondents in TransUnion’s most recent Financial Hardship survey said their household income hadn’t been impacted by Covid-19. Others said their financial situation had actually improved, perhaps because they had switched to working from home with no loss of income, whilst saving money on travel, socialising and luxury spending.

Brendan le Grange, Head of Research and Consultancy at TransUnion in the UK, commented further on the issue of inequality, saying:

“Younger consumers are more likely to be impacted than older ones. But it’s not just about who is more or less likely to be initially impacted by the crisis, we also need to consider who is more or less well-equipped to weather the storm.

“Here, access to savings is a useful proxy. We asked those consumers who were feeling a financial pinch how they’d try to close the gaps in their budget, and while overall savings are the most common answer, it once again varies with credit risk. Whilst 1 in 4 of who self-report a ‘good’ or ‘excellent’ credit score say they’ll use their personal savings, only 1 in 6 of those who self-report a ‘bad’ credit score feel they have ready access to the same.”

The report goes on to list the loans and bills consumers are most worried about repaying at present. Top of the list are:

  • Credit cards (mentioned by 37% of survey respondents)
  • Utilities (31%)
  • Rent (27%)
  • Personal loans (26%)
  • Mortgages (24%)

However, Generation Z are most worried about personal loan repayments (33%), followed by rent (32%).

Millennials are most worried about utilities (37%) and credit cards (34%).

28% of Generation X are worried about paying utility bills, but by far the biggest concern in this age group is credit cards (48%).

Credit cards and utilities both score 37% amongst the baby boomer generation, well ahead of all other categories.

The financial effects of coronavirus have led to many borrowers being offered payment freezes. Whether or not someone has been furloughed, lenders will need to carefully consider what additional forbearance may or may not be appropriate when these payment freeze periods end.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

07Aug

FCA consults on new vulnerable customer guidance

The Financial Conduct Authority has highlighted to firms that there are 24 million potentially vulnerable adults in the UK and calls on these firms to do more to help their vulnerable customers. The four key concepts the FCA wants firms to address are:

  • Recognising vulnerability and understanding customers’ needs
  • Recognising the value of sympathy
  • Understanding the importance of empowered and knowledgeable staff
  • Meeting vulnerable consumers’ communication needs

The FCA wants firms to be in no doubt that there are a great many vulnerable and potentially vulnerable customers in the marketplace, and that the effects of coronavirus will only increase both the number of vulnerable customers and the potential extent of their vulnerability.

The FCA says that the four main drivers of vulnerability are:

  • Health – health conditions or illnesses can affect a person’s ability to carry out day-to-day tasks (6% of UK adults fall into this category)
  • Life events – major life events such as bereavement, job loss or relationship breakdown can certainly make individuals vulnerable (20% of UK adults have experienced one of these events within the last 12 months)
  • Resilience – some people will have a limited ability to withstand emotional or financial shocks (21% of UK adults fall into this category)
  • Capability – certain consumers will have a limited knowledge of financial matters or low confidence in managing money. Others might lack literacy or digital skills (20% of adults)

Many consumers will exhibit more than one of these vulnerable characteristics.

The paper suggests that the vulnerabilities can lead to various personal and behavioural consequences that make financial management more difficult. These include:

  • Increased stress levels
  • Increased time pressures due to increased responsibilities
  • Being pre-occupied with other issues
  • Being unable to put things in perspective and make accurate comparisons
  • Becoming more reckless or careless

On one hand, the paper highlights the responsibilities of senior management to ensure that the firm has a culture that promotes fair treatment of vulnerable customers, but it is also mentioned that staff at all levels have a role to play here. On this subject, the paper says:

“Senior leaders in firms should create and maintain a healthy culture in which all staff take responsibility for reducing the potential for harm to vulnerable consumers.”

The paper not only provides some guidance for firms, but also gives details of some actions the regulator has taken in the past when firms have failed to treat vulnerable customers fairly. These include:

  • Action to stop a credit broker charging upfront fees when it failed to explain these fees transparently
  • A fine for mis-selling of mobile phone insurance
  • A fine for a bank over its treatment of customers in mortgage arrears

The FCA invites responses to the consultation until September 30 2020.

Christopher Woolard, interim Chief Executive at the FCA, said:

“Today’s guidance sets out what firms should do to ensure vulnerable consumers are being treated fairly. We know many more customers will be struggling with their finances as a result of the impact of coronavirus. Supporting vulnerable consumers is a key focus for the FCA, and the coronavirus crisis has only highlighted its importance.

“While many firms do excellent work to support their vulnerable customers, we will not hesitate to step in where others do not.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

06Aug

FCA says only exceptional circumstances should stop firms failing to complete complaints investigations within eight weeks

The Financial Conduct Authority says “firms have now had enough time to embed new ways of working” and that only in exceptional circumstances should the coronavirus pandemic be used an excuse for failing to conclude an investigation into a customer complaint within the usual eight-week period.

The FCA updated its complaints guidance for firms on July 31. Back on May 1, when you could have said Covid-19 was at its peak, the regulator recognised that the pandemic could have posed a number of operational challenges for firms, and that the length of time it took to resolve customer complaints could have been affected by these challenges. Now, the FCA has toughened its stance, and expects firms to conclude complaints investigations within eight weeks in all but “exceptional circumstances”.

The FCA’s update reads:

“When we first published this statement on 1 May 2020, we recognised that operational challenges could result in some firms finding it more difficult to meet certain requirements in DISP 1.6. In particular, the requirement to provide a final response to complaints within 8 weeks of receipt (15 business days rather than 8 weeks for payment services or e-money complaints), or a holding response explaining why they’ve been unable to provide a final response within the timeframe.

“We consider that firms have now had enough time to embed new ways of working, and, accordingly, a failure to comply with DISP 1.6, or other complaint handling requirements, should only arise in exceptional circumstances connected to the impact of Covid-19.”

Any firm that is still experiencing difficulty meeting the eight-week deadline in some cases is expected to inform the FCA – via their usual supervisory contact if they have one, or via an email to the Firm Queries email address if they do not. When making contact, the firm should inform the FCA of the steps it is taking to address the problem.

Where a firm’s complaint handling capacity remains stretched as a result of coronavirus, the FCA expects them to give priority to:

  • The payment of redress from upheld complaints, whether these are cases upheld by the firm or by the Financial Ombudsman Service
  • Complaints from vulnerable customers
  • Complaints from micro-enterprises and small businesses who are likely to face serious financial difficulties if their complaint is not resolved promptly and fairly

The FCA has identified four key drivers which may increase the risk of vulnerability. These are:

  • Poor health, mental or physical health
  • Low levels of financial or emotional resilience
  • Experiencing adverse life events such as bereavement or divorce
  • Low capability – this is a very wide-ranging definition that could encompass poor communication skills (including a limited ability to communicate and transact online), limited language or cognitive skills, or low financial capability

The pandemic could itself have exacerbated vulnerability in certain individuals, or even caused new vulnerabilities, for example:

  • Loss of income from losing employment or being furloughed
  • The impact of isolation on mental and physical health and people’s ability to work and care for others
  • Particularly in the case of some key workers, the impact of extremely demanding working conditions and greater exposure to the virus itself

The FCA also stresses that it expects firms to maintain the same quality of complaint handling. Firms are still expected to:

  • Inform customers of their complaint procedures and those of the Financial Ombudsman Service
  • Enable consumers to submit complaints via a variety of methods, although here the FCA recognises it may be necessary to give certain customers priority when it comes to use of telephone lines, for example customers who find it difficult to use digital communication channels
  • Acknowledge receipt of complaints
  • Co-operate fully with the FOS

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

05Aug

Adviser trade body holds podcast on protecting firms’ reputations during Covid 

Some firms may be conscious of the direct commercial impact the coronavirus pandemic could have. Fewer will have considered the reputational risk posed by the current health emergency.

The Personal Investment Management and Financial Advice Association (PIMFA) recently held a podcast examining how firms can manage, protect and enhance their reputations during the period of coronavirus disruption. The special guest on the podcast was Alex Just of Montfort Communications, a barrister who has advised a number of firms and public organisations on reputational issues when they have been faced with disputes and other issues.

Mr Just urged firms to consider not just their communications to clients but also their internal communications, saying it was vitally important that staff understood both their responsibilities and how the firm was adapting to Covid-19. It may also be important to ensure messages are communicated swiftly to investors, regulators or other parties in a reputational damage situation. The alternative could be more damaging if information leaks out before the firm has had a chance to give their official version of events.

Some of his key requirements for a firm at the present time are:

  • Resilient – the firm is able to react to things it did not necessarily expect to happen
  • Robust – the firm can continue to operate, and its supply chain and communication channels remain operational

Mr Just remarked on a recent trend for individual executives of larger financial firms to be required to appear before parliamentary committees, and when this occurs, reputational damage can obviously follow.

The speaker asked Mr Just how the Senior Managers & Certification Regime had affected reputational risk, and Mr Just agreed that this had been a ‘game changer’. When reporting a conduct rule breach to the FCA, the way the conduct was described, as well as the conduct itself, could have an impact on the firm’s reputation.

Mr Just said a “crisis” was just “an event that had been handled badly”, and in these circumstances, the quality of the response is vital. He said that the current circumstances may require some smaller firms to seek external help, especially if they lack experience of communications management or of dealing with the media.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

 

04Aug

Credit union issues data showing who is the typical furloughed employee 

It is no exaggeration to say that, just a few months ago, very few people knew what ‘furlough’ meant. Now of course things are very different, and an estimated 8.9 million UK workers have been furloughed by their employer.

A new report by credit reference agency TransUnion looks at who the typical furloughed employee is, and what impact being furloughed might have on someone’s finances.

The case study used in the report is for an individual with the following circumstances:

  • Married, but responsible for all household bills
  • Receiving healthy net income per month from employment of £3,732 (pre-lockdown)
  • Monthly expenditure is £3,602, so with so little surplus each month, the family typically use savings for big ticket spending and emergencies
  • However, the individual in question works as a senior hotel manager and so was placed on furlough earlier this year. His income reduced to around 60% of its normal level (the Government was paying 80% of the first £2,500 of monthly earnings, and his employer did not top up the remainder)
  • In spite of his apparently high income, he was forced to pause his mortgage and credit card repayments
  • Although he is now working again, his company is struggling, and he is worried about his long-term job security and is considering options such as releasing equity from his home

The report also acknowledges that 45% of respondents in TransUnion’s most recent Financial Hardship survey said their household income hadn’t been impacted by Covid-19. Others said their financial situation had actually improved, perhaps because they had switched to working from home with no loss of income, whilst saving money on travel, socialising and luxury spending.

Brendan le Grange, Head of Research and Consultancy at TransUnion in the UK, commented further on the issue of inequality, saying:

“Younger consumers are more likely to be impacted than older ones. But it’s not just about who is more or less likely to be initially impacted by the crisis, we also need to consider who is more or less well-equipped to weather the storm.

“Here, access to savings is a useful proxy. We asked those consumers who were feeling a financial pinch how they’d try to close the gaps in their budget, and while overall savings are the most common answer, it once again varies with credit risk. Whilst 1 in 4 of who self-report a ‘good’ or ‘excellent’ credit score say they’ll use their personal savings, only 1 in 6 of those who self-report a ‘bad’ credit score feel they have ready access to the same.”

The report goes on to list the loans and bills consumers are most worried about repaying at present. Top of the list are:

  • Credit cards (mentioned by 37% of survey respondents)
  • Utilities (31%)
  • Rent (27%)
  • Personal loans (26%)
  • Mortgages (24%)

However, Generation Z are most worried about personal loan repayments (33%), followed by rent (32%).

Millennials are most worried about utilities (37%) and credit cards (34%).

28% of Generation X are worried about paying utility bills, but by far the biggest concern in this age group is credit cards (48%).

Credit cards and utilities both score 37% amongst the baby boomer generation, well ahead of all other categories.

The financial effects of coronavirus have led to many borrowers being offered payment freezes. Whether or not someone has been furloughed, lenders will need to carefully consider what additional forbearance may or may not be appropriate when these payment freeze periods end.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

03Aug

New FCA chief says financial promotions will be a priority area

Officially, Nikhil Rathi’s appearance at the Treasury Select Committee was a chance for his appointment as FCA chief executive to be formally approved. In reality, the session was a chance to get some insight regarding what the FCA might be like when he takes over later this year.

Newly appointed Financial Conduct Authority chief executive Nikhil Rathi has signalled that cracking down on financial promotions will be one of his priority areas.

Mr Rathi will not take up his new role until October, but he has already been quizzed by MPs at the Treasury Select Committee. The session also allowed the Committee to formally approve the Chancellor’s proposed appointment of Mr Rathi to the role.

During the session, Mr Rathi promised to the Committee that he will “get tougher” on the oversight of financial promotions. At present, the FCA supervises the marketing of financial products, even if the products themselves might not be regulated. Nevertheless, this did not prevent 12,000 small savers losing £236 million through investing in high-risk unregulated minibonds in one recent high-profile scandal.

Mr Rathi indicated that three of the key areas of focus at the FCA will be:

  • A strong data strategy
  • A joined-up regulator that functions well
  • Diversity of thought

Regarding the first of these, the fact that the FCA is seeking to make better use of data to improve the way it regulates firms have been reported in the media as one of the reasons why Mr Rathi got the job ahead of some of his rivals.

Concerning the last of these, Mr Rathi indicated that the FCA is prepared to use strategies such as ‘no-name CVs’ when recruiting.

He also mentioned two well-publicised areas in the mortgage sphere.

Regarding mortgage prisoners, Mr Rathi said:

“On the mortgage prisoners, I know there’s been some progress with respect to affordability tests and enabling consumers to understand they can switch. But there remain some issues to resolve, particularly the take-up by banks of the new affordability freedoms that the FCA has put in place and I will look to take that as a priority.”

On the subject of payment holidays, he said:

“I understand that … There is considerable discussion about how to make sure that credit impairment doesn’t result from taking holidays for legitimate reason, but also that the integrity of the credit database is maintained so that people do not take on unsustainable debt.

“If they’ve taken holidays, debt will accumulate, and they may not be in a position to take on more debt with a new lender and that’s a difficult balance to strike.”

Asked by Rushanara Ali MP how he would like people to see him, Mr Rathi said:

“I haven’t applied for this job to be liked. It’s not a job I think you can take if you want to be liked.

“I wouldn’t want to define myself as being feared either. I would like the FCA to be defined as tough, assertive, thoughtful, decisive, and working with pace and agility and proactivity.

“I would hope that those who have worked with me in the past would describe me as an inspirational leader, someone who leads by example, empowering the senior team.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

30Jul

FCA sets out key risks affecting the debt advice sector

With so many consumers having been affected by coronavirus, demand for debt advice is set to increase dramatically. With this increase in demand comes increased risks, so what do firms in this area need to be aware of?

The debt advice sector is certainly expecting unprecedented demand as consumers suffer the financial consequences of the coronavirus pandemic. With this comes certain added risks, and the Financial Conduct Authority has set out what it sees as the risks facing the sector in one of its ‘portfolio letters’.

The FCA expects the boards of debt advice firms to consider the contents of the letter and make any necessary changes to their business model.

The letter starts with a reminder that, as in all sectors of financial services, the FCA can deem individual senior managers to be responsible when failings are identified within a firm, and that individuals carrying out controlled functions can then face enforcement action.

The FCA says it believes there are five key drivers of harm in the debt advice sector:

  • Consumers being unable to access debt advice when they need it due to insufficient capacity in the sector
  • Poor quality advice being given by firms, including issues with income and expenditure assessments, resulting in consumers entering into debt solutions which are not in their best interests
  • Inadequate governance and controls over fee structures leading to consumers paying excessive fees and/or additional charges related to the administration of the debt solution
  • Inaccurate regulatory reporting of data and failure to abide by notification requirements, thus adversely affecting the FCA’s ability to effectively supervise firms, which may, in turn, undermine consumer confidence in the market and conceal harm
  • Firms operating with insufficient prudential resources, as required under CONC 10 of the FCA Handbook, to enable them to remediate customers if required, in the event that their actions cause consumer harm

On the subject of capacity, the FCA cites research by the Money and Pensions Service indicating that demand for debt advice may rise by as much as 60% by the end of 2021. The regulator says it expects firms to have effective processes in place to identify, monitor and manage the risks they are facing, or might be reasonably expected to face, and that firms should consider whether the increased flow of consumers seeking advice could be one of these risks.

On the subject of quality of advice, the letter raises a number of issues, including:

  • Firms are required to monitor customer repayments for evidence which suggests a change in financial circumstances. The FCA notes that some firms have been struggling to complete these required annual reviews due to operational challenges associated with coronavirus. Where this is the case, the firms should notify the FCA and should develop appropriate plans to ensure that overdue reviews are completed as soon as possible
  • The FCA remains concerned about debt packager firms who might prioritise referrals to debt solutions that are more profitable, instead of recommending the most appropriate option for the customer’s needs
  • The regulator is concerned that some firms are not considering all of the issues raised in the recent Vulnerable Customers Thematic Review
  • The FCA believes there are still weaknesses in the monitoring of appointed representatives by some principal firms

Regarding fees, the FCA is still concerned about a lack of transparency around firms’ fee structures in some cases, which may result in consumers paying additional charges that they have not budgeted for or taken into account when choosing their debt solution. The regulator says it has observed instances where customers in debt management plans were paying more towards the firm’s fees than to their creditors. FCA rules say that the way fees and charges are applied must not undermine a customer’s ability to make significant repayments to creditors.

Any debt management firm wanting advice or clarification is advised to speak to their compliance consultant.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

29Jul

‘Triple whammy’ of FCA, FOS and Covid pushes guarantor lender to the brink

Faced with a massive increase in the cost of paying compensation on its upheld complaints, together with the possible costs of an FCA investigation and the far-reaching consequences of the Covid-19 emergency, a guarantor lender admits it is facing very tough times.

A leading guarantor lender has warned it is facing “material uncertainty surrounding going concern” due to the combination of a Financial Conduct Authority investigation, an increase in complaint volumes and the effects of the coronavirus pandemic.

The lender had previously announced that the FCA was investigating its affordability and creditworthiness checking procedures, and that this could lead to at least £35 million in compensation being paid to disadvantaged customers.

Now, the firm’s annual financial results show that the cost of complaints in the 12 months to 31 March 2020 was £126.8m, compared to just £100,000 in the period ending 31 March 2019 – an increase by a factor of 1,268.

Annual revenue increased by 8.7% but the net loan book reduced by 9.1% over the 12 months. The impairment over revenue ratio rose to 38.5% from 23.7%, and the firm said that this was primarily due to the impact of coronavirus.

After making pre-tax profits of £111 million last year, the lender has reported a pre-tax loss of £37.9 million.

For many of the UK’s lenders recently, it has been a case of: if the FCA doesn’t get you, the FOS will.

Some lenders do not conduct a detailed analysis of applicants’ expenditure in each area of spending. Instead, many firms use an estimate of living expenses, obtained from the Office for National Statistics. This ONS figure is merely the average expenditure that would be expected from someone living in the UK with the profile of the applicant in question. Recent FOS judgements clearly show that the independent complaints body does not agree that using ONS data to estimate expenditure is appropriate.

In most of its recent adjudications on guarantor and instalment loans, FOS have concluded that the firm should have conducted a detailed expenditure analysis and verified any expenditure data supplied by the customers by asking to see their bank statements. FOS often decide bank statements are a necessary component of ‘proportionate checks’ even when the loan amount is as low as £1,000 and/or the loan term is as short as 12 months.

Many firms also specialise in lending to consumers with an impaired credit profile, and FOS often concludes that this is another reason not to use ONS data to estimate expenses, as an applicant with a poor credit history is unlikely to be a typical ‘average’ person.

Guarantor lenders’ business models work on the basis that they lend to applicants who would not have been accepted for a loan had they not been supported by a suitable guarantor. However, it is clear that FOS does not believe that this means the checks carried out on the applicant can be any less rigorous than would have been the case had they applied for a non-guarantor loan.

Finally, in some recent adjudications, FOS has been applying a very strict interpretation of CONC 5.2A.36 in the FCA Handbook. This rule reads:

“A firm must not accept an application for credit under a regulated credit agreement where the firm knows or has reasonable cause to suspect that the customer has not been truthful in completing the application in relation to information relevant to the creditworthiness assessment.”

For example, FOS has upheld recent complaints, using this rule as its justification, where the customer’s income on their payslips was lower than they had stated in their application. FOS did not believe it was enough for the firm simply to say that it used the lower of the two income figures in its affordability calculation.

Similarly, FOS has also upheld recent complaints on this basis where the monthly mortgage payment given by the customer in their application was lower than the payment stated in a bank statement or credit report. FOS doesn’t appear to be accepting the argument that the figure supplied by the customer could have been their personal contribution to the mortgage payment.

The FOS uphold rate for guarantor loan complaints in the 2019/20 financial year was 89%, increasing almost threefold from the previous year’s 32%.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article

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