The Financial Conduct Authority has frequently spoken of the importance of consumer credit firms having robust procedures for assessing affordability and for fair treatment of customers in arrears. These are once again the main areas of focus in the Portfolio Letter sent by the FCA on December 2 to all firms in the Mainstream Consumer Credit Lenders portfolio.
The letter acknowledges that coronavirus has increased the operational and financial pressures faced by many lenders. The FCA says that, prior to the pandemic, it had already identified four principal ways in which the actions of credit firms could lead to harm for customers, but that Covid-19 has only increased the risk of unfavourable customer outcomes. These four scenarios are:
- Inadequate affordability checks, leading to over-indebtedness
- Firms not having clear, effective and appropriate policies and procedures for customers in arrears, resulting in poor outcomes for those in financial difficulties
- Poor outcomes for credit card customers when their cards are inappropriately and expensively used for long-term borrowing
- A potential lack of transparency in the pricing structures and features of products
The FCA says the customer outcomes it wishes to see include:
- Customers are treated with forbearance and due consideration
- Customers are provided with sustainable arrangements, which take into account their other debts and essential living costs and which give them a reasonable opportunity to repay their debt
- Customers are not pressurised into repaying their debt within an unreasonably short timeframe
- Customers are protected from escalating debt once they have entered into an affordable forbearance arrangement
- Firms recognise vulnerability and respond to the particular needs of vulnerable customers. Firms have clear, effective and appropriate policies and procedures for dealing with customers in payment difficulties and for those who the firm understands or reasonably suspects to be vulnerable. Firms have adequately trained staff who can provide customers with the help they need
- Customers are allowed time to consider their options and, if necessary, seek debt advice
- Customers are referred to debt advice if this is appropriate
Specifically regarding affordability assessments, the FCA says that firms’ business models must be designed to deliver good customer outcomes. The regulator says it is concerned by firms whose business models appear to be based on over-ambitious lending growth targets; and those who emphasise to prospective applicants how quickly and/or easily they can approve their loan, perhaps by using automated tools, without the need for the applicant to provide detailed information regarding their income and outgoings.
Regarding customers in arrears, the letter says the FCA is concerned about the adequacy of firms’ monitoring arrangements where they have outsourced arrears management activities such as debt collection and/or debt administration.
The letter also advises firms to ensure they are fully aware of how Brexit and the end of the transition period on December 31 will affect them.