The Financial Conduct Authority writes regular ‘portfolio letters’, where it sets out what it sees as the key risks affecting a particular sector. The latest such letter concerns debt purchasers, debt collectors and debt administrators.
The letter lists six principal ways in which the FCA believes consumer harm could result from the activities of firms who are active in these areas. Three of these ways fall under the heading of ‘consumer treatment’:
- Vulnerable customers – firms do not recognise the needs and challenges of vulnerable customers, do not take steps to address these needs and challenges and do not ensure that vulnerable customers receive outcomes that are at least as favourable as other customers
- Assessment of customer circumstances – firms fail to fully assess customers’ needs, and as a result, customers do not receive appropriate forbearance
- Customer service – the variety of issues covered under this point include: firms not keeping customers informed about their complaints, failing to handle the complaints themselves fairly, incorrectly pursuing people for debts and failing to answer customer queries
The next two ways in which consumer harm could result are listed under the heading of ‘litigation and unenforceable debts’:
- Vulnerable customers – firms fail to take account of customers’ circumstances and take disproportionate actions to recover debts
- Pursuing debts they aren’t entitled to recover – firms state or suggest to customers that they are entitled to cover certain debts, when in fact these might be ‘statute barred’, or there might be other reasons why the debt should not be pursued
The final area of concern is ‘prudential resources’. If a firm does not have sufficient financial resources, it may subsequently fail and then exit the market in a disorderly fashion, leaving customers without clear information about the status of their debt, or who to pay and when.
Regarding forbearance, the letter provides some examples of good practice, such as agreeing sustainable repayment arrangements, signposting customers to free debt advice and not pressurising them to pay a debt in unreasonably large amounts.
Bad practice examples cited include:
- Threatening legal action where the firm should have instead actively suspended pursuit of the recovery of a debt, because the customer had informed the firm that they were seeking help from a debt counsellor (CONC 7.3.12)
- Applying interest and charges to arrears on defaulted accounts without considering suspending, reducing, waiving or cancelling these (CONC 7.3.5G)
- Not considering whether customers will understand the practical application of terms such ‘legal action’ – firms have an obligation to ensure that communications are clear, fair and not misleading
Bad practice examples mentioned in the letter in relation to disputed debts include:
- Customers having to raise disputes multiple times before they were recorded as a dispute
- Unclear communications on the status of a debt and the outcomes of dispute investigations
- Long periods of inactivity on the part of the firm in resolving a dispute
- Firms incorrectly classifying customer complaints as disputed debt issues and therefore not handling these in line with FCA complaints handling rules
The letter warns firms to ensure that they have systems and controls in place to prevent consumer harm occurring:
“We continue to see some firms fail to treat customers fairly. The most common causes of this are weak operational oversight, ineffective systems and controls, and insufficient emphasis placed on Treating Customers Fairly within a firms’ culture. Increasing consumer debt has the potential to increase the prevalence of consumer harm in this portfolio, if these causes of harm are not addressed. We will take action where we identify firms causing or likely to cause significant harm to consumers.”
Finally, firms are reminded of their obligation to disclose to the FCA anything “of which the FCA would reasonably expect notice”. Examples mentioned in the letter include when a firm purchases significant new debt; or chooses to place its current or new debt purchases into a separate entity or fund not regulated by the FCA.