OVERVIEW In December 2016, the FCA published a report following its thematic review of how firms are treating customers who fall into arrears. How consumer credit firms recovered debts and exercised appropriate forbearance was one of the FCA's key supervisory objectives for 2015/16. Broadly, the review covered three areas: 1) how firms engaged with customers 2) what forbearance options they offered; and 3) what outcomes these led to. The FCA looked at unsecured lending products – credit cards, personal loans, store cards and point of sale finance. It covered firm practices from the point at which customers were identified as being in probable difficulties to the point at which the lender formally defaulted the customer or charged off the debt. HIGH LEVEL FINDINGS In summary, the FCA reported that: ► consumer credit lenders are improving the way in which they deal with customers in arrears and are thinking about what fair outcomes mean for their customers ► most firms were complying with CONC and other relevant standards but some have only recently implemented changes to ensure they were fully compliant – the FCA identified that a lot of business change in this area appeared to have only been recently implemented and in some cases, change programmes were ongoing and still embedding ► retail banks and card providers were generally more effectively complying than retail finance and online personal loan providers ► repayment solutions offered to customers varied significantly ► a firm's culture influenced how much forbearance it gave and only a small number had a culture that was explicitly and strongly focussed on achieving fair outcomes and were well organised to deliver forbearance effectively ► the majority of firms missed early opportunities to identify and offer appropriate forbearance ► nearly two-thirds of firms demonstrated good intentions and had forbearance policies in place, but these were not matched by execution in practice ► nearly a third of firms were less customer-centric and focussed on securing payment as soon as possible, often at the expense of giving due consideration to the customer's circumstances THEMES In the report, the FCA's data and analysis was grouped under a number of themes. A summary is set out below. Customer Engagement Firms are required to monitor the repayment history of their customers and take appropriate actions. In other words, they must maintain policies and procedures that demonstrate proactive customer engagement. The FCA seemed satisfied that most firms offering credit cards had a proactive approach to monitoring customer repayment records and cited the process in place for issuing min due payment letters, in line with the industry commitments to do so. Other practices identified included reviewing information obtained from other sources, such as Credit Reference Agencies. While there was evidence that firms took action once a payment was missed (reactive engagement), the FCA acknowledged that there are challenges in engaging with customers before a payment is missed. This remains perhaps one of the biggest challenges for firms as conversations with customers are likely to be difficult and awkward for front line staff, particularly if customers are up to date with their repayments and not willing to discuss or acknowledge their financial situation. That said, they did point to the credit card industry efforts under way to collaborate on developing the most effective ways to engage with and support customers at risk of falling into arrears. 10-8714750-1 2 Firms should review their criteria for identifying customers at risk of early arrears and consider whether these may need to be widened to include earlier indicators of potential difficulties. This should be carried out in conjunction with their strategies for managing customers at risk of difficulties. The credit card industry is likely to be the first to develop strategies to help firms engage and support customers on a more proactive basis, and good practices, where relevant, could be applied by firms offering other credit products. Contact Strategies The FCA highlighted examples of different contact strategies used, including the intensity of those strategies – identifying that typically firms made up to 3 contact attempts per day on each contact number held for a customer and gave 48 hours before re-dialling after leaving a voicemail. Some firms deployed more intense contact strategies. There are no prescribed requirements in CONC restricting the number of contact attempts and the FCA did not go further to describe what it considered would be excessive. This has often been a source of tension within firms' Collections teams and their control functions, as multiple attempts per day are likely to drive customer complaints and claims against them for harassment. In this report, the FCA's concern was more with firms who were in breach of CONC 7.9.4R – contacting customers are unreasonable times and failing to pay due regard to the reasonable requests of customers in respect of when, where and how they want to be contacted. Firms should ensure they have a clearly documented contact strategy that incorporates the entire customer experience (and covers not just telephone calls, but all methods of contact used when accounts are in arrears), and be able to articulate that strategy - why it is fair and reasonable and does not lead to poor customer outcomes. Written communications Examples were found where firms had set out consequences of missed payments that were misleading, for example, where the customer could be charged default interest, but it was not the firm's policy to charge it and stating that non-payment of arrears would result in legal action, where this was not the firm's process. Firms should ensure that their arrears and collections policies are aligned with the content of their customer communications. Assessing customers' circumstances CONC 7.3.4R states that firms must treat customers in default or arrears difficulties "with due consideration". Historically, some firms have struggled to understand what this means for their business. The report provides some useful examples which should assist them when reviewing policies and procedures. They should have processes that a) take into consideration indicators that a customer may be in difficulties or vulnerable early on without having to establish these via multiple conversations with the customer b) ask customers about their circumstances and why payments have been missed c) not take at face value statements by customers which are clearly likely to be over-optimistic given the information available to the firm; d) not amend results of income and expenditure plans to ensure that customers fit into the criteria for a particular repayment solution. Forbearance policy The FCA found that most firms did not clearly set out forbearance options in their policies, procedures or internal guidance. Also, there were inconsistencies between policy and what was offered in practice. It is extremely important that policies are accurately reflected in a firm's processes and the FCA highlighted that where gaps between policy and procedures were significant, firms are likely to be in breach of CONC 7.2.1R to establish and implement clear and effective policies and procedures for customers in arrears. Forbearance options The FCA found that how repayment and forbearance options were presented to customers varied considerably. Some firms focused heavily on the immediate repayment of arrears before the next billing cycle, and exhausted all routes to this – which included asking whether other members of the household could pay, before offering longer term solutions. The FCA did not expressly state that asking others in the household to help repay arrears was a poor practice, but it did say that where this approach was followed, short term promises often failed because due consideration had not been given to customers' circumstances, leaving them in a deteriorating position overall. The FCA also found that the majority of firms allowed customers to repay their debt with a credit card. Repaying credit with credit has historically been a regulatory concern because it can often result in customers falling into a debt spiral. 10-8714750-1 3 Surprisingly, the FCA made no comment about the validity or appropriateness of this practice, even if the customer was charged a fee for using a credit card to repay their arrears. Effective delivery of forbearance When presenting to forbearance options, firms must give customers enough information to enable them to make an informed choice. Otherwise, there is a risk of breaching CONC 3.3.1R. The FCA found evidence that unbalanced presentation of the different options by firms led to customers being guided toward selecting a forbearance repayment option that may not have been in their best interests. Firms should not disguise, diminish or obscure important information and equal weight should be given to both benefits and risks of each forbearance option. This should include consideration of the impact of various options on not only the customer's financial situation, but also on their credit file, for example. Use of Management Information While most firms collected quantitative information – amounts of debt collected, credit risk, and other operational information, the FCA noted that few firms collected information on customer outcomes and monitored the performance of different repayment options. To demonstrate compliance and the effectiveness of their arrears policies, firms should expand their MI to include customer outcome indicators. Collecting MI on customer outcomes is likely to be a significant change for many firms because it is not something historically they have had to do. Vulnerable customers in arrears The FCA found that some firms' policies for vulnerable customers in arrears were either limited or high level only – and did not go far enough to give specific guidance to staff about how to implement in practice. They also found that most firms failed to identify particularly vulnerable customers in line with their policies. Good practices were however also found - applying effective procedures for identifying customers in arrears, referring them to well-trained specialist teams, providing a single point of contact for all issues, handling sensitive data with appropriate care, suspending normal collections activity, freezing interest and writing off debts where it was appropriate to do so. To help firms improve in this area, they should refer to the FCA's Occasional Paper on consumer vulnerability and good practice guides which it referred to in the Annex of its report. Application of fees and charges to accounts in arrears The FCA examined how firms were applying fees and charges to accounts in arrears. They also looked at whether firms froze or reduced fees and interest. Most firms continued to charge default fees although the amount varied from firm to firm. Credit card firms charged up to £12 while providers of loans and point of sale finance charged up to £25. The FCA was concerned to find that in many firms, customers could be charged multiple fees stemming from a late or missed payment within a single month or payment cycle. Firms should review their approach to fees and charges in this context to understand the impact on customers, particularly if they are being charged multiple fees during any single payment cycle. Firms have no obligation to reduce or suspend fees or interest for customers in arrears, although they should, under CONC 7.3.5G(1), consider doing this as part of treating customers with forbearance. The FCA did not criticise the practices followed by firms – which varied depending on whether the customer was assessed to be in short or long term financial difficulties. When in arrears, refunding interest charges only occurred in a minority of firms. If waiving fees, the FCA reminded firms that doing so to influence customer behaviour needed to be balanced with their obligations to treat customers fairly. Customers with multiple accounts The FCA did not identify any material concerns with the approaches taken by firms when customers maintained multiple accounts and recognised it is a complex area to manage. They acknowledged there were no specific requirements on firms on how they must treat customers with multiple products. They noted that the approaches taken differed from firm to firm, and were dependent on the firm's ability to identify customers with multiple accounts.