FCA Thematic Review on early arrears management in unsecured lending

Background

In its 2015/16 Business Plan, the FCA said it would examine the ways in which unsecured consumer credit debts are collected. It focused on how customers are treated by lenders when they first experience arrears and payment difficulties. A firm’s early arrears approach often establishes the tone of its relationship with customers, setting them on a particular path and can be critical to the ultimate outcome for those customers.

This Thematic Review (TR16/10) has built on the FCA’s previous review of arrears and forbearance in high-cost short-term credit, broadening the focus to examine arrears in a range of unsecured lending products, including personal loans, credit cards and retail finance.

Scope of the review

The FCA examined a range of firms offering unsecured lending products including credit cards, personal loans, store cards and point-of-sale finance. The firms it looked at varied from large retail banks to smaller single product providers. It looked at firms’ practices from the identification of customers in probable difficulties at a pre-arrears stage to the point at which the lender formally defaults the customer and/or writes the debt down.

Key findings

Pre-arrears - most firms treated customers who contacted them pre-arrears in a manner consistent with customers actually in arrears (eg routing customers to trained collections staff) and offered the same forbearance options as if they were in arrears. This was widespread industry practice. One firm had a highly developed pre-arrears strategy which involved obtaining income and expenditure details to consider the most appropriate forbearance options.

Strategies for contacting customers - risk-based segmentation was common and contact was driven by this, resulting in limited attempts to contact low-risk customers who would "self-cure", and priority allocation of resources to higher risk accounts. Risk-factors included underlying risk score, balance outstanding and history of arrears. In terms of coordination and intensity:

• typically up to three contact attempts per day, per number held in file
• 48 hour break after leaving a voicemail
• intensity varied depending on risk segmentation (ie more days in arrears and larger arrears = higher intensity)
• some firms monitored their contact strategies closely to ascertain appropriate channels and times to develop smarter contact strategies
• some firms involved, at least in principle, up to 18 attempted telephone contacts per customer, per day, and
• one case study highlighted that a firm had greater success using text messaging rather than calls, and varying the time it did call and did not call every day.

Assessing customers’ circumstances - a common theme was that firms failed to take into account indicators that a customer might be vulnerable or in financial difficulty. Most firms had a policy of freezing or reducing fees and charges when customers were identified as being vulnerable. The FCA saw that customers often went through multiple conversations with the firm before their circumstances were recognised and addressed. This frequently resulted in the customer incurring more interest and charges, accumulating greater arrears and being subject to more collections activity than what would otherwise have been the case had the firm identified the customer’s circumstances in an earlier conversation and applied its vulnerable customer policy.

Training will be key here, in our view. Around a third of firms were payment-orientated (simply focussed in getting a payment or a promise to pay) whereas the other two-thirds were focussed on establishing the customer’s circumstances be asking appropriate and relevant questions.

Again, training here is key - the takeaway is to question almost everything. If a customer says that they can get back on track with payments, ask how. If a customer proposes a repayment plan, ask how they can afford it. If a customer says that can bring the account back up to date quickly, but have been consistently in arrears, ask how.

One example given showed that it took five calls to ascertain that a borrower hadn’t made payment because she suffered from mental health problems - by which time the amount owed was more than ten times greater than the amount originally owed. Extreme - but firms should be aware of this.

Forbearance - ensure policy is clear and practice matches policy. The FCA found that mismatches were common and some were significant and put firms in breach of CONC 7.2.1R to establish and implement clear and effective policies and procedures for customers whose accounts fall into arrears. The FCA noted that firms offered a range of forbearance options which included deferred payment of arrears, breathing space, interest and charges concessions and repayment plans. All firms allowed customers time to pay off their arrears while continuing to meet scheduled payments and this often took the form of a promise to pay, which took the customer outside of the contact strategy. Most firms also allowed the customer the option to repay the arrears in instalments in addition to standard monthly repayments. The FCA considered that effective forbearance involved effective use of IT & systems and quality staff training and guidance.

Explanation and consequences - the FCA found understatement and overstatement of the consequences of forbearance and also omission of information. Communications must be clear, fair and not misleading.

Vulnerable customers - some firms had adopted the TEXAS model (a practical tool to help with conversations around vulnerability) to help have effective conversations with vulnerable customers. Some firms handled cases of customer vulnerability with sensitivity and forbearance, for example:

• applying effective procedures for identifying vulnerable customers in arrears
• referring them effectively 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 in certain cases.

The FCA identified that some firms had policies which were limited or high level, which described the firms overall approach but did not provide specific guidance to staff about how to implement it in practice. Staff training is key. The FCA highlighted that, notwithstanding policies, firms often failed to identify vulnerable customers. Some were occasional, and some were systemic. When identified, some firms did not treat vulnerable customers appropriately or did so inconsistently.

The FCA set out a case study on vulnerability as follows:

Next steps

The FCA has provided firm-specific feedback to each of the firms in its sample on the good and poor practices it observed in their businesses. It expects these firms to review their practices in light of the feedback given and make relevant changes. A number of firms within the sample told the FCA that they had already identified areas for improvement and were actively exploring ways to improve their current policies and procedures. Where the FCA has found unfair practices, it has raised the issues with the firms. Depending on the seriousness of the issues identified and firms’ responses, further regulatory action may be taken.

The FCA encourages all firms that are involved in the collection of consumer credit debts to read this report, consider their approach to arrears in light of the findings and make improvements where necessary.

In addition to complying with the Consumer Credit Sourcebook (CONC) rules, firms must ensure that treating customers fairly (TCF) drives everything that they do to ensure good customer and market outcomes. The FCA expects firms to promote, embed and enforce the right culture within their organisation.