Borrowers in Financial Difficulties: what should lenders be doing in response to the cost of living crisis?

On 3 November 2022, the Financial Conduct Authority (FCA) published its report on borrowers in financial difficulty (BiFD Report). The BiFD project was launched to assess firms' policies and processes following the implementation of the Tailored Support Guidance (TSG) for mortgages, consumer credit and overdrafts. The TSG was put in place to ensure that lenders appropriately supported those experiencing payment difficulties as a result of the coronavirus pandemic.  

The TSG expressly stated that it was "not intended to have any relevance in circumstances other than those related to coronavirus". However, in June 2022, as the cost of living crisis grew, the FCA signalled its intention to bring the TSG (or parts of it) into the FCA Handbook, meaning that firms will likely need to continue adhering to at least some of the guidance going forward. In a Dear CEO letter to lenders, the FCA said that the TSG is "relevant for borrowers in financial difficulties due to other circumstances such as the rising cost of living". It is not clear yet whether the FCA intends for firms to apply guidance set out in the TSG to customers in financial difficulties more generally (i.e. where there is no catalyst for the difficulty such as a global pandemic, or national cost of living crisis).    

The BiFD Report therefore not only sets out areas where firms are required to take immediate action, but also may give an indication as to how borrower protection might be enhanced in the future.  

What are the findings of the BiFD Report?

The FCA sets out its findings in four key areas:

• Engaging with customers, both before and after the customer misses a payment: the FCA found that some firms did not do enough to engage with customers who had missed a payment, should set a tone which makes it clear that they want to help customers, and should ensure that customers are not disengaged (for example, through poor record-keeping leading to a need for customers to re-explain their circumstances to multiple personnel).  
• Effectiveness of conversations with customers: firms must ensure that they communicate effectively with their customers, and train their staff to do so, to enable them to understand their customers' personal and financial circumstances, including any vulnerability. Linked to this, firms must then ensure that forbearance options are tailored to customers' needs and circumstances, and implement effective oversight and potentially quality assurance programmes.
• Helping customers to consider and access money guidance and debt advice: the FCA noted that most firms missed opportunities to signpost customers to appropriate sources of guidance (for example, on the FCA website or MoneyHelper pages provided by the Money & Pensions Service), particularly during telephone conversations. Training for telephone agents should cover this point. 
• Fees and charges: the FCA notes that fees and charges for those in arrears should be applied fairly and reflect "reasonable costs" that firms incur, considering the impact of fees on balances.

The FCA also draws attention to its new Consumer Duty, which comes into force at the end of July 2023 for new and existing products that are open to sale (or renewal). It explains that this increases the standard it expects from firms for all customers, including vulnerable customers. Firms are required to focus on the diverse needs of their customers at all stages of the customer journey. The FCA's Finalised Guidance on the Consumer Duty (FG22/5) includes guidance on how firms should provide support that meets their customers' needs. For example, the FCA has set out its expectations regarding the existence of unreasonable barriers to firms' provision of support to consumers (see FG22/5, 9.25-9.27) and the need for firms to consider their call waiting times and ensure that the support they provide is effective, irrespective of the channel use to provide support (see FG22/5, 9.6 and 9.7).

What is next for the FCA in this space?

The cost of living is expected to continue to rise, and as a result occurrences of customers falling into arrears or payment shortfall situations will increase. The FCA will continue to collect and review data on consumer outcomes, working towards its statutory objective to secure an appropriate degree of protection for consumers and has recently announced a data collection exercise for around 600 consumer credit firms. The FCA says that it will take "robust action" where it identifies firms which are delivering poor customer outcomes. It is also planning to consult on the future of the TSG, which "may include proposing changes" to the FCA Handbook. The FCA's focus on this area was emphasised at a recent Treasury Select Committee hearing, in which Richard Lloyd, interim Chair of the FCA, said that the FCA needed lenders to "step up" and that it was "ready to do more".  

What should lenders be doing?

Firms should already be treating borrowers fairly, in accordance with the FCA's principles and relevant rules in the FCA handbook. For instance, the Consumer Credit Sourcebook (CONC) sets out rules and guidance relating to post-contract business practices, whereby firms are required to monitor a customer's repayment record, and take appropriate action where there are signs of actual or possible repayment difficulties. Such action should include notifying the customer, and providing details of not-for-profit debt advice bodies. CONC also sets out requirements for responsible lending, and treatment of customers in default or arrears.  

The BiFD Report makes clear that the FCA wants firms to take immediate action to ensure that they are well-placed to support customers, considering that the situation is likely to become more challenging in the months ahead. Particular areas of focus should be:

• Encouraging and facilitating customer engagement.
• Sufficiently resourcing operations and ensuring that staff are well trained.
• Providing appropriately tailored forbearance solutions to customers, taking into account their individual circumstances.
• Ensuring effective management oversight and quality assurance of forbearance processes and customer outcomes.
• Making customers aware of and helping them to access money guidance and/or not-for-profit debt advice.
• Ensuring that fees and charges for those in arrears are applied fairly and reflect reasonable costs incurred.

The TSG, and now the BiFD Report, set out useful elaborations on existing guidance and rules, and provide case studies of good and poor performance which has been observed by the FCA. However, as the FCA has made clear that all approaches should be "tailored", these case studies must not be used a checklist for compliance with the FCA's expectations. Firms need to consider their customer base to put in procedures which allow them to respond to borrowers' needs in an appropriate way, as the cost of living crisis continues to escalate.