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Handling customers with early arrears

Emily Benson looks at the messages from the FCA thematic review of unsecured lenders and arrears in Mortgage Finance Gazette

The Financial Conduct Authority recently reported findings from its thematic review of how unsecured lenders treat customers who have fallen into arrears. Whilst there are differences between the position of secured and unsecured lenders dealing with customers’ arrears, the FCA’s focus is on the lending market and its developing thinking in this area, which includes a significant impact for the mortgage sector.

With the continuing possibility of a rise in interest rates and no slowdown in the growth of consumer borrowing, the FCA views the lending sector as an area for focus, warning lenders of the risks of customers’ overindebtedness.


Overall the FCA found that the consumer credit sector, new to FCA regulation, is behind the mortgage sector in its efforts to embed Treating Customers Fairly.

The FCA is challenging firms to identify customers at risk of falling into arrears in the prearrears stage. According to the FCA, what ‘good’ looks like is to use the sources of information available to management to proactively identify where customers are at risk of difficulties in meeting commitments. It also means working with those customers to structure affordable and sustainable repayment solutions.

But the best proactive contact strategy will fail without good quality training for customer facing staff. They need to be given the skills to listen and understand individual circumstances and to be sensitive to implied indications of vulnerability.

This must be in conjunction with either a flexible system and procedures or the authority to override them, to give the customer a repayment or forbearance solution that is right for them.

These are essential in any strategy to compliantly handle the difficulties of all customers, but particularly the most vulnerable.

Vulnerable customers

This type of customer has been a particular focus for the FCA since 2015, and its Occasional Paper 8 on Consumer Vulnerability includes a ‘Practitioner’s Guide’ which the FCA regularly refers to. In it the FCA signposts other material produced by charities and non-financial services sectors.

It specifically states a belief that strategies for dealing with vulnerable customers should not be developed in isolation, but rather shared across sectors.

Whilst not expressly aimed at secured lenders, the guide suggests other considerations including:

  • the need to build the right culture through encouraging staff to empathise with vulnerability;
  • increasing their confidence through improved awareness and knowledge; and ultimately preparing them for discussions about situations and topics that may be uncomfortable or even taboo;
  • through building the right culture, customers will become comfortable with disclosing their vulnerability and confident that they will be treated fairly; developing systems that can be adapted to mitigate the impact of the vulnerability on the customer and their ability to meet their commitments; and
  • developing staff evaluation and compensation procedures and policies that reflect these values; and management information that is informative on the issue and that evidences that the culture is delivering the right outcomes for customers.

Such is the FCA’s focus on this area that it clearly expects firms to understand the implications of vulnerability across all of its processes.

In the recent thematic review, the regulator cited indicators from customers, such as job loss, not being probed to understand the underlying cause or whether a specific vulnerability lay behind it.

Clear policies

Policies and procedures need to give clear guidance to staff on how vulnerable customers should be dealt with; their implementation needs to be monitored closely, including through quality assurance processes.

The recording of vulnerability both on the customer record keeping system and for management information purposes is crucial. With these measures in place, vulnerable customers can be mapped against their outcomes ensuring (and evidencing) that they are receiving appropriate and fair treatment.

Other pitfalls include the need to protect the customer’s data protection rights when recording vulnerability. Equally importantly, the regulator does not consider it appropriate for vulnerable customers to be included in debt sale arrangements, presumably to protect the continuity of the standard of care being delivered by the original lenders.

Where customers have special circumstances and needs that create vulnerability, firms need to be alert to the regulator’s greater expectations in this area.

In the current relatively benign conditions in the mortgage market, for lenders that have taken on board the messages from the FCA’s work in this area in previous years, the path to be followed in managing and rehabilitating customers that fall into arrears is well understood.

But with the increasing risk of a downturn in the UK economic cycle, the mortgage sector needs to pay attention to the FCA’s messages regarding measures to be taken for those customers that will be most affected adversely and who are at risk of falling into arrears.

Originally published by Mortgage Finance Gazette on 6 February 2017

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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