Cost of Living – good practice and good outcomes in consumer credit
The Consumer Duty – coming as it has, in the middle of a cost-of-living crisis - puts consumer credit firms in a tight spot. UK customers are under more pressure than they have been at any other time during the tenure of the FCA and achieving good outcomes – never easy – is complicated by increasing rates of financial difficulties.
Combined with the regulator’s increased focus, even outside of the remit of the Consumer Duty, on fair treatment of customers in financial difficulties, this puts enormous pressure on consumer credit firms to get supporting these customers right first time. But given that so many customers are struggling, this seems to translate to more resources than ever before needing to be dedicated to identifying and assisting those customers.
The total amount of debt taken on by each individual is increasing. This adds to the pressure of the cost of living, and not only are more customers likely to be in financial difficulties than ever before, but the actions of financial services firms themselves could – where the customer’s interests do not come first – cause a disproportionate amount of harm. The tightrope in front of financial services firms seems to be getting slimmer.
Research by The Money Charity suggests that the average total debt per UK household, including mortgages, was over £65,500 in May 2023, an increase of £850 per adult over the year. This equates to around 103.3% of average earnings. Although these figures are averages, and some adults will have more, some less, the point remains. Household debt is increasing; for much of the population, wages are not increasing in line with inflation. Treatment of customers in financial difficulties aside, a majority of consumer credit customers will need to be careful with their money to be able to maintain financial stability.
After the first full month of the Consumer Duty, the FCA’s data collection for its review of firms’ delivery of the new rules is well underway. With an eye on what they’re looking for, firms of all sizes can find out how to work smarter, not harder, during this difficult period.
In particular, the FCA’s data collection will increase scrutiny of communications with customers. Communications with customers should be clear and timely. This is so important where there is a risk of financial difficulties or analysis highlights that a customer is in the early stages of financial difficulties. Proactive messages can influence customers to take simple, early action that might have a significant positive impact on their future finances. Often, customers just need to know that firms will offer support rather than blame, and have a couple of clear, appropriate choices presented to them, with simple explanations. This removes the difficulty of having to independently research everything from terms and jargon to potential actions, particularly important where a customer is vulnerable and may not have the facility or energy to take those independent steps. The bonus for firms is that simple and reassuring communications encourage customer-led contact.
Where possible, we can take advantage of a range of available options to communicate. Last week’s article highlighted the importance of digital channels for support of vulnerable customers. The added bonus here is that digital channels can be used to tailor messages that can be sent and received much more quickly than traditional channels, ideal for factual information appropriate to a customer segment (and bearing in mind the ICO’s guidance).
Once customers get in touch, we need to consider appropriate forbearance options. The Money Charity calculates that average annual interest per household, as at May 2023, would have been £2227 or 3.51% of average earnings. This puts it clearly into perspective; waiving or reducing interest payments, where this is possible, where it won’t have a negative effect on the customer’s profile, and is appropriate, could really help make a substantial difference and has been highlighted by the FCA as a forbearance option that is used much less commonly than it would like to see.
Although the Consumer Duty has only been in place for a month, it is possible to see great examples of best practice in firms that have acted early and been performing to Duty standards throughout 2023. Firms that have been singled out as forerunners of best practice in the industry have been able to identify, with precision, key customer segments and have devised clear plans for support, including understanding their main needs in practice. For example, where a segment is low earning, with high debt, then waiving of interest payments makes a huge difference for them. For a set of vulnerable customers, then an accessible document with clear definitions and explanations – which might seem simplistic to someone with industry experience – can be used by agents to give clear information to those customers so that they understand better what is happening to their finances, and which actions will have given outcomes.
And finally, avoiding poor practice is going to be key to reputation and staying on the right side of the regulator. This week, news that a customer interacting with a firm was told by both an agent and a team leader that they didn’t know anything about the Consumer Duty highlights the importance of good quality training.
Avoid those pitfalls by making sure all of your staff know what the Consumer Duty is, how it impacts their role, and what they need to do to support their customers. Our Consumer Duty Online Training course takes staff through the background to the Duty and what they’ll need to do in practice. Each learner is provided with a certificate on completion.
For staff working directly with customers, our Financial Difficulties course sets out a range of forbearance options. It introduces new staff to regulatory requirements, key legislation and process, and offers excellent refresher training for established staff, with up-to-date scenarios and soft skills training.