Financial Difficulties And The Consumer Duty
As we get to grips with the Consumer Duty and the framework needed to be installed, we begin to have scope to look at the finer details within the duty. For example, firms may be starting to explore the content of product approval processes or the MI which can inform the firm’s product reviews. This article focuses on another area, the interaction between the FCA’s rules and guidance in relation to customers experiencing Financial Difficulties and the duty.
The FCA released their ‘Borrowers in Financial Difficulties Following the Coronavirus Pandemic – Key Findings’ document in November 2022 which can be found here.
An interesting read which we have previously written about its main suggestions can be broken down into four key areas which this article relates to the provisions within the duty:
Engaging with customers
Firms should focus on their procedures for the point at which a customer indicates they expect to experience payment problems, so that support is expressed to customers in a way which is aimed at overcoming the typical barriers of disclosure, such as psychological barriers. This language is similar to the Consumer Duty where the following is required:
2A.5.5 RWith regard to PRIN 2A.5.3R(1):
(1) for product-specific communications, a firm should consider the target market for that product; or (2) for non product-specific communications, a firm should consider its retail customers.2A.5.6 RIn considering the methods of communicating with retail customers, a firm must satisfy itself that the communication channel: (1) enables the communication of relevant information which retail customers are likely to need in a way that supports effective decision making; and (2) provides an appropriate opportunity for retail customers to review the information and, where relevant, assess their options.
It’s clear the duty is asking firms to consider their target market, which may include customers likely to be in financial difficulties. For example, for customers with an inferior understanding of financial services, the duty places an obligation on the firm to act to provide the information they need, in a manner mostly likely to be understood by that group of customers, to make effective decisions, in this case about their financial difficulties.
Following this firms must ensure they engage with customers after an actual missed payment using a range of channels, in doing so firms should be conscious of setting the right tone. As part of this, firms should take steps to reduce friction in order to keep the process as simple and straightforward for customers as possible. For example, customers shouldn’t be passed from one department to another, and adequate notes should be taken in order to prevent the need for re-disclosure. This should help compliance with the following requirement within the duty:
2A.5.7 GIn supporting the understanding of retail customers through its communications, a firm should:
(1) explain or present information in a logical manner; (2) use plain and intelligible language and, where use of jargon or technical terms is unavoidable, explain the meaning of any jargon or technical terms as simply as possible; (3) make key information prominent and easy to identify, including by means of headings and layout, display and font attributes of text, and by use of design devices such as tables, bullet points, graphs, graphics, audio-visuals and interactive media; (4) avoid unnecessary disclaimers; and (5) provide relevant information with an appropriate level of detail, to avoid providing too much information such that it may prevent retail customers from making effective decisions.
The headline here is ‘ineffective conversations lead to customers agreeing unsustainable payment arrangements or options.’ The consumer support outcome comes into play here, stating:
2A.6.2 RA firm must design and deliver support to retail customers such that it:
(1) meets the needs of retail customers, including those with characteristics of vulnerability; (2) ensures that retail customers can use their product as reasonably anticipated; (3) ensures that it includes appropriate friction in its customer journeys to mitigate the risk of harm and give retail customers sufficient opportunity to understand and assess their options, including any risks; and (4) ensures that retail customers do not face unreasonable barriers (including unreasonable additional costs) during the lifecycle of a product, such as when they want to: (a) make general enquiries or requests to the firm; (b) amend or switch the product; (c) transfer to a new product provider; (d) access a benefit which the product is intended to provide; (e) submit a claim; (f) make a complaint; or (g) cancel a contract, agreement or arrangement or otherwise terminate their relationship with the firm.
Remember according to the FCA’s Vulnerable Customer Guidance the definition of a vulnerable customer can include customers in financial difficulties, therefore we need to pay particular attention to customers in financial difficulties as well as other vulnerable customers to ensure support provisions are designed with those customers in mind. A key message is that firms rely too much on payment arrangements, often ignoring other options such as interest rate reduction, extending the term of the loan, or properly considering how the customer’s situation is expected to change over time.
Fees and Charges
The FCA was fairly critical of firms increasing the level of debt through charges when a person has been identified as suffering financial difficulties. Whilst they don’t go as far as saying such charges should be banned, they do highlight the importance of structuring charges in a way which does not overly adversely impact customers in financial difficulties or trap a person into a cycle of debt. This is reflected in both the products and services as well as the price and value outcomes. Firms should consider the design of their products, including charges added for late payment and assess whether this is disadvantageous to any particular group of customers. Equally firms should, as part of their value assessments, review MI to identify customers who are paying more for the same service, asking themselves whether this is fair or appropriate. There will be times where additional payments are justified, for example where additional services have been utilised, however there will be circumstances where the customer is not receiving any additional value in return.
Helping customers obtain third party support / Training
The FCA found that most firms included signposting to third party debt advice in written communications, however they missed several opportunities to inform customers of the support available during telephone conversations. Again, this can be tackled as part of firms’ work on consumer support. The duty should be the catalyst for firms to review the support provided by agents and tighten controls for any areas of weakness.
In their findings the FCA highlighted a lack of training as a key finding resulting in poor outcomes for customers, whether introductory or refresher training. RB Compliance can help firms here, we have a range of e-learning courses which can be reviewed here, including our Financial Difficulties course.
You may find our range of resources on The Consumer Duty helpful.