Forbearance options – A wide view
As September draws to a close, there’s some good news for those struggling with the cost of living, as the inflation rate has stopped rising. While this is better for customers who are experiencing financial difficulties than another rise, it isn’t a magic bullet however, as prices are still rising – just at a slower rate than over the summer.
For those in employment, pay rises are also now matching the cost-of-living rises, although this won’t usher in a wholesale improvement in finances, but it will help to keep some afloat.
This means continuing financial stress on a significant proportion of UK customers. Those who are struggling with credit products could find it difficult to keep up their repayments. With the Consumer Duty meaning that firms must now ensure good outcomes for customers, the onus is on firms to support these customers towards better financial health.
Both the Consumer Duty and the forthcoming protections for borrowers in financial difficulties – which will incorporate parts of the Tailored Support Guidance, published during Covid, into CONC and MCOB – require the appropriate use of forbearance options. We’ll know for sure what the extent of the requirements are with the publication of the final Policy Statement on protections for borrowers in financial difficulties due before the end of the year, but it is likely that the FCA will ask firms to take reasonable steps to ensure forbearance options are appropriate, given the customer’s individual circumstances.
The FCA have been vocal about the importance of flexibility when it comes to forbearance, but in our experience, there’s often confusion around what can and can’t be done in practice. Most firms and staff are familiar with the basic options – a payment freeze is one of the most commonly used forbearance options.
The FCA give a short list of wider options, along with encouragement that firms consider using the full range when taking account of the customer’s circumstances. These include:
Suspending, reducing, waiving or cancelling any further interest and charges
Allowing deferment of payment of arrears
Accepting token payments for a reasonable period
They also clarify that these examples are not exhaustive. In short, the FCA wants firms to think outside of the box to support customers who are experiencing payment difficulties, with the caveat that whichever options are discussed will have good outcomes for the customer and are in compliance with the rules in CONC / MCOB.
A new repayment arrangement can be a beneficial alternative option for some customers. The FCA rules will require any arrangement to be sustainable over a reasonable period of time. In practice, this means taking reasonable steps to be sure that the arrangement is actually repayable by the customer. The definition of sustainable here is that if the customer is unable to meet their essential bills over the foreseeable period, then the FCA would not view the arrangement as sustainable.
Using up to date information to assess sustainability is so important, particularly when assessing customers’ income and outgoings. Using food shopping information from even a few months ago could hide increases in actual spending; in H2 2023, customers are spending on average £10 more per shop than this time last year.
Similarly, for all but a very small proportion of customers – for example, those who own their house outright – rising mortgage payments and rent mean that customers are likely to be paying hundreds of pounds a month more for this essential bill than in the previous 12 months.
The FCA proposal also draws attention to their recent research that customers can be confused about how balances escalate, particularly problematic for customer outcomes where arrears are not immediately repaid, and high fees and interest are applied. Where repayments are low, but interest rates are high, this can lead to the customer owing significantly more than the amount they borrowed. The proposals will mean that firms must suspend, reduce, waive or cancel any further interest or charges where a repayment arrangement is in place as a forbearance option, to ensure the level of debt does not rise for the period of that arrangement.
This would change depending on the customer's circumstances; if they become able to pay larger amounts, then the firm would not be required to waive as much interest.
At the crux of this, it is important to inform customers of the effect of the repayment and any charges, fees or interest that will be, or could be, applied to their debt, and give a practical illustration of its impact on their finances.
This means a change in practice – and potentially skills – in staff who work in customer-facing positions. Internal communications can help here – keeping staff up to date with the implications for the cost of living on the assessment of income and expenditure and the making permanent of the TSG along with a reminder about what those requirements mean in practice. Regular and robust training around the full range of forbearance options is also a must.
Our online training courses introduce new staff to regulatory requirements, key legislation and process, and offer excellent refresher training for established staff, with up-to-date scenarios and soft skills training. Our Financial Difficulties course is priced at £20, is accessible at the user’s convenience and provides a certificate upon successful completion.