The FCA has called for lenders to take immediate action after identifying shortcomings with how consumer credit lenders treat borrowers in financial difficulty following the pandemic. Will Stagg looks at how growing regulatory oversight and the requirement to improve customer engagement, combined with increasing consumer delinquency may lead to working capital challenges.

In November 2022, the FCA published the key findings from their review of lenders’ treatment of borrowers in financial difficulty following the pandemic. While the report highlights areas of good practice by lenders, as well as examples of firms delivering good outcomes to consumers, the FCA is explicit that many lenders need to make significant improvements, with seven lenders required to pay £12 million in compensation to nearly 60,000 customers.

The need for the report was driven by the rising cost of living caused by inflationary pressures and a rising interest-rate environment, which is having a knock-on impact on the affordability of goods and services for consumers. The regulator's Financial Lives 2022 survey shows that 1-in-4 of all UK adults have low financial resilience, 2.2 million more than in May 2020, and therefore a greater number of customers are at risk of financial difficulty. Those who have historically been able to pay their debts may now have problems for the first time.

The report assesses how well lenders are meeting FCA expectations1, and follows on from the FCA’s Dear CEO letter published in June 2022, sent to over 3,500 lenders, outlining the need for lenders to understand the changing pressures on consumers and the FCA’s regulatory expectations. 

FCA findings identify key areas to meet its expectations

The regulator has identified four key areas where lenders need to focus to improve outcomes for borrowers in financial difficulty, backed up by some stark statistics from their research.

Engaging with customers

The FCA identified issues with the way firms engage with customers at 19 out of 36 firms (53%). Some firms made it more difficult for customers to engage due to operational issues and barriers, leading to delays in providing support and the customer disengaging.

Effectiveness of conversations with customers

Only 15 out of the 50 (30%) firms sampled sufficiently explored and responded appropriately to customer circumstances, leading to ‘unfair, inappropriate and/or unsustainable’ forbearance arrangements.

Only 12 out of the 50 (24%) firms sampled recognised and responded to customers with characteristics of vulnerability appropriately.

Helping customers to consider and access money guidance and debt advice

Only 14 firms out of 49 (29%) firms assessed during 2022 discussed debt advice on customer calls. In several of these assessments, this was only discussed sometimes.

Fees and charges

10 of the FCA’s 50 (20%) assessments showed firms which charged fees inconsistently or charged fees which increased customers’ debt, with no plan in place or discussion with customers as to how these fees would be paid back. These increases only compounded financial difficulty. 

As a result of these findings, 32 out of 65 firms have been asked to make ‘material and significant’ changes to their processes. Seven out of these 32 firms have agreed to pay £12.38 million in remediation to nearly 60,000 customers.

Financial services restructuring and insolvency

The financial services sector is a diverse, dynamic and competitive marketplace. 

What lenders need to do

Lenders are required to take ‘immediate action’ where necessary to ensure that processes are in place to support customers.

The FCA summarises the following areas that management needs to focus on:

  • encouraging and facilitating customer engagement
  • sufficiently resourcing operations and ensuring staff are well-trained and experienced
  • providing appropriately tailored forbearance solutions to customers
  • ensuring effective management oversight and quality assurance of forbearance processes and the customer outcomes achieved
  • helping customers to access money guidance and/or not-for-profit debt advice
  • ensuring fees and charges are fair and reasonable.

Consumer Duty will increase lenders' obligations around consumer outcomes

The implementation of the Consumer Duty legislation from June 2023 will raise the regulatory bar for lenders by placing a greater burden on firms to ensure good outcomes for their customers.

The shortfalls in dealing with vulnerable customers appropriately that have been highlighted in this report are particularly concerning from the FCA’s point of view. FCA research shows there are 24.9 million adults in the UK with characteristics of vulnerability – 47% of the population. Consumer Duty raises the standard that's already expected of firms, based on the ‘Guidance for firms on the fair treatment of vulnerable customers’ (VCG), and requires firms to focus on the diverse needs of their vulnerable customers at every stage of the customer journey.

For example, the report highlights that while some firms were quick to identify vulnerable characteristics, the impact this had on the customer journey was unclear. The FCA will be taking a far closer interest in metrics which support the outcomes that vulnerable customers are receiving – and they expect management boards to do the same. Data will be required to monitor the quality of the support offered to vulnerable customers and evidence of where it may be falling short, enabling the firm to act promptly to address that. 

The FCA provides examples of what good treatment of vulnerable customers might look like, including keeping the same agent engaging with the same vulnerable customer, staff training from external specialists, role-play training for agents covering a wide number of potential vulnerabilities, signposting to not-for-profit debt advice, and also local mental health organisations.

Firms are also expected to give customers a level of care that is appropriate given the characteristics of the customers themselves. For many firms, internal processes will need to be reviewed and amended to enable customer outcomes to be tracked and measured, and significant resources allocated to training and recruitment to cope with the expected increase in customer vulnerability.

The impact on lenders

For some lenders, the changes required to provide the tailored support that the FCA is expecting will lead to increased operational costs and working capital challenges. This comes at the same time as delinquency rates are rising as consumers – many still suffering financially due to the consequences of the pandemic – face the cost-of-living crisis.

The difference today is that the underlying borrower isn't benefitting from the same level of support that the government provided during the pandemic.

Lenders are also at risk of increased redress claims over historic practices, including during the pandemic. The FCA’s report has highlighted that in many cases, lenders’ response to FCA requirements has been sub-standard. Increased redress claims can have a significant impact on lenders’ resources and liquidity, especially should claims management companies (CMCs) become involved. Over the coming months, the FCA will be investigating a further 40 lenders and will take ‘robust action’ where necessary, including requiring lenders to pay remediation to customers where appropriate.

We recommend lenders conduct detailed scenario analysis, with cash flow and liquidity modelling to enable management to understand what the business can withstand, both financially and operationally. This will also aid in understanding how customer forbearance strategies advocated by the FCA interact with customer engagement and collections going forward.

For more insight and guidance, contact Will Stagg.


1 The FCA assessed firms against existing Handbook standards (MCOB 12, 13, CONC 5, 6 & 7), Senior Management Arrangements Systems and Controls (SYSC), Principles 6 and 7, as well as guidance provided within the TSGs and the Vulnerable Customer Guidance (VCG).

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