Figures suggest that within the first six months of being offered, payment holidays were granted to more than four million customers in the UK across mortgages, credit cards, and personal loans. The government has also introduced the Debt Respite Scheme (Breathing Space), which around 700,000 people are expected to benefit from this year alone.
While this has offered much needed support for borrowers, the short time frame for lenders to adopt the schemes poses a range of conduct and operational risks. It’s important to consider how customers will continue to be treated fairly and the impact on vulnerable customers.
The FCA has published guidance for lenders in light of the exceptional circumstances caused by COVID-19. However, this guidance has been updated several times, highlighting the need to ensure fair outcomes and solutions for customers with either short or long term debt. These constant updates have meant lenders are under extreme pressure to adhere to changing regulatory guidance to make sure supervisory expectations are met retrospectively.
Keeping pace with changing expectations could have a significant impact on a lender’s resources, which could affect their regulatory compliance. Maintaining accurate records and documentation of all processes will provide a clear audit trail and demonstrate compliance with all government and regulatory expectations. This will mitigate compliance, reputational and conduct risks in the event of a Past Business Review (PBR) from the FCA. Completing a PBR is a rigorous task and could prove to be time consuming and expensive for a company.
These issues have affected a large number of customers, including some of the most vulnerable. This could lead to poor customer outcomes and regulatory intervention, and the FCA has highlighted that actions that are inconsistent with its guidance are likely to contravene its expectations that:
In addition to causing potential harm to consumers, any compliance issues could prove costly to firms in the long run if they do not take the time now to ensure all of their processes and actions are compliant.
In order to provide high standards of customer care, lenders need a stable affordability model with consistent lending criteria. Overstretching skilled resources could impact the quality of services and may result in ‘mis-selling’ to consumers, leading to potential reputational and legal risk.
There has been an increased demand on the frontline, both in terms of the higher volumes of customer enquiries about payment holidays and Breathing Space, as well as the specialist expertise required to manage the coronavirus-related government initiatives and provide appropriate assurance. This is why it's important to follow FCA guidelines regarding the pandemic and have an effective control framework in place.
FCA guidance requires lenders to demonstrate records of all information given throughout the customer journey and evidence to support any advice given to the borrower. Gathering and maintaining this additional documentation is a significant task at a time when resources are already strained.
Lenders also need to ensure that they do not report a worsening status on a customer’s credit file as a result of the customer taking a payment holiday. Often these reporting processes are automated, so rely on timely manual intervention.
Customers who are experiencing problems coming out of a Breathing Space or payment holiday need careful monitoring in both the short and long term and need to be offered forbearance options where appropriate. Any existing arrears, or arrears that occur after a customer has exited a payment holiday, need to be treated separately from any sums covered by a payment holiday. This can be difficult for lenders, whose systems are not designed to do this.
Lenders often need to adapt their calculation systems to adhere to the FCA guidance to provide customers with personalised illustrations and offer additional forbearance options. Given the short amount of time between the issuing and implementation of the guidance, there was limited time available to lenders for validation and testing of any system changes. In this case, lenders should be looking to undertake retrospective testing so that any errors can be identified and rectified as quickly as possible. Where firms have produced inaccurate calculations as part of customer statements for loans subject to the Consumer Credit Act, this can render the loan legally unenforceable. The significance of getting these calculations correct has never been greater.
These issues have significant implications for both lenders and borrowers, with some of the most vulnerable customers at risk. Firms should consider reviewing their forbearance and collections procedures to ensure regulatory compliance, particularly with respect to the fair treatment of customers.
Firms should document the details and governance controls of these procedures and identify new controls where needed. They should also validate the calculations carried out under the payment holiday and Breathing Space arrangements, including the contractual monthly payment following the period(s) of payment holiday or Breathing Space, any illustrations provided to the customer — such as the total amount payable or the impact of any alternative forbearance options offered to the customer like loan term changes.
This would allow lenders to have a sufficient framework in place to uphold best practice, supporting good customer outcomes and reducing regulatory compliance risks in the long term.
Contact Alex Ellerton for more information on the Debt Respite Scheme and managing payment holidays.