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By Matthew Drage (Managing Director) & Manbir Johal (Consultant) - [First Published by Collaboration Network] | 14/11/2023

Collections and Recoveries – Supporting customers within an evolving economic and regulatory landscape

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The UK has been gripped with economic uncertainty since 2020 following the Coronavirus pandemic. Since then, the UK and the rest of the world have been navigating a series of events, such as the war in Ukraine and the current cost of living crisis which has seen spiralling interest rates as a result of inflationary pressures, increasing energy and food costs, all of which continue to stress consumer circumstances and their financial capability.

With a backdrop of economic uncertainty, the FCA’s Consumer Duty Guidance for open products came into effect on 31 July 2023. What does the Consumer Duty mean when taken alongside the ‘cost of living crisis’ for supporting customers in financial difficulty?

 

FCA’s Borrowers in Financial Difficulty Project (BIFD)

Following the pandemic, in March 2021 the FCA launched their BIFD project. The aim of the project was to monitor, gather insights and act where customers were not treated in line with the Tailored Support Guidance (TSG). This consisted of firm surveys, consumer research and multi-firm work, which included 69 assessments across 65 firms.

In  November 2022, the FCA released its final findings outlining four key areas for firms to focus on to improve outcomes for customers in financial difficulty:

  • Engagement;
  • Effectiveness of conversations with customers;
  • Helping customers to consider and access money guidance and debt advice;
  • Fees and charges.

 

Within their findings, the FCA provided a clear direction for firms to focus on. This included encouraging customer engagement, staff resourcing and training, providing appropriate tailored support in line with customer’s individual circumstances, making customers aware and helping them access money guidance or not-for-profit debt advice and lastly ensuring fees and charges for customers in arrears are reasonable and proportionate to the costs incurred by firms.

In June 2022, the FCA sent their Dear CEO letters about the rising cost of living. The FCA further reiterated their expectations of the application of their TSG, noting its relevance to customers in financial difficulty, leaving no room for failure in application or interpretation.

 

Consumer Duty

In July 2022, the FCA published its final Consumer Duty Guidance. As Sheldon Mills, Executive Director of Consumers and Competition speaking in May 2023 in the run-up to Consumer Duty implementation noted “We will all become ever more outcomes-and data-driven – which means focusing on results over processes – ever more attuned to the needs of consumers”.

We explore each outcome of the Duty below, weaving in broader regulatory expectations with regard to evidence of consumer outcomes.

 

Outcome 1: Products and Services

Collection and Recoveries (C&R) teams will generally not be the product owners, the team will sit within the operational arm of an organisation. With any new product to market or alterations to existing products, it’s important to focus on all aspects of the possible customer journey. So now more than ever, it would be best practice to include the firm’s C&R subject matter experts at the earliest stage of any project or product design as well as ensuring they’re part of any product or project approval process.

The inclusion and enhancement of governance will help factor and understand all downstream impacts to customers and the business. It will highlight key risks to systems, existing processes and policies. By adopting this approach, firms will be taking proactive steps to avoid any foreseeable harm.

 

Outcome 2: Price and Value

With any C&R activity, inevitably there will be costs to support customers in arrears. Traditionally, this has been offset by firms charging interest on arrears, late payment fees, failed payment fees and broken promise fees, for example. The FCA, via its various handbooks, sourcebooks and publications has always been quite clear to firms, ensuring that any fees or charges are reasonable and proportionate and that customers are not overcharged and are designed so that firms are not commercially benefitting.

Within the BiFD findings, the FCA found that firms have wide-ranging charges for similar activities. They also noted the volume of charges and subsequent unpaid accrued interest resulting in an escalation of debt for the customer.

Firms should consider, what is the value of the service they are providing when customers hit financial hardship. Firms should review the volume and the skill set level of their teams and if they are appropriately armed to support customers, whether are they supporting pre-arrears as well as customers in arrears, their suite of forbearance options available and whether are there any third-party partners that can also support customers. These are all factors that can provide real value to customers, especially if they eventually lead to sustainable rehabilitation and customer behavioural transformations.

 

Outcome 3 and 4: Consumer Understanding & Support

In line with the FCA BiFD findings, key areas of focus should be:

  • Engagement
  • Effectiveness of conversations with customers
  • Helping customers to consider and access money guidance and debt advice

 

Firms need to ensure their communication strategies are reviewed regularly and understand the different mediums of communication and the success rates of each channel in reaching customers. Firms should also review the wording of customer communications.

Once successful contact has been made with the customer, firms should ensure that those conversations are geared to understand customer circumstances which should lead to appropriate treatment with the applicable forbearance. Customers need to be fully informed so that they understand the information provided and any subsequent consequences they may incur.

Finally, customers need to be signposted to free independent debt advice. Firms should support the customer through this process either by directly connecting them or clearly laying out how they may be able to access free debt advice. Pertinently, as part of any referral, firms should talk to customers about the benefits of this service.

 

Vulnerability

With all aspects of customer treatment, vulnerability should always be a key focus in any customer interaction and firms should ensure they are compliant with their obligations under FG21/1. With customers being in arrears, their proximity to vulnerability is significantly increased. From a C&R perspective firms should have appropriately designed and implemented policies and processes supporting customers with low financial resiliency. Firms should also pay due regard to any additional needs customers may have, ensure they are appropriately flagged, and tailor their support and communications so that those customers receive good outcomes and avoid suffering any personal or financial detriment.

 

Evidencing outcomes

The above is a small snapshot of some of the areas that firms can focus on to demonstrate good consumer outcomes, which has been brought into much sharper focus by the implementation of Consumer Duty. It is critical that firms are able to evidence the outcomes being achieved from the good work and efforts put into having practises that are robust, fit for purpose and support effective advice and good outcomes that demonstrate value for their customers.

The FCA is on the path to becoming a ‘data-led regulator’ and expects firms to harness the data available across the business to act as evidence. Outcomes Monitoring is a key component of Consumer Duty and plays a vital role in supporting a firm’s case in complying with the Duty. It is, therefore, a given that implementing a robust outcomes monitoring framework and reporting mechanisms to enable visibility of outcomes throughout the customer journey should be an important element of any firm’s risk and control framework. This will not only support good governance and decision-making but also a firm’s attestation that it is compliant with the Duty.

 

In summary…

Firms should review the success or failures of forbearance offered to customers and continue to monitor holistic customer behaviour, across the journey. Where firms identify harm, ensure they identify it as soon as possible and act swiftly to prevent further harm and remediate any impacted customer. The new Consumer Duty alongside existing regulatory initiatives, and the FCA’s focus on data in a ‘show me, tell me’ approach puts the impetus on firms to evidence the good outcomes they are delivering for customers against, what is and continues to be, a very challenging economic background.

If you would like to discuss any aspect of your firm’s Collections and Recovery approach or would like further information, please get in touch at: hello@square4.com.

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