The FCA has rightly turned its attention again to those customers who are struggling with the cost of living. Back in mid-June, the FCA first notified 3,500 lenders that they expect high standards of support to be provided as many grappled with the cost of living crisis.
It’s incredible to think about how much has changed in the intervening months since the FCA first put lenders on notice. We’ve experienced a change in government (and monarch for that matter), a new Chancellor who has effectively capped the unit cost of Energy but has also through his mini-budget, arguably exacerbated the cost of living through continued high inflation. We also risk continuing the remarkable and swift rise in interest rates (2.25% as of mid-October 2022, but widely expected to breach 5% in 2023).
Even today, we now know that households are spending on average 27% of their income on mortgage repayments. The average mortgage interest rate has already risen to above 6% which also means that households are paying the greatest portion of their income on mortgage payments since 1989. The outlook remains gloomy with interest costs only expected to increase.
So what did the FCA say to firms back in June with regards to cost of living?
The FCA reminded firms of three key areas:
make sure that your approach to taking on new borrowers takes into account the financial pressure they may face and the impact on their expenditure.
consider and, if necessary, improve how you treat consumers in vulnerable circumstances.
effectively direct customers who need it to money guidance or free debt advice.
Indeed, Sheldon Mills, Executive Director of Consumers and Competition at the FCA, stated:
'Many consumers are feeling the impact of the rising cost of living in their personal finances and we expect this to increase over the next few months. Early action is important for those struggling with debt. We need all firms to get the basics right and provide good quality support. Where we see more serious wrongdoing, we are already acting to ensure these firms improve.
'The financial services industry has a significant role in helping consumers manage their finances – and it should expect us to pay close attention to how they do that over the next few months.'
What does the recent FCA information request say regarding the cost of living?
The FCA have waited for several months before asking firms about how they have responded to their initial warning with a detailed information request.
For firms who have recently received the information request titled ‘FCA Request for Information: Cost of Living Forbearance outcomes testing work’ you shouldn’t feel alone.
We are aware of several firms across all sectors of the consumer credit marketplace that have received this information request.
Within it, the regulator is specifically taking a two-stage approach, to see how firms have responded to the warning given in June. They are looking at the following areas specifically:
Stage 1: Providing evidence of policies and processes:
The FCA is asking firms for a plethora of information to assess how firms are supporting customers during the cost-of-living crisis.
The information request within Stage 1 asks for detailed policies around arrears and forbearance. It also requests a view of your typical customer journey for individuals who first enter financial difficulty.
Unsurprisingly, the regulator has also asked for firms to evidence their approach to vulnerable customers and specifically to break down the difference between human and automated interactions.
Other documents which the regulator has requested include; an overview of firm practices when it comes to Quality Assurance (QA), details around second-line assessments, and summaries of fees and charges for customers within arrears.
All in all, we have counted over 9 individual documents requested, but the true extent of the information request is significant, with a number of supporting documents and data points likely to be required to evidence each area.
In addition to the above information request, the regulator is specifically asking firms to provide arrears and forbearance data for recent months in relation to specific product lines (see below).
Stage 2: Customer file sample
Following the conclusion of the information request and the short time frame allowed (typically within a two-week window), the FCA is then also asking firms to provide sample customer files to evidence the practices outlined within Stage 1.
What can we learn from the information request?
The speed and urgency of the request show the seriousness with which the FCA is taking the cost-of-living crisis.
Following on from its communications earlier in the year, we are seeing a regulator which is demanding an urgent response from firms.
We are also noticing a marked shift towards firms that would typically be considered ‘prime’ lenders receiving this request. This suggests that the FCA is becoming more concerned about the ‘squeezed middle’ during this time of high inflation and real wage stagnation. Previously, much of the focus was on those lenders who were towards the higher end of the APR spectrum.
The Solution – About Square 4
Square 4 are working with several retail lending organisations on their approach to supporting customers in financial difficulty.
We have helped a number of firms to reassess how they support customers in financial distress, given the change in economic climate. Now is an opportune moment to reassess given many expect further financial hardship over the winter months.
The cost of living crisis may well be a once in a generation event, but as we have all learned, previous ‘once in a generation’ events can happen quickly and unfortunately, the risk of inaction is significant. Firms need to be aware of the continued high expectations placed on them by a regulator which is pushing for ever higher standards of conduct and care.
With the Consumer Duty now visible on the horizon, a review of your approach to supporting customers in financial difficulty may well be prudent. We have a tried and tested assessment methodology, honed on our knowledge of the FCA’s expectations, both through informal and formal assessment and enforcement of firms.