Scenario:
Our client, a leading motor finance firm, was included in the Financial Conduct Authority (FCA) Borrowers in Financial Difficult (BiFD) project. The FCA identified a number of issues with the firm’s treatment of customers in financial difficulty. This included:
- failing to appropriately assess customer circumstances;
- not offering tailored forbearance;
- not differentiating in its treatment of vulnerable customers; and
- failing to retain adequate records/notes.
The FCA also highlighted weaknesses in the firm’s approach to the assessment and measurement of customer outcomes, the quality of its management information, and the robustness of its governance arrangements. As a result, the FCA issued the firm with a Requirement Notice under section 166 of the Financial Services and Markets Act 2000 (FSMA).
Activities:
Our engagement was structured into three workstreams in accordance with the FCA’s Requirement Notice:
- A forward fix project to address the concerns highlighted by the FCA.
- Embedding testing to measure the effectiveness of the changes made as part of 1 above.
- The identification and remediation of any harm through a past business review.
Workstream 1. Forward-Fix Programme:
Over a six-month period, the programme delivered a suite of impactful changes designed to strengthen the firm’s collections and vulnerability policies and the overall control environment within the first and second line. This included their compliance with regulatory requirements and their operational effectiveness. These changes provided a solid foundation for the firm to define how it intended to achieve good customer outcomes.
To implement these changes into everyday practice, we then created and delivered a tailored, two-day training course for approximately 50 employees. This comprehensive classroom-based course provided agents with the skills to execute the updated policies and manage collections with a heightened awareness of customer vulnerabilities, whilst providing tailored forbearance and delivering good customer outcomes. Record keeping practices were also strengthened, improving the qualitative nature of customer file notes and compliance with regulatory requirements.
The programme also included a complete redesign of the firm’s first-line assurance framework to incorporate outcomes testing. This provided a more robust mechanism for evaluating customer outcomes and operational success. This redesign not only enhanced senior management oversight, but it also ensured that outcomes were aligned with regulatory expectations, customer-focused objectives, and our client’s risk appetite.
Workstream 2. Embedding Testing:
We then conducted embedding testing to provide assurance that the comprehensive changes made as part of the forward-fix programme were effective and delivered the intended outcomes. It was also an opportunity to highlight opportunities to further enhance the changes where possible, whilst also providing assurance to our client ahead of the Skilled Person’s review, thus mitigating the risk of any unforeseen findings.
The Skilled Person also provided an independent evaluation to the FCA, opining on Square 4’s embedding testing, and its own testing of 25 cases. The results of both sets of embedding testing concluded that whilst the firm was on a journey of evolution, the issues identified by the FCA had been successfully addressed.
Workstream 3: Past Business Review:
We then guided the firm through a past business review, developing a methodology to identify and remediate identified customer ‘harm’, which was positively reviewed by the Skilled Person.
Using our extensive experience of past business reviews and remediation exercises, we structured this exercise into two stages:
- Stage 1 – a pilot to understand and investigate if the FCA’s findings were historically and systemically evident across a larger population; and
- Stage 2 – dependent on the outcome of stage 1, a data-led approach to identifying those customers impacted by the firm’s poor collection practices and the extent of any harm within the identified population.
We designed a comprehensive methodology setting out the approach to identification and assessment of various customer cohorts. The methodology provided a framework setting out the data used, the relevant time period considered, the starting population of customers, and the specific rules applied to establish the customer cohorts. It also included a remediation approach, detailing the rationale behind the remediation strategy and ensuring alignment with regulatory expectations, industry standards, and customer fairness principles.
In undertaking the review, we utilised highly skilled Square 4 case reviewers to conduct the sampling, initial analysis and extrapolation of results which informed the overall methodology. Throughout the review process, the Skilled Person provided positive feedback on the methodology, endorsing its robustness and alignment with the programme’s objectives.
Results:
Our engagement has delivered the following tangible outcomes:
- A market-leading, customer-focused collections environment that meets regulatory requirements and delivers good customer outcomes.
- Validation and approval from the Skilled Person that the quality and effectiveness of the deliverables successfully addressed the FCA’s findings.
- Applying insights and good practice from this review to the rest of the firm.
- Enhancing the relationship between the firm and the regulator through transparent communication and reporting.
As a result of our engagement, the firm has significantly strengthened its approach to customers in financial difficulty, supporting their future growth plans in a challenging market.
Client Testimonial:
“The team at Square 4 (Paul Scott, Nicola Crump, and Manbir Johal) have been an integral part in our response to the findings levied by the FCA – including creating new policies, procedures, and processes; designing the training and embedding of these processes; and designing a fair and pragmatic past business review strategy that they will now manage into execution. Square 4 have been key to me managing the s166 response as well as implementing and embedding a new risk focused framework and culture. The advice is always considerate, well informed, and pragmatic and I would happily provide references or testimonials for the Square 4 team”.
