FCA publishes thematic review report on arrears management in unsecured lending

Business meeting Print publication


On 13 December 2016 the Financial Conduct Authority (FCA) published its thematic review report on arrears management in unsecured lending (TR16/10).

In the report, the FCA examines how firms treat customers who fall into arrears, focusing on practices from the point of identification of customers in probable difficulties at a pre-arrears stage to the point at which the lender formally defaults the customer or charges off the debt. The report sets out how the FCA conducted the review, its findings, and where relevant, its assessment of how firms are currently meeting the relevant rules and guidance.

The report will be primarily of interest to firms engaged in unsecured lending activity, although other firms across the wider sector (for example debt collection agencies and debt advisers) will find the conclusions of relevance.

The FCA’s key findings are set out in chapter 3 of the report and include:

  • Most firms were improving the way they engage with customers pre-arrears and were proactive in the way they engage and approach customers when they see signs of actual or possible repayment difficulties.
  • Most firms were delivering good customer outcomes and complying with the majority of the rules under Consumer Credit Sourcebook (CONC) and other relevant standards. However, in some instances, firms were breaching the rules or had only recently implemented changes to ensure they were fully complying with the FCA requirements.
  • In accordance with the requirements under CONC, a firm must treat customers in default or in arrears difficulties with forbearance and due consideration (CONC 7.3.4R). The extent to which firms are offering and agreeing forbearance options to mitigate the impact of arrears on customers varied significantly.
  • The intentions of firms in helping customers in arrears also varied, with some firms focusing on identifying customers who can recover quickly from arrears difficulties and those who cannot. If these firms found that a customer could not recover quickly from their arrears difficulties then, depending on the customer’s circumstances, they would seek to obtain an affordable repayment solution or end the agreement to prevent further detriment. Other firms in the sample primarily sought to collect payment as soon as possible. Ultimately, findings indicate that a firm’s culture dictated its appetite for due consideration and forbearance.
  • Within the firms reviewed there has been significant change prompted by the introduction of FCA regulation. Much of the change has been positive and reflected a greater awareness within firms of the interests and needs of customers in arrears. However, many of the changes were only implemented recently and in a number of cases change programmes were ongoing and still being embedded.
  • Not all customers who pay late are facing repayment difficulties. However, the majority of firms missed early opportunities to identify and offer appropriate forbearance to customers who were showing signs of financial difficulty. Often multiple engagements with the customer were required before their circumstances were recognised by the firm.
  • Firms offered a range of forbearance options, yet in most firms there was a failure to explain the full range of options to customers and a failure to clearly set out forbearance options in policies, procedures or guidance.
  • In slightly under two thirds of firms the FCA found that culturally there were broadly good intentions to try and achieve fair outcomes for customers. Firms had placed greater emphasis on customer vulnerability and had made improvements to their approach to vulnerable customers in arrears, including developing and updating training for frontline staff and establishing new specialist teams.
  • Firms’ intentions and policies were not, however, always matched by execution in practice. Firms were failing to consistently pick up on indicators of vulnerability and some firms’ policies for dealing with vulnerable customers in arrears were limited, or were high-level and failed to provide specific guidance to staff about how to implement them in practice.
  • There was widespread evidence of poor customer outcomes in around a third of the firms who had a culture that was less customer-centric than other firms in the sample. Firms who focused on securing payment as quickly as possible, often at the expense of giving due consideration to the customer’s circumstances, exacerbated the financial and emotional distress of customers.

Overall, the FCA’s findings indicate that positive changes have been made over the past two years. Many firms have improved and continue to improve the way they deal with customers in arrears and are considering what constitutes a fair outcome for their customers and organising their staff, systems and processes to deliver this. However, there remains a need for firms to continue improving their practices and in some areas there is room for significant improvement.

Annex 1 to the report also provides a list of good practice guides issued by bodies that firms may find useful when identifying and interacting with vulnerable customers. Although the guides do not reflect the views of the FCA, guides produced by bodies such as the Money Advice Trust and the Money Advice Liaison Group are an effective resource in helping firms obtain practical guidance on how to treat vulnerable customers and understand what they could be doing to generate better outcomes for customers.

If you have any queries arising from this briefing, please do not hesitate to contact Jeanette Burgess or any member of Walker Morris’ Regulatory and Compliance team.