On 16 June 2022, the FCA wrote to lenders to ask them to support consumers suffering from the rising cost of living. It noted that, with a headline average inflation rate of 9%, the poorest households may face average inflation rates as high as 14%. Faced with a high cost of living, the FCA is concerned that more people will begin to struggle with the cost of borrowing.
The FCA’s letter sets out how the FCA expects lenders to support consumers struggling with the cost of living. The FCA expressed concern that some customers in vulnerable circumstances were not getting the support they need. It also noted that some lenders are not discussing the potential benefits of money guidance or free debt advice.
Treating borrowers fairly
Under the FCA’s rules, lenders are required to treat borrowers (both existing and new) fairly. It also indicated that earlier guidance brought in to address exceptional circumstances arising out of the coronavirus pandemic would apply equally to circumstances arising out of the cost of living crisis.
What are the rules on treating borrowers fairly?
The FCA’s Principles for Businesses (‘PRIN’) principles set out the standards the FCA generally expects of firms. Rules in MCOB 13, CONC 6, 7 and COCN 5D set out the FCA’s requirements and expectations of firms dealing with borrowers in financial difficulty.
The FCA considers that its Tailored Support Guidance (TSG) for mortgages, consumer credit and overdrafts - issued to address issues arising out of the coronavirus is also relevant to borrowers in financial difficulties due to the rising cost of living.
The FCA’s expectations of firms
The FCA expects firms to:
- Provide customers with an appropriate level of care and support.
- Give borrowers in financial difficulty tailored forbearance that is in their interest.
- Support borrowers showing signs of financial difficulty or struggling with debt.
- Ensure fees and charges levied against struggling borrowers are fair and do no more than cover a lender’s costs.
- Make sure a lender’s approach to taking on new borrower’s accounts for the financial pressure they may be facing and the impact on their expenditure.
- Consider what more can be done to encourage mortgage borrowers to think about switching to less costly options where available.
- Help consumers avoid falling victim to scams or illegal money lending.
The FCA has noted examples of behaviours that result in poor outcomes for borrowers. It identified that firms did not consistently:
- Explore customers’ circumstances fully to provide help and support tailored to their needs.
- Identify the specific needs and circumstances of a customers with vulnerable characteristics.
- Help customers in financial difficult access money guidance or free debt advice.
Relevance to Small Business Customers
The FCA is also concerned about the treatment of small business customers by lenders. The FCA stated that it will apply the same expectations to small businesses as to consumers. On 12 July 2022, the FCA published a review of banks’ treatment of struggling small businesses.
The FCA’s review of 11 bank’s collection practices identified several issues, including:
- Lenders not treating small businesses fairly in their payment plans. For example, by arranging payment plans that are clearly unaffordable.
- Staff not having the right training to support customers to make fair decisions.
- Lenders not having clear policies to identify and support vulnerable customers.
- Lenders lacking quality assurance processes to ensure they deliver fair results for consumers.
- Manual interventions within systems which appeared to make fair outcomes more difficult.
The FCA urged the whole sector to take action and wrote to the chairs of all retail banks. It stressed that it had found repeated instances of customers not being treated fairly by banks when they are struggling with repayments.
The FCA expects the board to ensure the issues identified are considered and, where necessary, addressed promptly. This should include suitable root cause analysis and redress.
Customers in Payment Difficulties
Where a customer is in payment difficulties, a lender must:
- Try to reach an agreement with the customer over the method of paying off the shortfall.
- Liaise with third party sources of advice to the customer.
- Allow a reasonable amount of time over which the shortfall will be repaid.
- Grant a change to the date or method of payment, if requested by a customer.
- If no reasonable payment arrangement can be made, then to allow the customer to remain in possession for a reasonable period
Check your agreements and policies and procedures
Lenders should ensure they make it clear to customers when and how they should get in touch if they have any concerns about their ability to repay money they have borrowed. This should be supported by information and guidance made available by lenders, e.g. on their website and in information packs.
Lenders must ensure their policies and procedures are fit for purpose and meet the FCA’s requirements and provide appropriate support to consumers and other customers to whom the requirements apply. Lenders should also ensure their staff are aware of their policies and procedures and kept up to date with any developments.