The UK’s Financial Conduct Authority (FCA) has handed out a £26m fine following poor treatment of more than 1.5 million struggling borrowers. It marks the highest fine issued to a lender for what it deemed a breach of consumer credit rules, since a £64m fine last year for lack of support for financially struggling mortgage customers.
The new penalty related to the mistreatment of business and personal customers who fell behind on credit card and loan payments between 2014 and 2018 – well before many of us had even heard of COVID-19. The move prompted the FCA to also warn other institutions against mistreating customers facing financial hardship during the pandemic.
In this instance the bank in question had ended up offering struggling borrowers unaffordable or unsustainable payment plans that were likely to put them under pressure to prioritise the debts ahead of other critical financial responsibilities. It is worth noting the bank’s management team apologised, quickly revised operating procedures and worked fast to resolve errors.
Eye-Watering Debt Numbers Worsening by the Day
As we pass the first anniversary of the pandemic’s outbreak, where does this leave lenders?
It’s fair to say there are growing concerns as to how households, sole-traders and businesses alike will be able to maintain growing debts as the crisis continues. But on the flipside, banks are also obliged to carefully handle collections, recoveries and manage their most financially vulnerable customers – all while under increasing regulatory scrutiny.
Research by UK charity StepChange reveals pandemic-related borrowing and arrears has surged by two-thirds (66%) since May last year and now tops £10.3bn. The number of customers deemed to be in ‘severe debt’ also jumped to 1.2 million – doubling since March 2020. Added to that are a further 3 million at-risk customers teetering on the brink of falling into arrears after taking on extra short-term loans. Anecdotally, we’re hearing from lenders that they expect a measurable uplift in credit arrears cases by June, when there will be a measured reduction in furlough, business and payment protection schemes.
Financial institutions are now working closely with the UK Treasury to craft a standard set of rules setting out how the collection and recovery of government-backed bounce back loans for small businesses should be handled. But the standards are unlikely to be extended to other forms of debt taken on by other customer segments during the pandemic.
According to new research by the Resolution Foundation, so-called ‘pandemic pressures’ have in many cases made it more expensive to live on a low income with children – and particularly so during lockdowns.
Factoring in Festive Financial Hangovers
Analysts are now factoring the added debt burden of festive finance after many Christmas shoppers went on a record-breaking credit spree by opting for online lenders’ buy-now-pay-later offers. Significantly, it’s estimated the average age of customers using these funding streams was 33 – notably older than younger consumers who typically utilise these types of credit lines.
The trend has seen some online retail POS lenders come under fire amid claims they are encouraging shoppers to spend more money than they can afford. Given the recent acquisition of the online arms of well-known struggling high street chains, it’s fair to expect further increases in the buy-now pay-later trend.
Forbearance Best Practice and Upholding Customer Engagement Standards
With an eye on near-term challenges, The Credit Services Association (CSA) has been quick to call on the British Business Bank and HM Treasury to set out best practice on forbearance and standards of engagement to ensure a consistent policy towards collections.
The trade body is also calling for the recovery of Business Bounce Back Loans (BBLs) to be picked up in part by professional debt collection agencies to ensure best practice and help make a £6bn difference to the public purse.
The creation of the BBL Engagement Scheme is expected to cost around £10 million annually for the next three years. But the returns are expected to far outweigh cost, with the return on investment between £3bn to £6bn in additional funds recovered.
What Happens Next?
With fewer people in full-time work, covering living costs is only going to get harder for many. Many are already obliged to borrow more simply to service existing debts. But those needing to collect from customers will also be facing significant regulatory scrutiny. Many consumers are likely to regard their level of indebtedness as being down to circumstances that are out of their control.
It’s clear that an active, agile, pre-emptive and insight-driven collections strategy is likely to yield far more effective, sensitive and successful recovery of outstanding debts. It’s a route we’ve seen work well in the past for many of our strategic customers.
Given the dynamic nature of rapidly rising and evolving pandemic debt, there’s no one single accepted measure analysing over-indebtedness or affordability risk. Right now, we’re advising lenders to adopt a flexible combination of criteria and pre-emptive approaches to evaluate debt risk.
Credit scores on their own don’t tell the full story. More in-depth data, analysis and insight are needed to comprehensively assess signs of stress and emerging affordability challenges. They can include gaining a view on the underlying reasons for hardship, a look at the type of relief applied for and an allowance for the longer-term impact on working customers’ employment sector. Communication and ongoing dialogue are also critical to success, underpinned by analytics and mathematical optimisation, to inform decision strategies and actions.
Fast, smart and scalable optimisation of collections can be applied across the different stages of the lifecycle to help safeguard at-risk and financially vulnerable customers. If embraced correctly and shown to be delivered appropriately, it’s also likely to help lenders ensure they don’t fall foul of the regulators. FICO has already highlighted the higher proportion of consumers in collections are good customers in bad circumstances. Now is the time to adopt appropriate personalisation, within regulatory guidelines, at speed and scale through automation. To read more click here.