Information current at 24 March 2020
This article reviews the issues banks (and other lenders, administrators and debt collectors) should be considering when dealing with customer financial difficulties caused by the COVID-19 situation. It reminds firms of the reporting steps the FCA has requested of them when taking initiatives going beyond usual business practices to support their customers. It also sets out, based on our experience of working with firms, some examples of forbearance and other support being offered across the industry.
With the Government having stepped up measures to fight the spread of COVID-19, there will clearly be substantial effects on individuals’ and households’ financial situations. In its recent guidance, the FCA has made clear the expectation that firms take reasonable steps to ensure they are prepared to meet the challenges COVID-19 could pose to customers and staff, and that they provide “strong support and service” during this period.
In line with its policy of prioritising the needs of vulnerable customers (including those who are potentially vulnerable), the FCA will expect firms to provide information and support to customers to help them avoid getting into financial difficulty and to show appropriate forbearance where they do.
Flexibility, access to funds and pre-arrears support
The FCA’s COVID-19 guidance is clear that it expects firms to make use of any flexibility within its rules to support customers, bearing in mind customers’ individual circumstances, and that it welcomes firms taking initiatives that go beyond usual business practices. By way of example, the guidance highlights the steps some firms have taken to enable customers to access cash. Firms should note, however, that they are expected to notify the FCA of any initiatives that go beyond usual business practice to allow it to “consider the impacts and offer support as appropriate”.
In light of its stance, we think it likely that the FCA will be supportive of firms exploring ways to help customers during this exceptional period and help them avoid getting into financial difficultly, including increasing access to existing funds. Examples of initiatives we have seen to help customers get access to funds include:
- Allowing customers to access cash within fixed savings accounts with no early access or closure charge;
- Allowing customers to apply for an increased (emergency) credit card limit; and
- Increasing deposit limits for mobile banking, giving customers the option to scan and pay in cheques via mobile banking.
The FCA will further expect firms to take proactive steps to identify and help customers prior to their going into arrears. For example, where firms are contacted by customers who expect to have difficulties meeting their payments in future, the FCA will expect firms to consider the customer’s circumstances and the most appropriate advice and forbearance options they may offer.
A firm must treat customers in default or in arrears difficulties with forbearance and due consideration (CONC 7.3.4R and MCOB 13.3.1R). Examples of treating a customer with forbearance would include:
- offering mortgage customers a payment holiday of up to three months (see below);
- considering suspending, reducing, waiving or cancelling any further interest or charges;
- allowing deferment of payment of arrears; or
- accepting token payments for a reasonable period of time in order to allow a customer to recover from an unexpected income shock.
In line with the FCA’s steer to go beyond usual business practices and consider the needs of individual customers, firms will need to look beyond their standard policies and procedures, adapt processes and take account of customers’ individual circumstances when considering which forbearance options they make available.
Firms need also to be mindful that customers will require flexibility as circumstances change and that arrangements may need to be revisited periodically, not least to ensure that they are not leading to an unsustainable problem. In particular, firms may need to consider adapting their income and expenditure assessments when assessing a customer’s situation. As the government announces initiatives to control the spread of the virus and help alleviate financial hardship, existing categories (for example, travel and childcare costs) may not carry the same weight.
In light of the current, extraordinary circumstances, the FCA has issued specific guidance to mortgage lenders and administrators making clear that firms should grant customers payment holidays for three months where customers may experience payment difficulties as a result of COVID-19 and where they have indicated they wish to receive one. Firms will need to be mindful of the risks involved in executing these options and ensure they are not mishandled to the overall detriment of the customer.
The FCA has emphasised that there should be no additional fee or charge (other than additional interest) as a result of the payment holiday and that the payment holiday should not have a negative impact on the customer’s credit score. The FCA has also made it clear that repossessions should not be commenced or continued unless the firm can demonstrate clearly that the customer has agreed repossession is in their best interest.
The FCA’s guidance does not prevent firms from providing more favourable forms of assistance to the customer, such as reducing or waiving interest. We also have observed mortgage lenders proactively offering longer-term options such as:
- extending the remaining term of the mortgage;
- allowing customers to switch part or all of their mortgage to an interest-only mortgage; or
- allowing customers to switch rates
The FCA’s guidance states that there is no requirement on firms to assess affordability when varying the terms of a mortgage contract solely for the purposes of forbearance or to avoid a payment shortfall. However, if they are considering offering options such as product or rate switches, firms will need to assess any wider affordability requirements and discuss these options with the FCA, where necessary.
The FCA guidance places particular emphasis on firms showing greater flexibility to customers in persistent credit card debt. Under recently introduced rules, lenders were required to take steps where customers had been in persistent debt for over 36 months. The FCA’s guidance states that firms can now allow customers an extension until 1 October 2020 to respond to them and firms do not have to suspend the cards of non-responders before then.
Communication and access to services
There is a clear need for concise, easy to access information for customers during this period. Firms should review their letters, websites and call centres scripts and guidance to ensure they clearly explain the options available to customers to manage their finances, and how they can access support if they are concerned about financial difficulties. This should including highlighting product features such as payment holidays, the availability and implications of forbearance options, and providing links to debt charities and advice.
In the light of government guidance on limiting social contact, many banks have a dedicated webpages providing explanations on how to access mobile or online banking rather than visiting branches. Others are focusing on providing “video banking” and chatbots to help guide customers. However, firms should also consider the needs of customers who may not have access to the internet or who may rely on visiting their local branch. Some firms, for example, have dedicated an hour each morning for elderly and vulnerable customers to enter the branch to manage their money without being exposed to crowds or queues.
Resourcing and training
Calls from customers regarding financial difficulties and payments have increased. In line with the FCA’s guidance, firms should be carefully reviewing their Business Continuity Plans (BCPs) to help manage staffing levels. In particular, firms need to consider how they resource call centres and collections operations since travel to the office may be challenging and remote working may prove difficult given the privacy and security implications of handling customer data.
Firms may look to re-deploy employees across business areas or jurisdictions to meet increased demand. During the financial crisis, for example, many firms re-trained their sales and underwriting teams to handle collections. If firms look to do this, they will need to ensure that re-deployed employees are competent and receive sufficient training to understand UK regulatory requirements. The lead-in time for training is likely to be limited so firms may wish to use re-deployed employees to handle less complex tasks, for example, initial triaging of customer calls or dealing with simpler customer queries.
MI and monitoring
To demonstrate that they are taking reasonable steps to ensure good outcomes for customers, firms will need to monitor regularly the efficacy of any pre-arrears and forbearance solutions and take decisive action to implement new solutions, where necessary. With this in mind, banks should consider the MI they need to monitor the solutions offered to customers (including any newly implemented solutions or forbearance options) and track that these are delivering fair customer outcomes.
In addition to monitoring MI to ensure that they have sufficient numbers of call handlers and specialist financial support advisors available, firms should consider increased monitoring of customer calls and interactions. This is especially so given that customers may have complex needs at this time and call centre staff and collections staff may have received limited training.
Credit reporting and IFRS
The FCA is clear that mortgage payment holidays should be treated as having been offered in exceptional circumstances outside of the customer’s control. Customers’ accounts should not be recorded as having any form of detrimental arrears where they receive a payment holiday and there should be no negative impact on the customer’s credit score. Firms offering other forms of credit will need to be mindful of the FCA’s stance in this regard.
Firms will also need to consider the correct reporting of any forbearance under IFRS 9. Even taking account of the recent Bank of England (BoE) guidance, there may be some changes in Stage 2 balances, Stage 3 balances and Expected Credit Losses (ECL) and defaults for capital purposes. More information on applying IFRS 9 can be found in our recent article.
These are challenging times and they are leading to significant and often unanticipated increases in consumer vulnerability. Firms will need constantly to review both the wider situation and their own plans and customer support tools. MI will be crucial to allow firms to monitor the outcomes being received by customers and to act quickly to address any issues. Firms will need to be flexible in their approach to forbearance and be mindful that customers may require support more than once and longer-term. Resourcing call centres and branches may prove difficult if employee movement is restricted but firms can look to alleviate some of the pressure by encouraging other methods of contact and support such as websites.
The FCA has asked firms to keep them informed of the actions they are taking to support customers and flag any areas of concern such resilience or liquidity concerns or potential failure to meet regulatory requirements such as complaint handling time requirements.