Temporary financial relief for consumer credit customers: managing the longer-term implications

Who should read this article?

Board members and senior executives of consumer credit firms including: CEO, CRO, CCO, CIO and those responsible for customer outcomes.

Reading time: 4 minutes.

At a glance

  • The FCA has introduced a package of temporary measures to provide financial relief to consumer credit customers experiencing payment difficulties as a result of COVID-19.

  • There will be challenges for firms in ensuring that customers are treated fairly when the temporary measures come to an end, and in quantifying and managing the capital and liquidity strain the measures may create meantime.

  • To manage any prudential strain, and ensure they deliver fair treatment and outcomes when the temporary relief expires, firms will need to monitor and analyse their customer data closely. They will also need re-visit credit and collections processes in light of the current situation, and pay close attention to the direction of travel indicated by the FCA’s recent proposals to extend temporary relief for mortgage customers.

Background

The FCA has introduced a package of temporary measures to provide financial relief to consumer credit customers affected by COVID-19. The package covers:

  • Overdrafts

  • Credit cards and revolving credit (i.e. store cards and catalogue credit)

  • Personal loans

  • Motor finance agreements

  • High-cost, short-term credit (i.e. payday loans)

  • Other forms of high-cost credit including buy-now-pay-later (BNPL), rent-to-own (RTO) and pawn broking.

Under the FCA’s new guidance, where a customer is experiencing or expects to experience temporary payment difficulties as a result of COVID-19, and wishes to receive relief, the FCA expects:

  • Firms offering loans, credit cards, revolving credit, motor finance and credits agreements such as BNPL to give customers a payment deferral of up to three months

  • Firms offering high-cost short-term credit (HCSTC) to give customers an interest-free payment deferral of one month

  • Where a firm provides an arranged overdraft to a customer, the customer should not pay interest in respect of up to £500 of the balance of the overdraft for three months.

The guidance for overdrafts, credit cards and revolving credit, and personal loans came into force on 14 April. The guidance for motor finance and high cost credit came into force on 27 April.

The FCA issued separate guidance on mortgages in March 2020.

The end of the deferral period: treating customers fairly and delivering good customer outcomes

The measures are intended as a stop-gap for consumers experiencing temporary payment difficulties specifically as a result of COVID-19. Speaking about the FCA’s work to protect consumer and small business affected by the virus, Nausicca Delfas, Executive Director of International, stated that the FCA had “been working […] to maintain high standards of conduct” and “no-one will want to see a tail of misconduct post coronavirus”. We therefore expect that, in addition to monitoring firms’ immediate response to COVID-19, the FCA’s focus will soon turn to how firms treat customers when these temporary measures come to an end.

Given COVID-19’s profound economic impact, ensuring the fair treatment of customers as they move out of temporary measures will create many challenges for firms. Whilst some customers will require no further help, others will need additional support including standard forbearance and debt counselling. Identifying customers who may require additional support will be a complex task, particularly as there has been no expectation that firms make enquiries of each customer to determine the circumstances surrounding their request for relief. Firms will also need to re-visit the collections process for consumers unable to resume payments as some stages of the standard process (i.e. initial customer contact strategies) are likely to be inappropriate in the circumstances.

To start planning their exit from the temporary measures, firms will first need to understand what data they have about their customers, and whether they can apply analytics to identify customer cohorts that are likely to require additional support. They can then begin to consider what appropriate measures are needed for each of these cohorts. Firms may be able to utilise the following types of data and modelling to inform this assessment[1]:

  • Payment deferral data - data on when customers’ payment deferrals come to an end, to help identify peaks in requests for support.

  • Employment sector - modelling to identify which employment sectors may experience the greatest number of permanent job losses and whether customers will, therefore, have a reasonable prospect of resuming payments

  • Account origination information - to identify customers who are potentially more vulnerable to an income shock, for example, those working in vulnerable employment sectors, those with high debt to income ratios, those with high non-discretionary expenditure and those without other forms income

  • Credit Reference Agency/open banking data - to assess customers’ wider financial health, for example, those who have obligations to other lenders.

Another important consideration will be the number of staff needed to deal with customers when their payment deferrals come to an end. Understanding how many customers may require additional support, and when, will be critical to ensuring appropriate levels of customer support are available.

Payment deferrals: acting in customers’ interests

Firm should be mindful that the FCA’s feedback statement (FS20/3) clarified that firms should not grant payment deferrals where it is obviously not in the customer’s interests to do so. For example, where a customer would be unable to rectify their financial position at the end of the three-month period. In determining whether the three-month payment deferral is obviously not in customers’ interest, the guidance states that firms should consider both customers’ need for temporary support and the longer term effect of the deferral on customers’ situation.

Given this clarification, and the fact that the measures will remain in place for three months from inception, firms should consider revisiting the systems and controls they put in place in the early days of the pandemic to ensure they are performing at least a limited assessment of whether the payment deferral was in customers’ interests. Firms may, in future, need to provide evidence, from a customer fairness and outcome perspective, of:

  • whether customers were experiencing financial distress as a result of COVID-19 or whether the financial distress already existed

  • how they assessed the impact of the payment deferral on customers’ overall debt burden and their ability to repay any interest accrued

  • what alternative help and support they made available to those customers for whom a payment deferral was not in their interests

  • whether customers had a reasonable prospect of being able to resume payments at the end of the deferral period

  • the information provided to the customer explaining the payment deferral and the consequences of taking it (e.g. increased interest).

To ensure that they can continue to provide support in a timely fashion, the FCA guidance says that this assessment may be done at a book or cohort level, rather than having individual customer conversations.

Preventing customers from becoming over-indebted

In recognition of the extraordinary circumstances firms and consumers face, the FCA’s guidance suspends recent remedies intended to address persistent credit card debt (e.g. requiring firms to engage with credit card customers at specified intervals where customers are paying more in interest, fees and charges than they are paying off their balance).

Notwithstanding the suspension of these remedies, and in line with the outcomes set out in its recent business plan, we think it likely that the FCA will continue to expect firms to monitor the overall debt situation of their customers and ensure that they are not becoming over-indebted.

Firms should therefore monitor very carefully any requests for new and additional credit and perform appropriate affordability assessments, bearing in mind that where a customer was in pre-existing financial difficulty, the FCA’s existing forbearance rules continue to apply. If, during these interactions, the customer indicates that they are experiencing or expect to experience temporary payment difficulties, firms should ask whether the customer wishes to request a payment deferral.

Prudential implications

The temporary measures could lead to significant prudential implications for many firms, exposing a tension between the FCA’s desire to support customers and the regulatory requirement that firms manage their financial resources responsibly. Whilst acknowledging the challenges its temporary measures create for firms, particularly non-bank lenders, the FCA is clear that “this does not affect our expectation that consumers should be offered appropriate forbearance in accordance with our rules and guidance where necessary, particularly given the current exceptional circumstances”.

Analysing and monitoring customer data will be critical to helping firms manage the prudential strain the temporary measures may create. In its statement on financial resilience for solo-regulated firms[2], the FCA says firms should plan ahead and ensure the sound management of their financial resources. This means taking appropriate steps to conserve capital, and planning how to meet potential demands on liquidity. Firms will need to know what proportion of customers have applied for temporary measures and will need to model customers’ likely progression from payment deferrals to forbearance and default in order to quantify likely potential losses and ensure they have sufficient capital to cover them. As part of their planning, firms should be mindful that where a customer is unable to resume payments at the end of the deferral period, any interest and charges accrued during the deferral period must be waived as part of subsequent forbearance measures.

Separately, firms subject to IFRS 9 will need to make assessments of whether customers have experienced a significant increase in credit risk under accounting rules and ensure appropriate impairment provisions are being held.

The apparent direction of travel

The FCA has recently announced proposals extending the period of time in which mortgage customers may request a payment deferral (until 31 October 2020) and requiring home finance providers to offer continued support for customers experiencing temporary payment difficulties, which could include extending their existing payment deferral for a further three months.

Whilst the FCA’s proposals apply only to home finance providers, consumer credit firms should be mindful of the FCA’s willingness to extend its temporary measures in order support customers experiencing financial difficulties as a result of COVID-19. In particular, firms might note the FCA’s expectations that home finance providers distinguish between the different financial circumstances of customers coming to the end of their payment deferral, and that firms contact their customers in good time before their payment deferral expires to discuss resuming payments and their options if they are unable to do so.

Conclusion

COVID-19 presents firms with a unique set of challenges. Regulatory expectations that firms act quickly to address financial hardship amongst consumers expose tensions in how firms balance the immediate financial needs of customers against longer-term outcomes and the requirement to manage their own finances responsibly.

To avoid storing up issues for the future, firms will need to leverage data and analytics to understand their customers’ needs, identify appropriate forbearance options, and understand the potential strain on the business. If they need better data and analytics to devise and execute their exit strategy from the temporary measures, now is the time to start building them.

[1] The processing of personal data is subject to the requirements of the General Data Protection Regulation (GDPR). Depending on the specific processing activities, firms may need to undertake or update the relevant Data Protection Impact Assessments (DPIAs), and put in place additional controls and safeguards to protect the data and privacy of their customers.

[2] https://www.fca.org.uk/news/statements/fca-expectations-financial-resilience-fca-solo-regulated-firms