Shortly before Christmas the FCA snuck out a review on early arrears management in unsecured lending. Due to the important implications of this report, Motor Finance has two legal comment pieces on the findings. Katherine Clark, solicitor at Weightmans, takes a first look at the recommendations


The FCA’s intention to focus on how customers in arrears are treated was initially set out in its 2015/2016 Business Plan, which explained that it would look at the way unsecured consumer credit debts are collected.

As a result, a report was undertaken by the FCA which reviewed how lenders manage early arrears in unsecured lending, and specifically how customers in arrears are treated.  

The FCA reviewed a wide range of firms, from large banks to smaller single-product lenders, and the products being offered by these firms were varied, including credit cards, store cards, personal loans and point of sale finance.

Not only were the policies and procedures of these firms reviewed, but an analysis was undertaken on how the firms implement them, through a review of case files.

In addition, representatives from the FCA visited firms to witness how they deal with arrears cases, and spoke to the staff involved in dealing with those cases.  

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The report focused on how customers are treated by lenders at the point when they first encounter financial problems, believing that contact at this early stage can set the tone of the relationship between the lender and the customer going forward and, of course, the final outcome of the case.

The report found that the forbearance and solutions offered to the customer varied from firm to firm, as did the way in which financial difficulties were identified and considered.  

In the statement released by the FCA following the report, Jonathan Davidson, executive director of supervision – retail and authorisations, said: “Firms must treat customers in default or in arrears difficulties with forbearance and due consideration.

“We found that firms who put customers at the heart of what they do saw the benefits of positively engaging with customers and agreeing sustainable repayment solutions.

“However, we found that firms whose culture was not motivated by securing fair customer outcomes were focused on securing payment as quickly as possible – which could mean delays, undue distress and the avoidable exacerbation of debts before customers with longer-term financial difficulties secured an appropriate repayment solution.

“We expect firms to embed a culture of doing the right thing for the market and consumers.”

The report found that the firms reviewed generally fell into three categories. A small number had a strong ethos on customers gaining a fair outcome and being given due forbearance, and these firms were organised in a way that enabled them to achieve this result.

Just under two-thirds had the right policies in place which, in theory, would allow their customers to achieve a fair outcome and due forbearance, but unfortunately the policies were not being implemented properly so those firms fell short of the intentions documented in their policies.

Approximately a third of the firms were less customer-focused and more concerned about the financial outcome of cases. These firms wanted to secure payment from customers quickly, rather than having consideration for the customers’ circumstances.

The report also considered at what stage firms identified customers as being in financial difficulties, and the impact that this could have on the outcome for the customer.

Clearly not all customers who fail to pay on time are in financial difficulties, but firms should take the opportunity to establish why a customer has missed a payment or may not be paying instalments on time. The report found that the majority of firms missed these early signs, and in many cases took numerous contacts with customers to establish their circumstances properly.

Clearly this delay in establishing customers’ circumstances means that there is a delay in affording them the appropriate forbearance, and offering them the right options to assist them in managing the debt.  

The outcome reminds us that the landscape has significantly changed when it comes to consumer finance. When the FCA took over regulation of the consumer credit industry in April 2014 there was no doubt that there would be a strong emphasis on regulatory compliance and, as such, firms were required to ensure that all procedures and policies were properly documented.

This report has highlighted the need to go a step further – as well as having in place, and implementing, arrears policies and procedures, firms must also have the right culture that takes into account the current FCA approach.

Having a good balance sheet and collecting as much as possible at whatever cost can no longer be the sole priority. Firms need to ensure that customers are getting the right level of forbearance and that the plan for each customer is appropriate for them so that a fair outcome is achieved. The focus on forbearance and a fair outcome needs to be embedded in the culture of all firms.

Continued monitoring

In the final paragraph of the report’s conclusion, the FCA makes clear that it will continue to monitor this area so it can identify any improvements made within the industry.

So, for those firms that are only half-heartedly implementing their arrears policies, now is the time to tighten this up.

There needs to be a cultural shift within those firms so that all staff are striving to achieve the right outcome for each customer.  Staff must be trained to identify the warning signs of financial difficulties, to engage with those customers early, to gather the right information from them, to offer the correct options to them, and to monitor those cases appropriately so that a fair outcome can be reached for customers.

The report found that when the culture of achieving fair customer outcomes is embedded in the culture of firms, those firms experienced real benefits, for example fewer complaints and greater staff job satisfaction.

This really goes to show that investing in this area can have a positive impact all round, so that the customers benefit, the staff benefit and, as a result, the firm benefits.