The protection of vulnerable customers is already at the heart of the motor finance industry, but with the new Financial Conduct Authority’s (FCA) guidance the sector is reassessing how it can best care for these customers.

The FCA’s recent consultation on Consumer Duty placed more explicit and higher expectations on the motor finance industry’s standard of care towards customers. While this is a major and welcome step, in many ways it is only putting in black and white what most in the industry already know.

“There are no major changes from a concept point of view. The principle of treating customers fairly is already something the business is on board with,” says Leanne Christmas, head of compliance for BMW Group Financial Services. “There’s almost nothing new there, but it raises its level of seniority in decision making.”

“It’s fair to say that assisting vulnerable customers has been one of the priority areas not just for the FCA but for all our members in recent years,” agrees Fiona Hoyle, director of consumer and mortgage finance at the Finance & Lease Association (FLA). “There has been a real focus on putting policies and procedures in place to ensure vulnerable customers are supported throughout the credit transaction, not only when applying for credit but the whole life cycle of the loan.”

In terms of real, practical changes brought on by the new guidance, things are a little bit vaguer.

“In reality what that looks like is still a bit up in the air,” Christmas explains. “It will allow the public greater confidence against the negative preconceptions the industry has had in the past. It means we need to document things in a slightly different way from how we have done. For those who are treating customers fairly at the heart of product development, it won’t make many fundamental differences.”

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                                                                    Leanne Christmas

Guiding principles

The FLA has been particularly active in the development and documentation of best practices in the industry, particularly around vulnerable customers.

“We got together with other bodies a couple of years ago to work with the University of Bristol to not only research what procedures were already in place and what frontline staff were dealing with but also into how we could deliver some very practical guidance. That research was published around 2017,” Hoyle says.

“We published a guide on debt collection, assisting customers in financial difficulties but also a guide for lending and points to take into account when lending to vulnerable customers. We worked extensively with 1,600 frontline debt advisors and 1,700 lenders, and even though it has been a while the guides we produced have stood the test of time and are equally as relevant now.”

“Getting these principals out to the market is really important. Our primary way of doing that is through the SAFF programme, the annual SAFF expert test taken by the majority of customer-facing staff in motor finance across the country,” says Adrian Dally, director of motor finance at the FLA.

These learning materials include a module about vulnerability and mental capacity that 30,000 staff are tested on every year. It also includes the teaching of the BRUCE protocol, a practical guide to identify and manage vulnerability in customers.

“The new guidance sets expectations in understanding customers’ needs, ensuring staff have the skills and capacity to support these customers”

“It explains what the vulnerability means, why it matters, and what the FCA rules mean. All that material is essential best-in-class practical tools for dealing with vulnerability,” Dally says.

If customers are repeating themselves, asking lots of questions, or are not fully understanding the product they’re looking at taking out, these are early pointers that may direct staff to refer customers to relevant teams within the company. This can happen at the lending stage, or if the customer hits financial difficulties.

“As with any industry, the identification of vulnerability is difficult. A vehicle or car purchase is emotive, a lot of people go in and fall in love with a car, and that emotion can mask some elements of vulnerability.

“As a lender, we’re reliant on brokers and retailers who conduct a lot of the sales process,” Christmas points out. “I believe generally people don’t want to talk about potentially having a vulnerability and can think that if you’re classified as vulnerable it will close off or limit access to finance.”

This is a preconception that Christmas is keen for the industry to challenge.

“We absolutely need to do more to make people feel comfortable so we can ensure customers get the right product that fulfils their need and doesn’t put them in a position of stress,” she says. “Just saying ‘we’ve identified a vulnerability’ doesn’t mean we can’t help.”

“All companies have policy and procedure they go back to regularly, and when consumer credit transferred into the FCA they had to share their policy,” Hoyle adds. “But the new guidance sets expectations in understanding customers’ needs, ensuring staff have the skills and capacity to support these customers.”

                                                         Fiona Hoyle

A new period of vulnerability

These issues are pressing now than ever, as whole swathes of the customer base have fallen into the “vulnerable” category over the last year who might not have before, thanks to the Covid-19 pandemic.

Several million customers have been seeking payment deferrals, many of whom have been able to resume payments, but we will have customers who are not able to do that and we’re looking at issues such as the furlough scheme coming to an end along with other government support mechanisms,” Hoyle says.

“That’s a focus for us, looking at customers who may need further support. That’s where we’re speaking to members here and now over the next quarter or so to best support them.”

The consequences of the pandemic have driven reflection and reassessment across the finance sector.

“What it absolutely has done is bring vulnerability to the forefront of every conversation,” Christmas says. “Throughout the pandemic, every one of our customers could have had a potential vulnerability, so we want to be in a position where customers get the tailored support they need.”

An important aspect of vulnerability to keep in mind is that it isn’t a simple binary or a permanent status. The pandemic put many people into a vulnerable position who then recovered, while others have found their position even more precarious.

“You can’t rely on the markers you had previously,” Christmas points out. “Especially when the retailers were shut and there were a lot more distance sales, that lack of human interaction, or reduction of human interaction could have caused much bigger problems for a vulnerable customer.”

The pandemic also highlighted contradictions within the regulatory environment. For instance, the priorities in place around protecting vulnerable customers can come into conflict with the Consumer Credit Act.

“For example, last year with payment deferrals, we know the principle is to treat customers fairly, take individual circumstances into account and provide documentation,” Christmas recalls. “But that quickly became a challenge because the Consumer Credit Act means any modifying agreement must be made a contract to make it legally enforceable, with a lot of legal information for vulnerable customers in a high area of stress, so that was a real problem last year.”

   Adrian Dally

The human touch

Another common phenomenon last year was the universal rise in video calls and e-commerce, accelerating trends that were already well underway before Covid-19 hit. In terms of how digitalisation affects vulnerable customers, and lenders’ ability to support them, it has proven to be a mixed blessing.

“With motor finance, in particular, it’s a threat and opportunity,” says Dally. “Through digital channels, you’re not looking at and seeing someone, which can create barriers. But through digital processes, you can build in all the checks and balances you need, backed up by human intervention.”

This approach was crucial to the implementation of the forbearance processes last year.

“Ultimately lenders were able to build processes that start digitally but ensure there is always a human backstop there to recognise that not everyone will get the help they need through a digital process,” Dally tells us.

“There is always an escape hatch that means someone can access a voice or physically engage with someone. It’s not rocket science, and it’s not unique to finance. The principle that the FCA put together for the forbearance guidance this time last year said that a digital process is good but two things, in particular, were important.

“Firstly, you need a human backstop readily available to look at someone’s issue individually, where customers can have their issues dealt with in their choice of process. Secondly, the customer should always have access to debt advice. Instantly you can be routed to proper debt advice guidance and support if you need it.”

“How to handle and identify vulnerability and prevent it from becoming a problem is at the frontiers of knowledge. There is always more all of us can learn”

This guidance is not unique to coronavirus. Those three qualities define best practice for digitalisation across a wide range of commerce.

The really good thing about digitisation is it allows customers to interact in the way they choose. The amount of choice means they can do a lot of research if they want to. People can look at what finance they can get based on their profile, carry out a soft credit search before a hard credit search,” Christmas explains.

“There are a lot of good points, but one of the biggest problems is human interaction falling away. We know as an industry the easiest way to identify if someone is potentially vulnerable is through that interaction, so we need new tools to identify that through automated processes.”

Among the new tools that have been proposed, but not yet implemented in the finance sector are online application processes that track customers’ keystrokes. If a customer takes a long time on a particular part of the form or struggles with simple details such as their birthdate, that can act as a catalyst to open an online chat window and introduce some human support, or at least alert the financier that this customer is potentially vulnerable.

Everyone we speak to emphasises that any solution must ultimately rest on human intervention, however.

“If we come back to the FCA’s recent guidance on vulnerability, they specifically call this out and say where you have automated processes you need to build in manual intervention for vulnerable customers,” Hoyle tells us.

“It’s a regulatory expectation that at the offset when you onboard customers you are talking to them about how they want to interact with the lender. That can be via a variety of different communication methods – some may want a letter, while others may want other forms of communication.”

“But we absolutely cannot rely solely on digitalisation and automation to look after vulnerable customers,” Christmas insists. “A hybrid and suite of options is good practice anyway. You should be able to write an email if that’s the most sensible option but deal with a human directly if you want to.”

A Continuing Journey

The range of tools finance companies has to monitor and support their customers with is continually growing and developing, and the challenges their customers face are always changing. However, the responsibility that financiers have to their customers will remain a constant.

“This is a permanent part of the landscape and always has been,” Dally says. “That is one of the drivers behind the FCA’s focus on Consumer Duty and this isn’t a temporary thing, it’s a permanent reality. But how to handle and identify vulnerability and prevent it from becoming a problem is at the frontiers of knowledge. There is always more all of us can learn about this and part of our job is to be at the centre of that and connect our members with genuine excellence and knowledge in the field. This is what ethical responsible finance looks like.”

“It’s very clear the FCA require us to have vulnerability at the heart of our governance processes to ensure customers are treated the right way,” Christmas says. “I see us possibly being more data-driven. What it means to our customer base when we have something like the pandemic or a specific sector of the economy affected in some way, or an economic trend we should take a more proactive approach about.”

As Dally points out, the industry must get this right, as the service it provides is vital.

“Credit is valuable, useful, and has a good social purpose, but life happens to all of us, and you need processes for recognising customer circumstances change,” he says.