It’s December. It is bitterly cold outside and everything is blanketed in a thick fog.
Though this sort of weather is to be expected for this time of year, , many communities are already in the grip of a harsher, financial winter. UK food price inflation hit a new high of 12.4% in November, homebuyers face higher interest costs and Citizens Advice warned that half of the charity's debt assessment clients are left in the red after paying for essentials.
Many people will turn to credit to get through the winter. Many more will review existing credit arrangements to make ends meet. Those already struggling to make their repayments will be looking to their lenders for support. Is the industry ready to respond?
Based on two reports issued by the FCA in November, it appears not.
Inaccurate information
The reports highlight several challenges for lenders, for credit reference agencies and for those involved in collections & recoveries in the months ahead.
The MS19/1: Credit Information Market Study Interim Report and Discussion Paper (CIMS) focuses on the data Credit Reference Agencies provide to lenders, and found, amongst other things, ‘significant differences in the credit information held on individuals across the 3 large CRAs’, and ‘That market failures and inherent difficulties in matching new credit information can lead to poor outcomes, including the oversupply of credit to individuals whose credit risk is understated, and limiting access to credit for individuals whose credit risk is overstated’.
The FT reported that between 5 million and 7 million UK Britons were at risk of financial exclusion due to limitations in the information being used to make decisions about them.
Must try harder
Meanwhile, Borrowers in Financial Difficulty following the Coronavirus pandemic - Key Findings (BIFD) reviewed the impact of the FCA’s Tailored Support Guidance and subsequent June 2022, Dear CEO letter to Lenders.
This report said, ‘firms need to do much better’. Of 65 lenders assessed, 32 were asked to make ‘material and significant changes to their processes’ and pay over £12 million pounds in remediation to about 60,000 customers.
Firms’ slow take up of readily available tools, such as Open Banking powered affordability assessments, is frustrating the best possible conversations with borrowers (especially those in arrears) and harming customer outcomes.
Pre-Consumer Duty, one might argue this is short-sighted. Post-Consumer Duty it’s a failure to mitigate foreseeable harm.
The FCA cited examples of firms’ ineffective discussions with borrowers leading to unfair, inappropriate and/or unsustainable forbearance arrangements where:
Firms did not demonstrate that they considered or took account of how circumstances may change for individual customers over time
Documents had to be submitted via a particular channel e.g. through the post or by email with little flexibility offered
The focus of discussions between the firm and the customer was too often on asking customers how much they could pay, often before exploring or collecting information on the customer’s circumstances
Firms often agreed payment arrangements based upon a brief understanding of what the customer said they could afford, with limited probing. This often resulted in customers suggesting an unaffordable payment
A review of customer files identified many examples where customers clearly displayed characteristics of vulnerability that agents did not pick up
It is no longer enough for firms to claim they don’t have the information they need to prevent, reduce, or manage arrears effectively. It has never been easier for a customer to connect a lender easily and securely to their bank account, using Open Banking, so that a holistic, accurate, timely, forward-looking assessment of income, expenditure and affordability can be achieved.
It’s better for customers, it’s better for firms’ productivity, and it can protect the wellbeing of those underwriting and collections colleagues whose jobs are made harder because of inadequate information.
So what should firms do?
The FCA requested feedback to the CIMS by 24 February 2023. A Q3 2023 report will seek to agree an agenda for the industry for the next 3 years.
However, the BIFID report and the scale of this winter’s cost of living crisis indicate that decisions are being made today by underwriters, collections and debt advisory teams who don’t have the data they need to deliver good outcomes for borrowers.
Moneyhub’s Open Banking powered affordability dashboard can be up and running in your contact centres in a matter of weeks, so you can evidence improved customer outcomes this winter and be Consumer Duty compliant come July.
Your customers can give you the information you need with minimal friction. Your teams can get rid of paper or pdf bank statements and the manual completion of I&E forms. You’ll be able to evidence to the FCA that you understand borrowers’ needs, characteristics and vulnerabilities.
Consumer Duty and Open Banking will fundamentally change the lending landscape. Whilst this financial winter may be long and hard, firms that adapt and adopt new tools can, it is hoped, help their customers look forward to a brighter spring.
Simon Ripton is Moneyhub’s Director of Propositions and a Volunteer Director at Nottinghamshire & Lincolnshire Credit Union.
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