The Financial Conduct Authority's mandate to lenders vis-à-vis their borrowers, who are financially distressed as a result of Covid-19, amounts to one of: forbearance, forbearance, forbearance.
As we explain in this insight, the FCA has issued emergency lending guidance to offer temporary financial relief for customers caught in the economic upheaval. (It has published guidance for mortgages, loans, overdrafts, credit and store cards, and catalogue credit.)
The guidance makes specific provision for measures such as payment holidays, but the FCA has reiterated that its existing forbearance rules and guidance continue to apply over and above those measures. At some point, there will need to be a return to "business as usual". Indefinite forbearance is not good for borrowers, who sooner or later will need to start repaying their debts (rather than forever increasing them with the accrual of interest); nor is it good for lenders, who at some point will need to start recovering funds owed to them.
That does not mean that customers will not still be suffering financial difficulties. Moreover, if lenders don't get their treatment of these customers right, they are likely to face the wrath of the FCA for not treating customers fairly.
In a timely reminder of the harsh consequences that can follow from how banks treat their customers, the FCA has issued a massive £64 million fine to the Lloyds Banking Group: –Lloyds Bank, the Bank of Scotland and The Mortgage Business – for perceived failings in its historical treatment of mortgage customers in payment difficulties or arrears. This is in addition to the comprehensive consumer redress scheme the banks voluntarily put in place in 2017.
How to engage with borrowers in difficulty
What can be learned from the FCA's Final Notice about how to engage with borrowers in financial difficulties and arrears? Although the particular issues Lloyds faced were fact specific, some lessons can be learned from the regulator's stance:
- Make sure that those engaging with borrowers in financial difficulties or arrears truly understand the customer's personal circumstances, including what the customer can truly afford to repay and when and whether the individual is a vulnerable customer.
- Give those engaging with these borrowers the flexibility to adapt proposed courses of action to the customer's personal circumstances. Alternatively, if escalation to a more senior colleague is required before doing so, at least make it clear that this should be encouraged in the right circumstances. (One of the FCA's criticisms of Lloyds was that the bank used a "payment authority matrix", which sets out the minimum percentage of contractual monthly payments an employee was authorised to accept as a payment arrangement without seeking further authority from a more senior colleague. The FCA was concerned that this created a risk of inflexibility in approach, with the result that call handlers might fail to agree appropriate payment arrangements.) The difficulty here – which the FCA did not grappled with (other than to say that training and monitoring are crucial) – is the tension that arises between giving employees sufficient flexibility to achieve the right outcomes and ensuring that there are sufficient systems and controls in place to provide consistency across and quality assurance over those employees.
- Ensure that loan arrears handlers are appropriately trained, their training is refreshed on a regular basis – including in respect of vulnerability – and they have sufficient expertise. The FCA considered that Lloyds' mortgage-arrears call handlers were insufficiently experienced, making it more likely that they would rely on the "payment authority matrix" rather than properly investigating customer circumstances.
- Ensure that arrears-handling practices are properly monitored and reported on, not just generally or in relation to an individual customer interaction, but by considering the whole customer experience. For example, where more than one bank representative is involved, each interaction individually may be deemed to be fair, but taken together they may not. Monitoring should involve not only whether a fair outcome was achieved, but also whether the process followed to achieve that outcome was fair.
- As ever, record, record, record …
The FCA's £64 million fine of Lloyds may seem draconian, given the issues that were identified by the regulator. However, the concerns that the regulator picked up on are a strong indicator of the focus that it has in this area and the stance that it will take on these matters. It is a level of scrutiny and focus that it is only likely to intensify with the return of life to a "new normal" as lockdown is eased and lending and borrowing move towards more routine patterns after the Covid-19 pandemic. In this more stringent regulatory environment, lenders would be wise to ensure they are compliant and in-step with the new practices and demands on how they should handle customers faced with financial difficulties.