Moving from treating customers fairly (TCF) to the Consumer Duty

Whilst tempting to hope the authorities might want to put this on the back burner, if anything, we believe there will be an increased focus on regulated firms avoiding foreseeable harm. In particular, the FCA’s Consumer Duty outcome around price and value is likely to become even more important as consumers come under increased financial pressure.

The FCA has confirmed as much, stating that while the Consumer Duty is not yet in force, firms should be stepping up now to support customers in these straitened times and ensure that customers get good outcomes.

To a certain extent this also chimes with policy objectives that underpin the “S” (Social) in the regulatory focus on ESG measures (not least financial inclusion as a policy objective).

In particular, firms will need to consider whether they should reach out proactively to customers experiencing difficulty or vulnerability, or that are likely to do so. Firms will need to consider whether their channels of communications are adequate – particularly if these rely on digital communications such as in app support or chatbots. The needs of customers can change too, eg a tech savvy customer who loses tech access as a result of financial difficulty. It’s likely that customers will need to be able to access other channels such as telephony/face to face support.

Additionally, despite guidance that the Consumer Duty should not be applied retrospectively, the FCA seems to want to apply the spirit and intent of the Consumer Duty towards the cost of living crisis and we would expect this to continue in advance of the effective date next year.

Affordability and forbearance

The FCA has stated that the Tailored Support Guidance (TSG) for mortgages, consumer credit and overdrafts which was issued during the pandemic ‘is also relevant for borrowers in financial difficulties due to other circumstances such as the rising cost of living’. See for example its June 2022 Dear CEO letter to over 3,500 lenders, its Portfolio letter to mainstream consumer credit lenders sent in the same month, and its mortgage support guidance published for consultation in December 2022. The mortgage support guidance is part of a range of measures agreed by the government, major mortgage lenders and the FCA that firms can use to support their existing mortgage customers to manage their monthly payments during the cost of living crisis. This Engage article ‘UK FCA consults on mortgage support guidance as cost of living starts to bite borrowers’ includes more detail on the measures.

The FCA is also in the process of requesting data from certain consumer credit firms on their credit activities to enable it to monitor and assess the impact of the rising cost of living on consumers.

Firms may want to consider the extent to which an approach to forbearance adopted during the pandemic still works for them. Certainly the difference in interest rate environments makes payment holidays less attractive for regulated firms if rates increase dramatically in the interim.

Firms will also need to ensure their approaches to forbearance and enforcement continue to meet fairness requirements in times of increased economic stress, when any actions on the part of the firm are likely to be subject to both challenge from customers and scrutiny from the regulators. There will also be increased scrutiny on whether decisions to lend (both historic and going forwards) are based on proper affordability checks. In relation to mortgages, the FCA’s mortgage support guidance clarifies when affordability assessments or advice are needed.

Firms should consider whether their policies and procedures offer them adequate protection should they come under the spotlight.  The recent publication of the Key Findings from the FCA’s Borrowers in Financial Difficulty review highlights a number of areas where firms may be failing to deal adequately with these customers as well as some examples of good practice. Firms should also be aware that, on publishing the Key Findings from its review, the FCA stated its intention to consult on the future of the TSG, and that may include proposals to make changes to its Handbook. For more on the Key Findings, take a look at this Engage article ‘FCA Report on the review of borrowers in financial difficulty following COVID-19’.

The FCA has also recently published the long-awaited interim report on its Credit Information Market Study. In the report, it highlights the importance of prioritising ‘remedies which have the potential to deliver benefits for consumers most affected by the rising cost of living’ so that the industry is well placed to provide high quality credit information in support of ‘effective and responsible lending’ as the UK economy works towards recovery from the current challenges. Firms will therefore also need to be ready for changes in this area. For more on the FCA’s credit information proposals, take a look at this Engage article ‘Attention lenders: UK FCA proposals to improve the credit information sector’.

Vulnerable customers

Firms are going to see more customers seeking support – many of which will be vulnerable or on the edge of it. Firms will need to ensure that they have processes in place to identify an increased number of vulnerable customers, particularly lower income, older and rural households who are most at risk of the cost of living crisis. Firms will need to check they are monitoring the position appropriately, obtaining the necessary data and MI, and that they have the resources to deal with vulnerable customers appropriately.

Firms should consider reaching out proactively to such customers.  If firms support only through digital, is this sufficient or without unreasonable barriers?  As noted above, expanding alternative communication channels may be needed for some digital based services.

BNPL

Will increased interest rates mean customers curtail their spending habits or rely on BNPL products at an even greater rate given constrained finances? The answer is probably a bit of both – which means affordability checks (or absence thereof) in BNPL products will become even more of a focus point.

Separately, firms need to be alive to the risk of increased default levels – not just in terms of conduct requirements, but also the impact on profitability. This is equally true of retailers offering true BNPL products (e.g. deferred payment), where they bear the risk directly, as it is of lenders offering credit products at checkout.

In the latter case, it will be interesting to see if the current business model of merchants paying BNPL providers for this payment option at checkout will come under further scrutiny.

The FCA does not yet regulate BNPL products; however, it has met with unauthorised BNPL providers to encourage them to provide their customers with an appropriate level of care and support.

Knowing your terms and conditions and creating an audit trail for changes

Businesses may wish to move quickly in making changes to existing customer terms and products given the rapidly changing financial picture. Understanding what may be permissible under customer terms and conditions, and the extent to which rights of variation are fair and what fair use of those rights might look like will certainly help manage expectations around quick changes, relaxing requirements or pulling offers etc. Equally important will be the need for the business and legal functions to determine and record the rationale for making decisions under the terms where a firm has the ability to exercise discretion – for example, in finding reasons to pay or not to accept rate increases.

Mortgage and other debt prisoners

The opportunity for re-financing debt (be it mortgage debt or other forms of financing such as motor finance with customers increasingly becoming unable to afford to service vehicles due to high fuel prices) is narrowing as firms begin to limit the range of products they offer. Firms will need to ensure that customers who are unable to re-finance are dealt with fairly and, in the Consumer Duty world, in a way that means they still derive value for the cost of the product they are unable to re-finance.

Changes to debit/credit interest rates 

How banks react to changing interest rates for borrowing may well have implications for what they can do later – particularly if deposit rates don’t move when lending rates do. Decisions should be taken in the round to ensure chickens don’t come home to roost later.

Operational resilience

Firms should check that their operational resilience projects continue to provide robust protection given the increased strain facing supply/distribution/service chain dependencies.

Capital markets

Securitisations may come under strain if increased defaults and a difficult enforcement environment make it harder for firms to pay their note holders. Firms may want to consider the reps and warranties in their agreements should they come under pressure.

Switching

While switching of some financial products has tended to be low, this may rise as consumers look for the best deals. Regulated firms (in particular retail banks, mortgage lenders and insurance firms) will need to be mindful of their obligations around switching.

Cost of living crisis in Ireland and the U.S.

Similar trends can be seen in Ireland and the U.S.

Next steps

Please contact us if you wish to speak about any of these areas.

Updated 10 January 2023

Authored by Charles Elliott, Eimear O’Brien and Liz Boison.