There is an expectation that the pandemic will result in significant increases in consumers impacted by issues relating to vulnerability. In lieu of this, the FCA believes that now, more than ever, firms should pay attention to the needs of vulnerable consumers and ensure that they experience outcomes that ‘are as good as those for other consumers’.
With firms planning for the impacts of end of job retention schemes, the potential growth in unemployment rates and/or health impacts of their consumer base, the FCA has issued the second stage of their consultation on 'Guidelines for firms on the fair treatment of vulnerable consumers'.
Why is it more important than ever to develop your vulnerable consumer processes?
With payment deferrals and job retention schemes coming to an end at the same time, and following the news that the UK economy has moved to the deepest recession since records began with a fall of 20.4% in GDP in the 3 months to June, firms will be grappling with how to handle the expected growth in arrears in the coming months, be that with headcount increase, outsource support or implementation of digital solutions.
The numbers being shared across the industry lends itself to a growing shift of vulnerable consumers failing into arrears, across both a temporary and permanent basis:
- 4m people on furlough
- 7m payment deferrals on credit cards and personal loans[1]
- 9m on mortgage payment deferrals, with one in six mortgages subject to a payment deferral
- unemployment rates expected to hit 11-15%.[2]
Undoubtedly, firms will need to ensure that they not only have the resource and/or capabilities to service the growth in numbers but that the outcomes for consumers are fair and appropriate, particularly where vulnerability is displayed.
The FCA wants firms to take vulnerability seriously, and issuing the guidance now is a call to action for firms to ensure they embed the fair treatment of vulnerable consumers into their culture, policies and processes and that the Principles and Outcomes are front of mind.
How has the FCA updated the guidance so far?
Although this second stage consultation remains relatively unchanged, it does include updates of the draft guidance in response to the feedback and provides further clarity, including:
- an altered approach to actual and potential vulnerability by providing a spectrum of risk of vulnerability based on the risk of harm and the likeliness of differentiated needs
- refinement of the descriptions of what firms should do
- additional content to address feedback and replacement of some examples or case studies.
The deadline for feedback on the second stage is 30 September 2020. The FCA then plans to finalise the guidance later in 2020 or early 2021, clearly outlining that they will monitor how firms respond to it through supervisory work, enquiring around how firms:
- Understand the needs of their target market and customer base
- Ensure their staff have the right skills and capability to respond to the needs of a vulnerable consumer
- respond to consumer needs through product design, flexible customer service provision and communications
- Monitor the needs of their vulnerable consumers (are they being met and responded to?), collecting data on the impacts of policies and processes, and assess how they result in good outcomes for vulnerable consumers.
Why does it make sense from a cost perspective to improve vulnerability strategies?
It is evident that by including a cost-benefit analysis as per their commitment in GC19/3, the FCA believe that investment has its benefits to both firms and consumers;
- the inclusion of cost analysis, showing one-off costs and on-going costs for implementing processes that ensure the fair treatment of consumers, estimated at £710m and £448m respectively.
- The inclusion of benefits relating to ‘more appropriate consumer transactions’, ‘reduction in the probability of individuals experiencing financial loss/harm’, ‘reduced psychological stress’ and ‘time-saving,’ all leading to reductions in ongoing operational costs, at a break-even point of between £50-£180 per vulnerable consumer per year.
Where should you start when it comes to improving vulnerability strategies?
For those sectors regulated by the FCA, and especially within collections and recoveries functions, expectations are that it’s all hands to the pump with multiple projects in place to ensure that organisations are fit and ready for the end of October, and the landing of a major consultation may not have been on their agenda.
Reviewing the guidelines and/or completing a gap analysis may be a resource stretch too far and comparing them against any newly created treatment strategies may not have been in the plan for October’s implementation.
At Arum, we have highly experienced collections professionals and technology transformation experts who can work remotely and provide an extra pair of hands to help deal with the workloads; our experts can support on a specific task or project; we could review documentation and processes or indeed complete a full gap analysis of your treatments with an eye on the draft guidance from the FCA. From a system side, we can support the implementation or optimisation of your collections technology with help on testing, configuration and business analysis.
Darren Furlong
Lead Consultant
Arum
[1] UK Finance
[2] The Organisation for Economic Cooperation and Development (OECD)