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Dealing with customers in early arrears

The Financial Conduct Authority’s recent Thematic Review considered how firms are treating customers who fall into arrears and has concluded that, whilst firms across the industry are making improvements into their arrears handling practices, approximately one third of firms are failing to give sufficient consideration to a customer’s circumstances.

The approach that firms take when dealing with customers in arrears difficulties cannot be underestimated. Indeed, in its business plan for 2015/2016 the FCA identified, as one of its five key objectives in its supervision of the consumer credit market, the need to ensure that firms were treating customers fairly and exercising appropriate forbearance when seeking to recover debts.

In its ‘executive summary’ to the Review, the FCA encourages firms, from across the industry, who are involved in the collection of debts relating to consumer credit agreements, to read the report, consider their approaches to arrears handling and to make improvements where necessary.

This article will assess the FCA’s findings and consider what steps firms can take to ensure that their arrears handling policies and procedures are in line with the FCA’s hard-line approach in this area and highlight examples of both good and bad practice.

The Review can be viewed at  https://www.fca.org.uk/publication/thematic-reviews/tr16-10.pdf


All firms must, when dealing with customers in default or arrears, comply with the requirements under the Consumer Credit Sourcebook (“CONC”), in particular the rule under CONC 7.3.4:

“A firm must treat customers in default or arrears with forbearance and due consideration”.

Whilst not made expressly clear in its Review, the underlying, but fundamental theme of the FCA’s message relates to culture. Ultimately, the Review determines that a firm’s culture will significantly influence how much due consideration and forbearance is afforded to customers in arrears difficulties. In the press release which accompanies the Review, Jonathan Davidson, the FCA’s Executive Director of Supervision – Retails and Authorisations confirms this view:

“We found that firms who put customers at the heart of what they do saw the benefits of positively engaging with customers and agreeing sustainable repayment solutions. However, we found that firms whose culture was not motivated by securing fair customer outcomes were focused on securing payment as quickly as possible … We expect firms to embed a culture of doing the right thing for the market and consumers”.

The FCA found that firms with a culture that was what they termed; ‘customer-centric’, consistently achieved fairer outcomes for customers and were in a much stronger position to meet the regulatory requirements in respect of arrears handling. Conversely, those firms who failed to give sufficient regard to customers and who focused too readily on commercial factors such as securing repayment as soon as possible, failed to sufficiently discharge their obligations.

Whilst, it is has to be accepted that in general there is a significant tension between a firm’s commercial objectives and its need to be compliant, the FCA applauds the approach of forward-thinking and progressive firms who actually recognise that a customer focused culture can benefit them commercially:

“These firms typically took a pragmatic commercial approach, recognising the cost savings of not expending resources continually phoning unresponsive debtors, and of positively engaging with customers and agreeing sustainable repayment solutions. In some cases, these firms cited benefits of this approach, such as reduced complaint levels and greater job satisfaction”. 

Specific Findings

In the Review, the FCA sampled a range of firms from across the industry and focused its evidence gathering and analysis under a number of key themes, all of which are discussed below.

– Engaging with customers pre-arrears

In line with CONC 6.7.2, firms are required to monitor the repayment history of their customers and take action when they see signs of actual or possible repayment difficulties. The FCA recognised a distinction between ‘reactive management’ (situations in which customers contacted firms to say they would have difficulty making a payment) and ‘proactive management’ (situations in which firms took action of their own initiative when they spotted warning signs of potential arrears situations).

In practice, it was determined that firms generally treated ‘reactive’ circumstances in the same manner as they would customers who had actually fallen into arrears but did need more clearly documented procedures for such scenarios. Although, the FCA considered the approach to be acceptable, it made clear that even though there is no requirement to offer forbearance until a customer is in arrears, firms must treat customers fairly.

In respect of ‘proactive management’ it was also apparent that firms took action when they saw warning signs of repayment difficulties and used a wide range of strategies to help customers in such circumstances.

– Strategies for contacting customers

Under CONC 7.9.4, there is a requirement that firms do not contact customers at unreasonable times and pay due regard to the reasonable requests of customers in respect of when and how they should be contacted. The FCA identified situations, which they considered amounted to poor practice, in which customer’s reasonable requests were being refused, customers were being contacted after a repayment plan had been agreed and customers were forced to take telephone calls at unsuitable times of the day.

Furthermore, the FCA assessed the use of technology to engage with customers in arrears situations and was broadly supportive. Nevertheless, it noted that firms should consider the risks that could arise, such as the risk of being unable to identify vulnerable customers, and to take appropriate steps to mitigate such risks.

Any written communications must be fair, clear and not misleading to comply with CONC 3.3.1. The Review identified circumstances of misleading statements and, generally in which firms stated they would take action against customers by, for example, issuing court proceedings when the firm knew that they would not actually do so.

– Assessing customers’ circumstances

The FCA identified the key issue in this area to be that firms failed to take into consideration indicators and factors that a customer may be in financial difficulties and/or vulnerable or only spotted such indicators after numerous engagements with the customer. This often result in customers incurring further charges and interest, when had their circumstances been identified in the first engagement, this would not have occurred. Worryingly, the FCA concluded that this was a consistent theme in around one third of firms.

The key distinction identified by the FCA was between firms which are ‘highly payment-orientated’ and those focused on seeking to establish the customer’s circumstances. The use of income and expenditure documentation was also recognised by the FCA but it was said that firms should ensure that they are sufficiently scrutinised to determine a true representation of the customer’s circumstances so that repayment schedules were realistic and achievable.

– Forbearance policy and appetite

A wide range of forbearance options were offered by firms. Yet, the FCA determined that in many cases, customers were not provided with the most suitable forbearance option suited to their circumstances as firms typically had a default, or favoured, repayment strategy. In addition, the FCA found considerable inconsistency in the way that forbearance options were presented to the customer and only one firm, that was part of the Review, routinely explained all of the available options.

– Effective delivery of forbearance

The use of technology was supported by the FCA but it had concerns about consistency. It was said that a combination of systems and process limitations meant that the ability of firms to consistently deliver their forbearance policies was impeded in many cases.

In respect of staff training, it was clear that all firms invested in this regard but the focus was firmly on arrears collection as opposed to identifying customer’s circumstances meaning that staff focused on asking when arrears would be paid rather than identifying the reasons whey payments had been missed.

It was also evident that, in many cases, firms explained the consequences of forbearance options to customers incorrectly by either significantly understating, overstating or omitting important facts. The FCA stressed that firms are under an obligation to ensure that their communications are fair, clear and not misleading and so such practices may lead to the customer selecting the forbearance option which was not best suited to their needs.

– Vulnerable customers

It is a requirement under CONC, for firms to establish and implement clear, effective and appropriate policies and procedures for dealing with customers whose accounts fall into arrears, and to treat those that the firm understands, or reasonably suspects, to be particularly vulnerable fairly and appropriately – CONC 7.2.1.

The FCA recognised in the Review that all firms had placed greater emphasis on customer engagement in circumstances of vulnerability. However, it was said that whilst many firms had adopted detailed and considered policies for vulnerable customers, often these had not been sufficiently embedded and led to inconsistencies in practice and evidence of failures to identify vulnerable customers. It was also concluded that whilst many firms did identify vulnerable customers, there were many examples in which firms failed to treat them appropriately such as putting in place a vulnerability team but then only allowing vulnerable customers to contact them in writing.

– Dealing with debt advisors

The Review found that firms’ approach to dealing with debt advisors acting on behalf of customers was on the whole positive and in many cases firms were actually acting in a manner which went above and beyond their obligations under CONC. It was also stated that, although unlikely to be intentional, customers with debt advisors were able to access forbearance options quicker. The FCA also commented favourably on practices in which firms gave customers, who had sought debt advice, some additional breathing space by, for example, freezing or reducing interest and charges on a customer’s account.

– Fees and charges

In examining how firms applied fees and charges to accounts in arrears, the FCA determined that most firms did charge fees and charges in respect of accounts in arrears. Whilst, it was acknowledged that this was a contractual right of a firm, the FCA noted that instances in which multiple fees were charged to customers could have a negative impact on their ability to come out of arrears. The FCA concludes that it expects all firms to consider the fairness of such an approach which could see customers find themselves in a never ending cycle of fees and charges.

– Outsourcing early arrears

In general, the FCA concluded that outsourcing the collection of arrears to third party service providers was well managed by firms with sufficient oversight and monitoring in place. In addition, customers were being properly informed their account was being transferred to a third party for the purpose of arrears collection.

– Customers with multiple accounts

The Review found some inconsistencies across the industry in respect of customers with multiple accounts, specifically in respect of a firm’s ability to identify customers who had multiple accounts. The FCA welcomed examples of practice whereby firms had established specialist teams capable of dealing with arrears in respect of different accounts and/or products held by a customer and encouraged firms to explore and share ways to effectively manage multiple account holders in the future.


The general tone of the Review is positive and recognises that consumer credit lenders are improving their practices, procedures and approach to customers who find themselves in arrears difficulties. Nevertheless, it is clear that there are some areas in which firms still need to improve and a firm’s overall approach should be to helping the customer, identifying their difficulties and identifying their most suitable solution for their specific circumstances.

The undercurrent of the Review makes it abundantly clear that the FCA will not tolerate firms who place too greater emphasis on commercial considerations, by focusing solely or wholly on securing repayment as quickly as possible, at the expense of meeting their regulatory obligations; treating customers in arrears with forbearance and due consideration.

Indeed, the FCA conclude by saying:

“We expect firms to promote, embed and enforce the right culture within their organisations, which has the primary objective of doing the right thing for the market and consumers”.

The message is clear to firms; make sure that the culture of your firm embeds an approach of treating customers fairly.

For further information please contact Penri Jones 


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