Treating the poorest fairly

“The fair treatment of customers should be at the heart of your business and you should be able to demonstrate this….Treating customers fairly is a requirement for all regulated firms, no matter their size or the nature of the activities they undertake…Firms need to consider the fair treatment of customers throughout the entire customer journey – both before and after entering into a contract.” The Financial Conduct Authority (‘FCA’) [1]

Pretty clear. However, we propose that, as a result of disjointed regulation and a culture of acquiescence rather than constructive challenge towards consumers of credit, the industry and the regulator are failing to treat customers fairly.

This is a bold statement in light of the considerable effort that the industry has invested in responding to the FCA’s demands. But, we are motivated to raise it in the interests of both the consumer and the industry.

So now we have your attention, where’s the evidence?

Statement of Facts

At the point of sale. Finance is most expensive for the poor. The poor have lower incomes and a basic cost of living demands a much higher proportion of it. Less affordability means they are more likely to access credit to cover these basic costs and at the same time are deemed a higher credit risk to the lender.

A central tenant of finance is that the greater the risk taken the greater the return expected.  As a consequence, the poor attract higher rates and penalties when accessing finance. Ready example; mortgage rates are lower for those with a smaller LTV! This does not appear to be treating customers fairly.

The supporting evidence is readily forth coming. This includes pay day lending which in itself was a reaction to higher bank charges for short term access to credit and the current dearth of buy now pay later providers for those in need of white goods or home furnishings without the savings to finance them. What’s more the high cost of credit is regularly discussed in parliament [2].

The pre-delinquency stage. Financial resilience is dynamic and typically more variable for those that are less financially resilient. Lenders have a variety of tools at their disposal to monitor financial resilience which apply alternative data sources such as elanev Resilience.  Such tools can identify those consumers most likely to become delinquent.

Arguably lenders would prefer to support consumers at the pre-delinquency stage as better customer journeys retain customers, build brand and reduce risks and costs. However, regulation would require that the lender hold a provision for the potential loss identified at this stage. Provisions are expensive for the lender. Finance is all about leveraging money for return and tying it up in provisions means it can’t be worked in this way. As some customers do scrape by and don’t become delinquent more provisioning would be needed if identified at a pre-delinquent stage. In this case regulation incentivises consumers to be treated less fairly than they otherwise would be.

At charge off. There is a disconnect in the interpretation of financial vulnerability! This difference was highlighted to elanev through working with clients using elanev Resilience. Lenders consider a consumer to be financially vulnerable if they are unable to prevent charge off and are not suitable for litigation and of little value in being a customer. However, at charge off debt purchasers and collections firms will seek to contact these same customers with a view to recovering the debt. Ideally repayments will be made over a short term (3- 6 months) but longer terms with lower payment amounts are common. It is the consumers that are unable to pay any amount at this point that debt purchasers and collections firms view as vulnerable. The risk and cost of recovery appears to influence the interpretation of vulnerability between lending and recovery. That can’t be fair to the customer.

In recovery. Are long-term repayment plans in the best interest of the customer? They are if the consumer is confident of their circumstances changing in the short to medium term. Less so in the longer term especially as it takes a further 6-years at the end of the term to clear from their credit file. And of-course the addition of other outstanding balances will further extend this term.

A 30-year-old customer who gets a 10-year repayment may believe they have achieved a good outcome. However, did they realise that they won’t eligible for a prime mortgage until they are 46 but had they opted for bankruptcy it would have been 36. Is this fair? Do consumers know that had they declared insolvent they would be debt free with a clear credit file much sooner? Will this be the industry’s next conduct risk scandal?

Collections firms and industry bodies regularly herald their customer satisfaction surveys [3]. However, these surveys wouldn’t be so positive if customers had been presented with a shorter term more painful, but ultimately better, outcome. There appears to be an acquiescence to the consumers wishes rather than having an honest conversation with regard to customers longer term interests.

Could this be motivated by cost? Self-certification and digital journeys are cheap but are not tuned to the specifics of personal circumstance. Persons of low financial capability may not know that they are financial vulnerable; they may not self – certify as vulnerable or engage correctly with the digital journey. What’s more self- certification and digital journeys are also open to fraudulent claims of vulnerability. Auditing such certifications is also costly if not applying independent financial resilience scores to screen consumers for financial vulnerability [4].

Exacerbated by coronavirus. The response to COVID-19 is increasing the number of financially vulnerable customers. The relevance of bureau credit data has been eroded [5] due to mistakes in record keeping at a number of large UK lenders [6] and delays by the FCA in warning borrowers that payment holidays could adversely affect their credit files [7]. As a result, access to credit will become more difficult for those that need it the most. We expect to see a greater increase in longer term repayment plans than insolvencies. Noting that in previous economic downturns insolvencies increased.

Conclusion
There will always be demand from consumers to access credit. This is best provided by a regulated industry. Industry regulation is correctly focused on the fair treatment of credit customers. However, more needs to be done to protect the poorest and most financially vulnerable. Current pricing models unfairly disadvantage these groups. Misguided and misinterpreted regulation dissuades lenders and recovery firms from honest conversations to ensure the best outcomes for the lives of those most financially vulnerable.

The financially vulnerable are best served through one-to-one conversations that seek to understand their personal circumstances so the best outcomes can be discussed. Digital journeys and self-certification of financial vulnerability are clearly failing such customers. The industry needs to look again at how they can utilise alternative data sources to proactively identify the most vulnerable and to lower the operational cost of agent contact to help ensure consumers can access the best outcomes for their individual circumstances.

Is it time to emulate the US and provide a ceiling limit for enforceable debts? This will stop the purchasers from aggregating balances and extended repayment plans beyond the 5- or 6-years outcome period accepted for lending or should we insist on an insolvency or a resolution plan if an individual’s circumstances haven’t changed after a year? Clearly the status quo can’t continue, with the unquantified challenges brought from the COVID-19 pandemic and large volumes of the population entering a recoveries process for the first time in their lives.

The team at elanev welcome your thoughts and insights on this article. Contact us at enquiries@elanev.com.

References
[1] “Consumer credit – Treating customers fairly” FCA video, April 2019.
[2] “Protecting consumers from unfair high-cost credit”, UK Parliament, House of Commons Library, Briefing Paper 8810, 12 February 2020.
[3] “UK Collections: Will consumer vulnerability bankrupt the recovery sector?”, Credit Connect, 1 May 2019.
[4] “Vulnerable customer data sources post COVID-19”, elanev.co.uk, 18 August 2020.
[5] “Delay in warning about payment holiday credit risk attracts criticism” The Financial Times, 27 July 2020.
[6] “Poor IT fails customers on COVID-19 payment holidays” Credit Connect, 5 August 2020.
[7] “Credit Scores; it’s #ConfusedDotCom” elanev.co.uk, 7 August 2020.