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Cost Of Living And Practical Support For Customers
Forecasts suggest that the cost-of-living crisis is set to continue throughout 2023, as incomes struggle to keep up with the increases in living costs. Despite news that energy bills could drop in the next quarter following a new price cap forecast, the balance between income and living costs are not set to return to 2021 levels until 2027.
This has consequences for customers of UK financial services. National Debtline research has found that the average level of priority debt has risen from £2642 to £4080 in just five years and research conducted by Which? shows that around 700,000 households missed a rent or mortgage payment in the last month. Renters are particularly affected, with one in 20 missing a payment in April.
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The same research showed that 2 million households missed or defaulted on at least one mortgage, rent, loan credit card or bill in April. Missed bills include energy and council tax, demonstrating that a significant proportion of UK households are struggling to meet their essential costs.
This matters for consumer credit firms. The FCA certainly expects firms to help customers who are struggling - requirements to assist those experiencing escalating debt set out within the tailored support guidance first introduced at the start of the pandemic remain – the expectations of the Consumer Duty mean that we now need to be able to show we have supported those customers to achieve good outcomes.
The FCA has always expected that those who are in financial difficulties are identified and that appropriate forbearance is explored and applied. With the cost of living increasing, the numbers of customers struggling combined with the Consumer Duty making achieving good outcomes for customers a requirement means we need to make sure we’re able to meet those expectations as a minimum.
FCA research has found that firms can miss the mark here, despite their best intentions. The initial identification is repeatedly flagged by the regulator as an issue, as is the appropriate choice of forbearance option. However, these are two issues that can be significantly improved by staff training and experience. Given the continued cost of living, FCA eyes will be on how well we’re supporting our customers in financial difficulties, and given that that proportion is rapidly increasing, preparing now will pay off in the long run.
So how many customers are likely to be affected? Research by Which? Found that an enormous 59% of households needed to make at least one adjustment – including cutting back on essentials, using savings or borrowing – to meet essential bills. This suggests that customers struggling with their essential bills represent a significant proportion of the consumers that we’ll interact with.
So, what do we need to do?
In short, the FCA expects that we understand who our customers are, what their circumstances are, and what they need to achieve good outcomes. During the cost-of-living crisis, this means being able to identify those who are in, or who are close to experiencing, financial difficulties, and then understanding which forbearance options are going to help.
Finding the right support option is going to be more complex than it might have been previously. National Debtline research found that one in five said their income was too low for their basic needs – meaning they need to use credit to cover the basics, which in turn means that some of the most common forbearance options will be of little use here.
Forbearance needs to be appropriate for the customer’s circumstances. Where a customer’s income doesn’t cover essential bills – and isn’t likely to for the foreseeable – this means that substantial repayments are off the table. The aim is that customers are supported to repay their debts – and any arrears – sustainably, without negative consequences that might arise from repeated arrears or default.
Forbearance can be both short-term and long-term. The most common forbearance options are freezing repayments, reducing or waiving interest charges and accepting token payments, but less common options, including refinancing, might need to be considered where they wouldn’t have been a key option before. Where refinancing is considered, we must make sure that we act in accordance with CONC 5 and carry out a creditworthiness assessment, and make sure that we do not encourage refinancing if it would be unsustainable.
Above all, we need to work with the customer to make sure we understand their full circumstances and that we’re open about the consequences of any actions we take.
As the cost-of-living crisis goes on, we must also make sure that customers who would benefit are referred to not-for-profit debt advice. FCA research has repeatedly found that this option is underused. There are likely to be a range of reasons; it can feel as if we’re ‘fobbing off’ customers, or passing them on to pillar and post. Or, because it’s not internal to our firm, staff might feel that it’s not a solid option. But with customer outcomes at the forefront this year, it’s important to remember that this option – which can be used alongside other options – can make a huge difference to the customer’s financial wellbeing.
Ensuring that financial difficulties are identified and supported at the earliest opportunity is one of the primary metrics by which the FCA will measure firms’ compliance over the coming 12 months. The key building block is regular, up-to-date training for all staff working with or for consumers. RB Compliance can help firms here, we have a range of e-learning courses which can be reviewed here, including our Financial Difficulties course.
You may also find our range of resources on The Consumer Duty helpful.
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