FCA Portfolio Letter: Implementing the Consumer Duty – Debt Purchase / Collection

Building on the Financial Conduct Authority’s (FCA) recent feedback on firms’ implementation plans [see: Consumer Duty implementation plans | FCA], the regulator has released a portfolio letter aimed at the debt collection and purchase sector.

The letter aims to remind firms about the implementation deadlines but also how the FCA expects such firms to implement the Duty with a focus on the cost-of-living crisis.

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Consumer Duty: Open Product Review Template

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Implementation timeline

Firms should be fully up to speed with the implementation timeline, however as a reminder:

• By the end of October 2022 firms’ Boards or management bodies should have agreed their plans for implementing the Duty

• By the end of April 2023 manufacturers of financial products and services should have completed all reviews necessary to meet the outcome rules and shared necessary information with their distributors

• The Duty comes into force on 31 July 2023 for new and existing products or services that are open to sale or renewal

• On 31 July 2024 the Duty comes into force for closed products or services.

How the Duty applies to Debt Collection and Purchase firms

An important starting point is to understand how the Duty applies to your organisation, in particular whether you offer a product which falls under the Duty. Here are two quotes from the FCA’s letter which should prove useful:

“If you carry out debt collections activities, in Consumer Duty terms, the ‘product’ is the service provided by the debt collection firm to the lender which enables that lender to procure performance of the credit agreement. The product of debt collection does not involve a contract between the debt collector and retail customer, so it cannot be classed as a ‘closed product’ under our definition. The extent of a debt collection firm’s responsibilities under the Duty will depend on the firm’s role and the extent of its influence over retail customer outcomes. The level of responsibility depends on what the firm’s actual role and influence is in practice, rather than just what is set out in contractual terms between firms in the chain.”

“If you carry out debt purchasing activities, where a regulated loan is purchased from a lender, the purchaser becomes the creditor under the agreement. The product that the purchaser holds will be closed if the purchase took place before 31 July 2023 and the product is not being marketed or distributed to retail customers (including by way of renewal) by the purchaser. Whether or not the original lender is continuing to market or distribute the original credit product is irrelevant to the open/closed status of the product held by the purchaser.”

The definition of product is therefore quite wide and in line with advice we have been providing clients. Collection firms must realise the product is not the original credit product but the collection process itself. Therefore the Duty applies meaning firms must undertake reviews of their open products before the end of April [see here for our template: Consumer Duty Compliance Resources | RB Compliance Consultancy].

This review aims to identify the foreseeable harms the product could cause customers. Helpfully the FCA have listed some harms they would expect to see identified as part of this process; they include:

1. The cost-of-living crisis: the FCA link to their tailored support guidance and cost-of-living crisis Dear CEO letter, the upshot is that firms must have provision in place to assess the damage the crisis has on customers’ finances and ensure staff are sufficiently trained to spot struggling customers and procedures are in place to support customers. The product review is the ideal time to use your MI to identify whether the current support you offer to struggling customers is enough to avoid harm.

2. Customers’ circumstances and vulnerability: The FCA point out that in the current climate customers are more likely to be vulnerable and therefore this should be identified as part of the reviews. Steps to assist those customers must be set out meaning that firms need to ensure they are identifying, managing, and adapting services for vulnerable customers in a changing environment. The FCA also state “The outcome of the Duty on ‘Consumer Support’ reinforces the importance of identifying vulnerability in potential customers and treating them appropriately. The Duty’s cross cutting rules also require you to act in good faith, avoid causing foreseeable harm, and enable and support the customer to pursue their financial objectives.”.

3. Statute barred debt: The FCA has previously written to firms raising concern that customers are often incorrectly pursued for statute barred debt. By this the FCA mean that firms have been mentioning the potential for legal action when a debt is statute barred and not ceasing collection activity once a customer has stated they won’t pay due to the debt being statute barred. The FCA point out the root cause is often systems incorrectly identifying payment adjustments as a payment to the debt, or outgoing correspondence as refreshing the statute barred period.

4. Operational resilience: At this uncertain economic time the management team of regulated firms need to ensure the business can continue to operate. This includes ensuring enough capital and liquidity to meet changing financial circumstances as failing to do so could cause disruption of service and therefore harm to customers. The FCA direct readers to their operational resilience work: PS21/3: Building operational resilience: Feedback to CP19/32 and final rules (fca.org.uk).

5. Specific high-risk actions such as the sale of back books of high-cost-credit or other high-risk products - which may include customers requiring redress - should be considered carefully prior to purchase to ensure all obligations to customers can be met by the buyer. Equally actions such as outsourcing collection should be met with oversight and control of the levels of service. Again, failure to do so could harm customers and therefore this should be factored into product reviews.

In summary, a useful update which will point a lot of the industry in the right direction. The challenge now is to conduct the assessments on each collection product before the end of April!