The introduction of payment holidays for all types of repayment plans provided much needed financial relief for many people throughout 2020. However welcome this initiative was for consumers, the feeling in the industry is that it may be storing up problems that are likely to need remediation in 2021 and beyond.
One challenge is that many consumers may have taken advantage of these payment holidays unnecessarily. This is perfectly understandable given the uncertainty that surrounded the very first lockdown. With furlough schemes only just starting, and many sectors such as hospitality and entertainment coming to a complete halt, the chance to postpone mortgage, credit card, car finance, and loan repayments was a welcome relief to those suffering from income shocks.
Yet even those whose income was relatively unaffected by the lockdown could also take these payment holidays, seeing it as an opportunity to create a nest egg against future uncertainty, and these are the consumers that could be complaining in 2021. During the first lockdown, more than 1.7million payment holidays were taken  across loans, credit and store cards. As of December 2020, that number had reduced to 80,000. Whilst that is still a significant number of people needing help, the big drop does leave us wondering how many of those 1.7 million breaks were necessary.
The key question is how many consumers fully understood the implications of postponing these repayments, and how well did firms explain these implications given the speed of the roll-out? Any delay in a repayment schedule will impact long term interest accumulation, often increasing the overall cost of the loan, as well as the duration. Plus, while the FCA has stated that these payment holidays will not affect credit scores, future lenders will still be aware of them. How many consumers were fully aware of this when they took advantage of these “too good to be true” initiatives?
The other challenge is that these payment holidays were applied to many products for the first time, and in a great hurry. Under pressure from the government to deliver support at speed, lenders asked few questions of those applying for payment holidays, in many cases applying blanket criteria that will inevitably not have suited everyone. As stated above, communications of the implications were probably not on point given the companies were figuring out those implications as they went.
With the rules around payment holidays for different products now settled, companies now have the time to thoroughly review the changes to their products and policies. And they have probably identified which consumers are truly in need and which were not. Communication is always key in potential remediation activities and being proactive in detailing the implications of these payment holidays for all consumers and being able to evidence that the consumer has fully understood those implications, will be vital in preventing widespread claims for recompense against confused and hurried advice.
With the economic impact of Covid-19 likely to be felt far into 2021 and beyond, financial services firms are going to have to rethink the approaches they take in dealing with the increasing numbers and types of vulnerable customers.
As of December 2020, there were 9.9m jobs furloughed from 1.2m employers taking advantage of the job retention scheme. That is 9.9m people facing uncertain employment prospects when the scheme ends in March and is expected to increase the unemployment rate from its current 4.9% to as much as 10% based on some estimates. This is a lot of financially vulnerable customers who are looking for support from their banks, mortgage lenders, and credit providers.
The good news is that financial services firms are extremely well placed to meet this need. Treating Customers Fairly and vulnerable customer initiatives have been a driving factor in their customer service operations for many years. However, lots of tried and tested methods that worked pre-pandemic have been found wanting in the face of such increased and complex demand.
Both the FCA and the companies themselves have responded swiftly to these problems, as we have seen with the introduction of payment holidays. Throughout the year, the FCA introduced and updated a raft of new regulatory guidance and advice for financial services firms to help them deal with the ever-changing circumstances.
- The introduction of payment holidays for those struggling with income shocks.
- Changes to credit scoring to discount payments missed under payment holidays.
- Increased forbearance and changing criteria for personal payment plans.
- Proactive and personalised engagement with vulnerable customers.
These last two points, in particular, are of interest for the future of vulnerable customer management and are expected to become BAU throughout 2021 as the economic fallout of the pandemic becomes more acute.
In a November speech at Credit Week, Jonathan Davidson made it clear that the FCA’s focus in 2021 would be very much on how firms adapted to the pandemic and their ongoing treatment of vulnerable customers. They are looking at the importance of personal support tailored to the customer’s individual circumstances, including highlighting the importance of suitable advice both from within the business and from independent agencies such as the Money Advice Service.
High-Cost Short-Term Consumer Credit
With the number of financially vulnerable consumers expected to grow throughout this year, HCST credit providers should be well placed to provide a vital service to those struggling to pay their bills. But in an industry that has seen considerable change and upheaval itself even before the pandemic, how can HCST lenders meet the needs of desperate consumers and stay true to the new regulations they are now under.
The buzz word for this sector over the past few years has been “responsible” – responsible lending, responsible collections, and responsible management of their businesses. Throughout 2019 and 2020 they have worked to escape a less than flattering reputation and take their place as FCA regulated providers of financial lifelines to millions of consumers.
This has not been without pain as many of their number have fallen by the wayside, including some of the biggest and most well-known names in the sector. The companies that remain work under more stringent regulations and have had to find a new balance on how to continue to lend and collect debts at levels that sustain the health of their business, whilst maintaining the treating customers fairly approach the FCA demands.
As with all FCA regulated companies, they have been provided with detailed guidance around the treatment of customers during the pandemic. For HCST lenders this centred around payment holidays and deferrals, forbearance on collections activities, and a proactive and personal approach to those in prolonged financial difficulty.
Each of these initiatives is a challenge for HCST lenders which typically operate on very slim margins. Whilst the demand for their services may be increasing, can they both meet this need from consumers and the criteria for responsible lending set down by the FCA? With HCST credit often the “last resort” for many consumers, how can providers cope with greater volumes and still offer the correct guidance, advice and help to those struggling with long term debt?
All indications from the FCA are that they are looking for all financial services firms to take a more personal approach with their customers struggling due to the pandemic, but in an industry built on automated approvals and high volumes, the shift to a case by case approach is likely to prove a significant challenge for HCST providers.
We are already seeing promising steps from the lenders, with partnerships and links to independent debt advice organisations and charities. But many of these still rely on the consumer taking the initiative and we are back to the question of responsibility – how much lies with the consumer and how much with the lender?
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