The FCA was quick to respond to the emerging pandemic, providing whole stock guidance to all areas within the consumer credit and retail lending sectors, and financial relief to customers experiencing payment difficulties as a result of COVID-19. The current challenge for firms is working out how and when to return to business as usual.

The FCA has already announced an extension to the period of time in which mortgage customers may request a payment deferral (until 31 October 2020) and require home finance providers to offer continued support for customers experiencing temporary payment difficulties, which could include extending their existing payment deferral for an additional three months.

Other lenders are now awaiting additional guidance in relation to payment deferrals for their sectors. The challenge for firms is in ensuring that customers are treated fairly when the temporary measures come to an end, making sure that those customers who deserve support get it, whilst not unduly exposing the firm to capital and liquidity risk.

Now that lockdown is easing, many customers will no longer require additional help, meaning an end to the temporary relief. Other customers will not be as fortunate and will need further support including standard forbearance and debt counselling.

Identifying customers who may require additional support will be a complex task, particularly as there has been no expectation that firms make enquiries of each customer to determine the circumstances surrounding their request for relief. Firms will need to re-visit the collections process for consumers unable to resume payments, in order to ensure that they are treated appropriately depending on their circumstances.

The first step is to understand available customer data in order to identify customer cohorts that are likely to require additional support. Firms may be able to utilise the following types of data and modelling to inform this assessment:

• Payment deferral data
• Employment sector
• Account origination information (e.g. income vs expenditure)
• Credit rating data
• Payment records

The FCA have been clear that firms should not grant payment deferrals where it is not in the customer’s interests to do so, for example, where a customer would be unable to rectify their financial position at the end of the three-month period. In determining that the three-month payment deferral is not in customers’ interest, the FCA have stated that firms should consider both customers’ need for temporary support and the longer-term effect of the deferral on each customer’s situation.

This may prove a good opportunity for firms to review their own operational resilience and control environment, to ensure that they are well placed to manage increase in demand and continue to deliver the right outcomes.

• Operational resilience – forecast anticipated volumes and the number of staff needed to deal with customers when their payment deferrals come to an end. Understanding how many customers may require additional support, and when, will be critical to ensuring appropriate levels of customer support are available.
• Control environment – ‘kick the tyres’ on decisions taken to date and understand any amendments that may be needed to ensure that controls continue to deliver desired customer outcomes (which may have changed in circumstance), including how they identify and explain:
• The cause of financial distress (e.g. COVID-19 or pre-existing);
• The impact of any payment deferral on customers’ overall debt burden and their ability to repay any interest accrued;
• The right recourse for customers, particularly where a payment deferral is not in their interest;
• The likelihood that the customer will be able to resume payments at the end of the deferral period; and;
• The consequences of taking the payment deferral, or any resulting actions (e.g. increased interest) to customers.

Firms should monitor any requests for new and additional credit and perform appropriate affordability assessments, bearing in mind that where a customer was in pre-existing financial difficulty prior to the pandemic, the FCA’s existing forbearance rules continue to apply. If, during these interactions, the customer indicates that they are experiencing or expect to experience temporary payment difficulties, firms should ask whether the customer wishes to request a payment deferral.

Firms should contact their customers in good time before their payment deferral expires to discuss resuming payments and their options if they are unable to do so.

Huntswood are here to help firms, in the provision of flexible resourcing solutions where needed to mitigate short term operational spikes in a cost-effective manner. Huntswood’s Advisory team can also support the review of customer cohorts, controls and development of new compliant processes.