Two recent huge fines imposed by the FCA have once again spotlighted the ongoing need for improvement across all forms of financial service lending. It highlights that firms need to ensure that customers are receiving effective support and good outcomes in periods when they experience financial difficulty.

The regulatory fines relate to relatively current conduct and are by no means ‘historic’ business. For Volkswagen Financial Services (UK) Limited, the FCA fined the firm £5.4m for failure to understand the customer’s individual circumstances and provide tailored support. This was particularly relevant to vulnerable customers between 1st January 2017 and 31st July 2023. TSB Bank was fined £10.9m for their inadequate training of team members who could not understand and react to customer circumstances. This led to the agreement of unaffordable repayment plans, inappropriate fees being charged, and potential conflicts in incentive schemes. Despite other action by the regulator to improve outcomes for customers in financial difficulties, clearly there’s still work to do in this sector.

Supporting customers facing financial difficulty

For years, the regulator has concentrated on this crucial area, culminating in the launch of robust new rules and guidelines for consumers in financial difficulty. This was detailed in Policy Statement 24/2 and Finalised Guidance 24/2, which take effect from 4th November 2024, replacing the Tailored Support Guidance (TSG) (PS24/2 and FG 24/2) and guidance for the fair treatment of vulnerable customers (FG21/1), alongside the Consumer Duty (PS22/9 and FG21/1).

Firms will need to ensure they are ready for implementation by 4th November, but the key messages from the regulator have been consistent for some time. Most crucially, firms need to ensure that their approach and treatment of customers who are, or potentially might, experience financial difficulties are aligned with the Consumer Duty outcomes and, in turn, report on the outcomes annually to their board.

Longstanding approach

Back in 2021, the FCA took steps to support consumers who may be experiencing financial difficulty due to the Covid pandemic, introducing the TSG. It then issued a report in March 2021 with the results of its supervisory work on how lenders are delivering forbearance measures. This report found that firms were failing to personalise the assessments of customer circumstances, with attention being on collections and the customer’s offer to pay, with pressure being applied around affordability. At that stage, more firms were offering specialised support to vulnerable customers, but staff needed more understanding to recognise vulnerability and enable access to the support needed.

Following that review, the FCA embarked on the borrowers in financial difficulty (BiFD project), surveying around 500 firms with detailed reviews of a selection of them. As a result, the FCA published its expectations and findings in 2021. It identified some good practices around staff training and quality assurance procedures, offering earlier options to customers who may potentially experience payment difficulties whilst improving the ability to identify and support vulnerable customers. However, improvements were needed in all areas, particularly in assessing customer’s individual circumstances and in taking remedial action where poor customer outcomes were identified during monitoring and inconsistency in staff training standards.

What are some of the risks?

• Inadequate resources and skills gaps. Staff lack the expertise to swiftly detect and address customer challenges, such as payment difficulties or vulnerabilities, which is crucial to preventing escalation and mitigating harm
• Lack of empowerment of staff. Team members don’t feel able to challenge if existing policy could result in a poor outcome for a particular customer
• Short-term thinking. A collections mentality still pervades, and flexible treatments are not utilised
• Inadequate data to keep you fully informed. When businesses can’t effectively monitor that products and services offer fair value and meet the needs of their actual customers (rather than a hypothetical average customer)
• Inadequate data to pre-empt potential harm. Firms don’t have the customer data needed to pre-empt who may be less financially resilient and prone to harm
• Not knowing your customer. Operating a one-size-fits-all approach that doesn’t adapt to changing customer needs and circumstances or vulnerability
• The customer’s voice is not heard. There is just a single touch point with customers and no engagement to determine if they were understood, supported, and received a good outcome
• Inadequate oversight and challenge. The Consumer Duty champion and board are not sufficiently informed on consumer outcomes and rely on MI without challenge
• Collective and personal censure 

The board, senior management and Consumer Duty champion must effectively discharge their duties for the effective management of risk, corporate governance, and culture.

Future regulatory scrutiny could focus on a number of factors, such as the discharge of duties, awareness of response to emerging risks, historic risks in terms of the go-forward risks of existing products and services and the risks associated with closed products. It’s vital to now consider if your board is sufficiently proactive to identify and address the risks of customer harm.

The FCA could also challenge firms on the suitability of products and services in the hands of the customer and is likely to be unsympathetic where it is foreseeable that certain features could result in customer harm, for example, unfair fees or other terms and conditions.

TCC’s experts have the knowledge and experience to help. Our team of industry practitioners and ex-regulators can review your current operations, outline the steps necessary to deliver fair outcomes for your clients and support you in implementing strategies that ensure good customer outcomes for long-term compliance. Get in touch to find out more.