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Persistent Debt on Credit Cards: New rules from the FCA

On Thursday 1st March 2018 the FCA introduced their new set of rules relating to persistent debt for credit cards.

Although there has always been focus on pre-delinquency and early action to prevent escalating debt (CONC 6.7.2-3 are the relevant paragraphs), this has now been extended with specifics for the credit card market. These have been developed following the findings from the FCA credit card market study.

The changes are tucked away in the detail of the Consumer Credit Sourcebook (CONC), however, a quick summary of these is below.

Guidance on financial difficulties: There is now specific guidance in CONC on what constitutes appropriate action for customers in financial difficulties. (CONC 6.7.3A-D). It is also a requirement that firms have processes in place to identify these customers too.

In our experience most lenders have already been doing this and following these guidelines for a while, however this is now specifically mentioned within the regulation. It is worth checking compliance and your existing control framework.

Credit cards & persistent debt: There are now a series of rules and guidance relating to action that needs to be taken for customers in this category (CONC 6.7.27-40). These include:

  • A requirement to review customer accounts who have paid less than interest and fees over the last eighteen months. This needs to be reviewed for each customer monthly (a definition of a customer in persistent debt).
  • Customers need to be notified (and again at nine months) and provided options to assist repayment of the debt more quickly. This includes increased payments, or offering debt advice and other existing options for customers in financial difficulty. The duration of any repayment period should not extend beyond four years.
  • However, if a customer does not respond to the notification, the customer’s account should be suspended or cancelled (although not if this should generate further hardship).

These provisions are similar and link to much of the work already started around pre-delinquency. However, this is now more prescriptive, and the requirement to suspend/cancel customers’ accounts on non-response has direct customer implications. Processes and procedures around these will now need to be factored in.

Time to get ready?

Although the new set of rules was implemented on 1st March, firms have until 1st September 2018 to be compliant. This provides a window of time to review existing processes, procedures and ensure revisions are in place.

This is now regulation, will be enforceable and will form part of future FCA review, so now is a good time to get prepared and be ready.

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What to be aware of … setting your goals for 2018

It is starting to develop, slowly but surely, that end of year feeling. End of year parties are taking place, decorations are up and more importantly EVERYTHING now needs to be done by the end of the week.

Unfortunately, the days when we would all ‘wind down’ for the holidays seem to be long gone. Now if anything it seems more intense as we all try to squeeze in one more deliverable before January.

Despite delivery pressures, thoughts at this time of year do gradually start to move to what next year will bring. Importantly what do I need to put in my 2018 goals, what can I promise and what is actually achievable? Here are some thoughts.

Being prepared

There are a couple of trends we know about, on the horizon, and worth being prepared for. They are heading our way.

1. Seasonal volume increase. Q1 is always busy, especially in collections. Customers have started the new year too and many sort out their affairs at this time. Undoubtedly this will increase demand for resources. Have smart strategies to help handle the volume. Have these ready asap.

2. IFRS9. The much-anticipated new accounting standard is live in January. Understand the impact and ensure you have a strategy to respond.

3. GDPR. The new data protection regulation is due to go live in May 2018. Whilst many organisations are advanced in terms of regulatory preparation, this will get rolled out to operational teams for implementation Q1. Procedural and operational readiness will be required, so make sure you are ready.

4. Persistent Debt. Further to the FCA Credit Card market study, the policy rules for companies to help customers in persistent debt are expected Q1 2018. This is expected to include the waiving of interest and fees for customers in persistent debt, bringing a new wave of volume into the collections arena (if it is not there already for pre-arrears work). Understand the implication, volume impact and anticipate a strategy to handle the change.

5. Open Banking and PSD2. Open API frameworks are due to go live in early 2018. If you are in financial services, it is worth checking in on the response for your organisation. Be ready to handle or capitalise on implications or opportunities for your process.

Ready to respond

This is a lot of change and let’s not forget all of this is in a cost controlled environment, already requiring strict regulatory compliance. Responding is not always easy and staff can often feel over stretched with not enough hours in the day.
However, a couple of approaches we have seen may also help.

Automate and use data. The use of automation and data is becoming increasingly important to both manage compliance and control costs. These techniques can be used to take the load off existing processes.

Ensure System robustness. Many organisations are still reliant on legacy system platforms. The collections system market is particularly exciting at the moment, with many new entrants competing against established suppliers. Innovation is up and some organisations are using this as an opportunity to make a significant step change of capability. This could be worth review and benefit assessment to see if the time is right for an upgrade too.

Prioritise activity. This can help to eliminate or de-prioritise non-value add activity, focusing on high priority items such as financial performance, ensuring customer fair treatment and compliance. Understand where you are, what needs to be done and in what order to maximise benefit.

Flexible resourcing. But genuinely, in a world where resources are stretched and there are not enough hours in the day, there are three choices; elongate the deadlines, reduce quality of output or get additional resource. When deadlines cannot be moved, time limited expert resource can really add a lot of value.

2017 was undoubtedly a year of consolidation and change. Indications are next year will be similar, with some new structural change we know we will need to be handled.

So once your year-end deadlines are done, the stream of email subsides (at least for a day!), hopefully you are able to take a breath, step back and recharge, so you can be prepared and take charge in 2018.

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OFWAT: Affordability in the water industry

Recently OFWAT released their Affordability and Debt document and it has made interesting reading.

There has been a significant increase in the debt burden across the water industry, with outstanding bills jumping by £300m over four years. Collectively, supporting unpaid bills is now adding £21 to everyone’s bill, which of course also hits those already in financial difficulty.

What is also interesting is how the water regulator has clearly listened and taken note from other UK regulators, in particular the FCA. Affordability and vulnerability feature prominently across the document, and there is a small sense of frustration that more can still be done.

Clearly there is a compelling financial argument to improve performance and, with the news that there will be no glide-path in the next price review (PR-19),  improvements in customer treatment and performance are essentially being mandated which is good news for customers.

Accepting bad debt as ‘just a cost of doing business’ is no longer going to be acceptable.

Getting ahead of the game

Just as OFWAT has been guided by other industry regulators, so can the industry itself be guided. In fact, although the guidelines may seem tough in many ways, they are in line with what we observe elsewhere. Knowing this can provide a huge gain in setting out a plan of action and response which can provide companies with a competitive advantage.

Here are three steps to think about.

1          On-boarding process

A response often heard is ‘we have to accept everyone’, so why does this matter? As a universal service this is true; however, understanding your customers’ circumstances as early in the lifecycle as possible (i.e. acquisition) is critical. It allows you to develop and sell appropriate propositions which better meet customers’ needs. It also informs and provides insights that enable effective collections strategies to be developed for different customer segments, including the use of affordability schemes. It’s important that customers are encouraged to embrace these schemes and manage within their means.

2          Gathering and maintaining high quality data throughout the customer lifecycle

Customer service and collections are in the data business. In every interaction we need to gather data that can help us inform and improve the level of service provided from onboarding customers to the collection of debts. This data is also invaluable in developing and determining which collection strategies to deploy, when to deploy them, anticipating problems and presenting solutions early before they come unresolvable. This scientific approach as used to a great extent across the wider industry is also applicable here. The emphasis needs to be on prevention rather than cure.

3          Tailoring solutions

A significant theme over the last nine years in financial services has been one of treating customers fairly (TCF). More recently this has been referred to under the headings of Affordability and Vulnerability, the terms used in the OFWAT report. On every call, affordability needs to be discussed, potential vulnerability assessed and appropriate solutions found. These can range from product switches, pricing changes, forgiveness of additional fees to sign posting of free debt advice, the objective being to find the right affordable solution to mitigate the risk of the customer spiralling further into debt.

Identifying, assessing the customer situation correctly and presenting the best options is not always easy; now, however, with many years’ experience in this area we have implemented some great solutions that are well worth considering and discussing.

A change of approach

From what has been seen, there has already been some great progress. See for example Arum’s case study with Thames Water reduced the bad debt charge by around 35%.

There has also been substantial investment by some companies facilitating the execution of good practice including the use of scoring, segmentation and indeed some robust practices in Account management/Collections which have assisted various stakeholders and delivered improved customer outcomes.

This being said, there is also opportunity. Some of the best in class practices/process routinely implemented in other sectors are also applicable in water and with the latest guidance from OFWAT will need to be implemented to maintain and hopefully improve performance and customer outcomes.

OFWAT’s direction is one of a number of good reasons why water companies who are already performing well in debt would wish to improve in addition to those who are performing less well.

Looking further ahead, full, open market competition in the consumer water industry is not yet in place, although this is likely to be another step on the path to it.

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