Early arrears management in unsecured lending: TR16/10

This report provides the findings from our thematic review into early arrears management in unsecured lending. The review looked at the way lenders treated customers in the early stages of arrears.

Show TR16/10 (PDF)

In our Business Plan for 2015/16 we said we would examine the ways in which unsecured consumer credit debts are collected. We focused on how customers are treated by lenders when they first experience arrears and payment difficulties. A firm’s early arrears approach often establishes the tone of its relationship with customers, setting them on a particular path and can be critical to the ultimate outcome for those customers.

The review built upon our previous review of arrears and forbearance in high-cost short-term credit, broadening our focus to examine arrears in a range of unsecured lending products, including personal loans, credit cards and retail finance.

Who this applies to

The report should be of interest to lenders and other firms involved in the collection of consumer credit debts.

It will also be of interest to trade bodies representing these firms, firms and other bodies that provide debt advice and solutions to consumers and consumer representative groups.

Scope of the review

We examined a range of firms offering unsecured lending products including credit cards, personal loans, store cards and point-of-sale finance. The firms we looked at varied from large retail banks to smaller single product providers.

We looked at firms’ practices from the identification of customers in probable difficulties at a pre-arrears stage to the point at which the lender formally defaults the customer and/or charges off the debt.

Key findings

Not all customers who pay late are facing repayment difficulties. However, for those who were showing signs of financial difficulty we found that the majority of firms missed early opportunities to identify them and offer appropriate forbearance. Often multiple engagements with the customer were required before their circumstances were recognised by the firm.

Within the firms reviewed, there is a lot of ongoing change prompted by the introduction of FCA regulation. Much of the change observed was positive and reflected a clearer awareness within firms of the interests and needs of customers in arrears. However, a lot of the change appears to have only been recently implemented and in a number of cases change programmes were ongoing and still being embedded.

The review revealed that the forbearance and repayment solutions offered to customers varied quite significantly. Both in terms of short, medium and long term solutions offered, and the way in which payment difficulties were classed as temporary or longer term.

The findings also show that the firms’ intention towards assisting customers in arrears varied and that a firms’ culture influences the approach taken to giving due consideration and forbearance to customers in arrears difficulties.

Next steps

We have provided firm-specific feedback to each of the firms in our sample on the good and poor practices we observed in their businesses. We expect these firms to review their practices in light of our feedback and make relevant changes. A number of firms within our sample told us that they had already identified areas for improvement and were actively exploring ways to improve their current policies and procedures. Where we have found unfair practices, we have raised the issues with the firms. Depending on the seriousness of the issues identified and firms’ responses, further regulatory action may be taken.

We encourage all firms that are involved in the collection of consumer credit debts to read this report, consider their approach to arrears in light of our findings and make improvements where necessary. We expect firms to promote, embed and enforce the right culture within their organisations, one whose primary objective is doing the right thing for the market and consumers. We encourage all firms to continue to focus on achieving fair customer outcomes as well as regulatory compliance.

More information

TR15/3: Arrears and forbearance in high-cost short-term credit