Assessing the FCA’s new rules on support for borrowers in difficulty

By Adam Butler, Public Policy Manager

New FCA rules raise expectations of how financial services identify and support borrowers in difficulty — now attention should shift to addressing root causes

StepChange clients often reach debt advice too late, when their debts have escalated and their ability to cope has deteriorated: half of clients tell us they waited over a year after experiencing financial difficulty to seek debt advice.

Against this backdrop, the FCA last week published new rules on firms’ responsibilities to identify and support borrowers in difficulty, alongside the most recent update to its Financial Lives survey. Both pieces come after a welcome UK Regulators Network letter affirming high expectations and a commitment by regulators to coordinate to support customers in financial difficulty.

The new FCA rules build on the ‘tailored support guidance’ (TSG) put in place by the FCA during the pandemic that raised expectations by specifying outcomes the FCA expected firms to achieve, such as ensuring repayment agreements were sustainable.

Supporting people struggling with consumer debt has always been important. With one in nine UK adults (5.5 million people) having fallen behind on bills or credit commitments in the past six months, it’s clear this remains an essential point of focus for firms and regulators.

Shifting the focus to early intervention

The new borrowers in difficulty rules build on the TSG in some key respects. First, the rules shift the focus from a reactive to proactive approach by requiring firms to support customers ‘at risk of’ missing repayments. This should shift intervention by firms to an earlier stage.

Second, the rules place a stronger emphasis on the suitability of forbearance agreements. A perennial problem StepChange clients experience is that some firms do not accept evidence presented in a debt advice budget (typically the Single Financial Statement) and push for higher repayments than clients can afford. A clearer focus in the rules on the sustainability of forbearance and the role of the SFS should help reduce these experiences.

Third, the FCA has now placed more emphasis on effective referrals to free debt advice. Even when people in difficulty are signposted to free debt advice, they often do not reach out: most people do not know what free debt advice can offer, and many have unwarranted fears such as a concern seeking advice might itself negatively impact their credit record. Now firms will be expected to effectively communicate the potential benefits of free and impartial debt advice.

As a package, we would hope to see more people prevented from deepening financial difficulty through earlier intervention by firms, more effective forbearance agreements and earlier referrals to debt advice for those in more serious financial difficulty.

A missed opportunity

Despite these positive steps, it’s hard not to view aspects of the new rules as a disappointment. While obligations on firms to support customers have shifted to an earlier point, in reality firms will still be obliged only to respond to obvious triggers such as a customer themselves telling a firm they cannot meet repayments or a customer actually missing repayments.

We would have preferred the FCA require firms to put in place a data-driven early intervention strategy. The FCA is clear that is not its expectation: “Our rules and guidance do not introduce new requirements on firms to take additional steps, or create new processes and systems, to identify customers who may be in financial difficulty.”

The FCA’s data shows how ineffective it is to rely on customers in difficulty to ask for help: its latest Financial Lives survey found that just one in five (21%) adults who felt heavily burdened by their debts sought help in the last 12 months, and just three in ten (29%) of those who had fallen behind on or missed paying their bills did so.

Learning from payment deferrals introduced during the pandemic has also been set aside: giving customers a prominent, easily understood and attractive offer with no immediate credit reporting impact was extremely successful in engaging people who were struggling with lenders.

Paired with prompt support to address the key weakness of payment deferrals that customers could be ‘parked’ for too long before receiving help, this approach has the potential to significantly improve engagement with those in difficulty.

Unfortunately, the situation has reverted to the pre-pandemic norm where there is an unclear offer of help and fears about credit reporting are a barrier to encouraging customers to engage with lenders. This is particularly disappointing in light of the continued availability of six-month interest-only mortgage payment deferrals that are free of negative credit reporting.

Preventing harmful financial difficulties journeys

In light of these opportunities, aspects of the new rules look frustratingly close to ‘more of the same’. As a whole, the changes do not go far enough to create a holistic, joined-up strategy that draws a stronger connection with the Consumer Duty focus on good outcomes.

Despite these misgivings, the updated rules are an important foundation: StepChange will hope to see people who do need free debt advice reach advice at an earlier stage when their difficulties are less serious and easier to resolve.

There is much more that can be done, however, to prevent serious financial difficulties in consumer credit emerging in the first place. Next month, we plan to set out more about the challenge of addressing root causes and potential solutions.