This month the FCA has been highlighting the need for credit card companies to treat customers fairly when they are in persistent debt. They have even explicitly warned against the blanket suspension of customers’ accounts.
Persistent debt rules.
All this has to do with new affordability debt rules introduced in March 2018. These have required credit card companies to speak with customers who have only made minimum due payments for at least 18 months to discover if they are in financial difficulty (offering options) or take escalating steps to try to persuade them to pay off the balance. At 36months they have mandated that they offer a method to repay the balance in a reasonable period and must show forbearance. The initial 36-month deadline is in March 2020 (PD36).
The challenge for many credit card companies has been getting hold of many customers during this 18month period and getting them to agree to higher payments. Some customers, whilst not in financial difficulties per se, do not want to agree to highly monthly payments if they do not need to. Undoubtedly, they will pay more in interest, but this will affect their cash flow, and if they are okay with this, they feel this is their decision.
However, in March there is a crunch. At this point the regulator has mandated action and all customers still classed as being in persistent debt (including those that have refused change) will need to be actioned. Importantly this includes the entire legacy volume of customers who were in persistent debt from before March 2018.
Even the FCA are worried. The FCA has estimated that around 5.6m people are potentially in problematic debt and that 2m will remain in persistent debt at the 36-months stage. This volume is expected to hit all at once as this first deadline is reached.
Operational impacts: Ready or not
For those in the financial services industry, and especially in Collections call centres, this could have some dramatic impacts as all of these customers are notified at once, with a call to action. It could be a challenging month and there are a couple of key questions to ask
- Is this on the radar for the executive team? Ensure there is awareness and estimation of impacts
- Do you need to and have you right-sized your operation to handle the uplift in customer contact? Are there alternatives you can look at to help manage volume and prevent knock on impacts on performance elsewhere
- Do you have a robust process and procedure to handle this topic? Are your collections staff trained? Is there a robust objection and even complaint handling process? Can they assess and help educate customers on the benefits of increased payments?
- Are there any other knock on impacts for customers should an account be suspended, of increased payments creating further difficulties (eg credit bureau impacts)?
Areas to prepare
In addition to resource requirements there are a couple of additional areas to prepare
- Ensure you have processes in place to monitor any uplift in customer repayments for accounts that have historically not been in collections.
- Ensure there is an appropriate forbearance toolkit (e.g. reducing, waiving or freezing interest) that enables the acceptance and subsequent monitoring of sustainable repayments over a reasonable period.
- Make sure you have plans in place to manage accounts where minimum due is being received but the customer does not respond or declines to make increased payments. These plans need to include educating customers or directing them to alternative cheaper lending facilities
- Consider options if ‘persistent debt customers’ stop making payments and default following a credit line closure; this is an unknown, but being prepared with some thought on contact and treatment strategies should this happen is worthwhile
- Speak to the finance team on the impact of up-to-date IFRS Stage 1 customers moving to Stage 2 as a consequence of persistent debt treatments. This needs to be estimated
The start of something bigger
The FCA’s commitment to tackle potential problem debt is core to advancing their objective of achieving appropriate protection for consumers. They are estimating this will save customers between £310m and £1.3bn per year, reducing customer stress and related financial difficulties by resolving debt problems sooner.
This of course good news for many consumers, however this may also be the start of something bigger. Minimum due payments in other markets are set as high as 10% (or higher) of outstanding balance each month. Is this something we could see here too?
Our view is Collections teams need to get this right from the start. Asking questions now will be helpful for banks and financial services organisations to handle PD36 and be ready for the future.
Get in touch with us to find out how we can help, either handle the bubble in March or prepare for more upcoming change.