Coronavirus linked forbearance: key findings

Firms have the policies and processes in place to provide appropriate forbearance and in the main, have provided clear communications when engaging with customers. There are areas for further improvement including the approach which firms use to assess their customers’ personal financial circumstances and quality assurance and oversight of third parties. We have also not yet tested whether firms’ delivery of forbearance outcomes is appropriate and in line with the policies and processes they have put in place.

Policies and Processes

We observed that firms’ existing forbearance policies provide a range of options to help customers who experience financial difficulty. We found that a number of firms had added to them to include specific TSG guidance and/or provided training to staff on new processes. We were encouraged that firms appeared to treat any customers approaching them for help under the approach of the TSG, irrespective of whether they had experienced difficulties caused by the pandemic.

We observed the following changes made by firms to reflect the TSG.

• We found that 3 of the 17 mortgage firms reviewed had considered offering short term forbearance to customers without assessing the appropriateness of that support (for specific customer cohorts) as permitted by paragraphs 3.5 - 3.8 of the Mortgages TSG (MTSG). By December, just 1 firm continued providing support to customers exiting payment deferrals through this optional simplified approach.
• Section 5.19 of the MTSG highlighted that second charge firms may wish to consider alternative forbearance solutions beyond those listed in MCOB 13. These include applying simple interest rather than compound to any payment shortfall or reducing the interest rate charged on these sums (in some cases to 0%). From our review of second charge firms, we found that 1 firm had stopped charging compound interest on arrears balances while 2 more second charge lenders in the sample were already doing this.
• Most credit firms in our sample have confirmed that they do not allow balances to escalate for customers in arrears (Credit TSG (CTSG), 5.36 – 5.41). However, we remain in discussion with 2 high cost credit firms to fully understand their position.
• Most credit firms in our sample have policies in place to waive additional interest accrued during payment deferrals for customers remaining in financial difficulty (PDG 4.13 - 4.16). We remain in discussion with 4 firms where their position is unclear.
• We found that 3 of the 9 motor finance firms reviewed have maintained the Guaranteed Minimum Future Value (GMFV) of the vehicle for customers with PCP contracts, who take up to 6 months of payment deferrals even if it pushes the contract term out.

We encourage firms to read the TSG and to embed it into their day-to-day approach to forbearance. Where firms choose not to implement sections of the TSG, we would expect them to be able to explain clearly why and how their existing policies and processes comply with Prin. 6 and relevant handbook rules.

The TSG states that firms should provide support to customers that reflects the uncertainties and challenges that many customers are and will be experiencing due to coronavirus (MTSG 5.3). The TSG also states that when agreeing arrangements to pay (including arrangements to make reduced payments), firms should ensure that these arrangements are sustainable. When considering if an arrangement to pay is likely to be sustainable firms should take into consideration the customer’s individual circumstances (MTSG 5.14 and CTSG 5.20 – 5.30).

We found that in general, mortgage firms would try to undertake an assessment of the customer’s financial circumstances using an Income & Expenditure (I&E) tool. We recognise that in some circumstances, customers may be unable or unwilling to complete these and we found that mortgage firms had policies to address these situations.

We found that credit firms, in general, had polices and processes in place to assess customer’s financial circumstances, including the use of an I&E but that the process varied and was inconsistently applied in practice. Some examples are as follows:  

• 1 motor finance firm did not complete an assessment of customers financial circumstances at any point pre-collections stage when arranging a forbearance option.
• The approach to assessing customer circumstances, especially the use of I&E, is inconsistent and firms were unable to fully explain the difference in approach that we observed on a case-by-case basis.
• We observed 4 high cost credit firms where the structure of the call primarily focused on asking customers to make a repayment offer. In other high cost credit firms, where a customer proposed a payment, the firm did not assess the customer’s circumstances to see if the arrangement was sustainable.
• 1 credit firm where agents would offer forbearance based on the customer’s estimation of what they might be able to pay. A full I&E assessment was only completed when the customer proposed a payment that was significantly less than the contractual monthly payment.
• Some firms apply a ‘buffer’ in assessing disposable income to allow for unforeseen and unplanned expenditure. Other firms however, appeared to use all of a customer’s disposable income in determining how much could be repaid.
• 1 credit firm, after completing an I&E assessment with a customer to determine affordability, offered the customer repayment options using all their disposable income or amounts greater than their disposable income. There is a risk in this approach that customers will not be able to sustain the arrangement. The firm has since revised their approach.
• CTSG 5.26 states that if a proposal is made by the customer with no prompting or pressure, this can be done without undertaking an I&E. At 1 credit firm where no I&E was completed, we found customers were asked if they could pay more than they initially offered.
• We also identified that at a least 20% of firms where customers had made repayment offers with no I&E, credit firms did not proactively contact the customers after 60 days, an important expectation set out in CTSG 5.26.

We found that most mortgage and credit firms accepted the financial information provided by their customers during meetings without any further evidence, allowing arrangements to be set up immediately. Some firms asked customers to send information such as bank statements to confirm the discussions. Where discrepancies were identified, the firm would recontact the customer to discuss and ensure that the proposed arrangement to pay would remain sustainable.

We would encourage firms to have clear policies and processes on how the firm will assess a customer’s financial circumstances before agreeing a forbearance option (CTSG 5.33). 

These processes may include specific areas of discussion for example:

• the reason the customer has missed a payment(s) or is unable to make a future payment
• what the customer’s current financial position is including: 

- whether they are able to meet priority bills

- what other debts they have

- what disposable income they have to meet their debts

• what the customer’s expectations are of future changes to their financial position

Firms may wish to ensure that payment arrangements (other than changing the regular payment date of a loan) are not agreed without an exploration of the customer’s circumstances.

For consumer credit, when determining a customer’s disposable income, we expect firms to explore this using an I&E approach unless the customer makes a proposal without prompting or pressure from the firm or the firm proposes token or no payments (CTSG 5.25-5.29). We understand that there may be circumstances in which an I&E is not appropriate, for example where a customer has completed a recent I&E and their circumstances have not changed or where they have no income. These circumstances need to be clearly set out in the firm’s processes.

Where customers proactively make an offer of a repayment without any prompting or pressure, we would still consider it good practice to assess a customer’s financial circumstances. If no I&E is undertaken in these circumstances (CTSG 5.26) any arrangement should be reviewed by the firm after 60 days to confirm whether they require further support or a review of the sustainability of their arrangement.

Figure 2: Approaches to I & E validation

6 out of 9 mortgage and consumer credit firms using an automated approach collected I&E through open banking and other data sources. 7 firms using an automated approach gave customers the opportunity to confirm that the I&E breakdown and subsequent disposable income was accurate. At 4 firms, customers were also able to amend the pre-populated figures and enter a sum they felt was affordable. 2 firms had controls in place to notify customers if expenditure figures appeared too high or too low against the Standard Financial Statement (SFS) spending guidelines to mitigate any user errors. Further, if the customer entered an amount significantly higher or lower than the calculated disposable income, 4 firms sought to discuss this with the customer. 

We encourage firms to sense check and challenge I&E information provided to ensure it is realistic. There are a number of ways firms could do this including using data such as ONS statistics or SFS trigger figures to compare customer stated outgoings to ‘average’ figures for certain customer types or from information collected through open banking.

We also encourage firms not to delay agreeing forbearance arrangements if they require customers to provide documentary evidence about their financial circumstances and I&E.

Reviewing arrangements

Both MTSG 5.21 – 5.23 and CTSG 5.42 – 5.44 are clear that arrangements should be reviewed regularly to ensure circumstances have not changed and that the support remains appropriate. We saw differing approaches to review period lengths and triggers and we would encourage firms to consider how it would determine if an arrangement remains appropriate. In some cases, the firm would require the customer to call in to provide updates on their personal situation while in others, the firm would make regular outbound calls. It is important that firms agree an approach which allows its customers to properly engage in the review of these arrangements.

Firms may wish to maintain regular contact with customers in financial difficulty. We are aware that some customers may be reluctant to engage with their lender and firms may adopt a variety of methods to try and overcome this. We also draw firms’ attention to our expectations in relation to customer engagement in MTSG 5.25-5.28 and CTSG 5.45-5.49.

Using automation in the customer journey

MTSG 2.9 and CTSG 2.11 sets out how firms could use automation or digital tools to automate processes to ask customers to provide information on their circumstances and offer options. We identified and engaged with 9 firms using automation as a substantial part of their approach including large retail banks, mortgage firms, credit card firms, and smaller consumer credit firms.

All firms acknowledged that further enhancements to their automated approaches would be beneficial and plan to make changes. These firms have accelerated plans to allow customers to interact without human input during the forbearance journey following the introduction of payment deferrals in March 2020.

Firms are automating processes and using digital tools to provide forbearance in a variety of ways. This ranges from gathering information on customers’ circumstances including I&E, to offering a range of forbearance options to customers. 4 of the 9 firms are using third parties to deliver some or all aspects of their automated processes and digital tools. We found that firms are looking to further embed third party tools into their own offering but had not achieved this in current timeframes.

We reviewed the 9 sample firms’ digital tools during a series of meetings to understand how they worked in practice. From these meetings and our review of the information provided, we found that in general these automated approaches were easy to navigate with minimal steps and helpful menus for customers to select from. Customer communication prompts and the actions the customer needs to take were clear.

We identified that some enhancements would be beneficial particularly around the avoidance of leading questions and ease of access to the non-digital channel. We also identified evidence of some ‘sludge’ practices which can add friction to the customer journey and, in some cases, may lead customers to make decisions that are not in their best interest. These included:

• Customers using third party digital tools having to register and log on to more than one system/platform to complete the automated forbearance journey. Customers complete a section then wait for an email from the firm before being able to progress to the next stage of the journey.
• Customers having to click on multiple boxes to reveal additional text to help inform their decision-making.
• Customers using third party digital tools may wait a day or more before receiving confirmation of their payment plan or if they need to provide further clarity.

MTSG 5.28 and CTSG 5.49 highlights that firms should consider what they can do to mitigate challenges with many customers requiring support. One approach could include clearly telling customers the information or documents they will need to have to hand. We did not observe any firms providing customers with a detailed list of information required in advance, meaning that customers may drop out of the automated journey. 5 of these firms enable customers to save their progress and come back to where they left off. In 3 of these firms, we found that the design of the automated approach may make it difficult for customers to change any incorrect information they have entered or go back and select another option.

During our review of the firms in our sample, we observed the following examples which could be helpful to customers.

• Customers able to record any vulnerabilities when they start the online journey, allowing them to be routed to appropriate customer teams if required.
• Third party budgeting tools embedded within the firm’s digital offering, providing a seamless approach to the customer.
• Contact details for debt advice and non-digital support clearly presented throughout the digital journey, allowing the customer to drop out of the process if they require an alternative approach to obtaining support.
• Pop-up boxes appearing which give additional help to questions and/or highlight where answers given appear unusual. For example, when recording expenditure, figures which are higher or lower than known averages.
• Presentation to the customer of disposable income remaining after completion of the online I&E together with an explanation of how the figure has been arrived at. Additionally, the customer being given the opportunity to confirm its accuracy and make changes.
• The ability for customers to revisit their I&E and update it in the event of financial circumstances changing.
• Monitoring of click rates and surveys which allows the firm to identify aspects of the online journey which require improvement.

The FLS survey found that in October 2020 there were 27.7 million adults in the UK with characteristics of vulnerability, namely poor health, low financial resilience, recent negative life events or low capability. This figure had increased by 15% since February 2020, when 24.0 million displayed characteristics of vulnerability. Having any one of these characteristics means that these consumers are especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.

Under section 5.36 of the MTSG and 5.54 of the CTSG, we expect that firms establish and implement clear, effective and appropriate policies and procedures for the fair and appropriate treatment of customers whom the firm understands, or reasonably suspects, to be particularly vulnerable. All firms have vulnerable customer policies in place with 94% of mortgage firms and 64% of credit firms having reviewed or added to them in light of the pandemic. We found that firms were understanding of the additional pressures which the pandemic was placing on customers and that in some cases this had led to additional staff training.

We found that firms had 2 broad approaches when helping vulnerable customers:

• 47% of mortgage firms and 68% of credit firms have a dedicated team to whom vulnerable customers are referred by staff
• 100% of mortgage firms and 32% of credit firms rely on agents to be able to identify and help vulnerable customers

We also saw some firms adopt different strategies to reach specific customer cohorts. This includes those already known to be vulnerable as well as new groups emerging due to potential financial stresses. These included customers identified as experiencing significant reduction in income through analysis of credit data, those who had very short terms remaining on their mortgages post deferral as well as those with existing vulnerability flags on their accounts.

Few firms explicitly asked customers to self-identify new vulnerabilities via digital channels. Of the 9 firms where we reviewed automated approaches, 2 of the firms asked customers at the outset if they were experiencing physical or mental health issues, as well as circumstances that may affect their ability to manage their finances. If so, they were re-directed to specialist support.

We would draw firms’ attention to sections 4.32 - 4.38 of the guidance for firms on the fair treatment of vulnerable customers[16] issued by the FCA on 23 February.

We encourage firms to review the recent guidance[17] and to embed relevant aspects into their processes to ensure that vulnerable customers are treated fairly.

Our assessment to date, has not identified any systemic issues with firms' capacity to provide help to customers during this period. Firms have seen a lower number of customers requiring further support, than originally anticipated. This is, in part, due to the extension of the furlough scheme and payment deferrals guidance in the Autumn of 2020.

We observed that in all firms in our sample were prepared and have adequate plans in place to support customers in financial difficulty. 

Staffing capacity

MTSG 5.28 and CTSG 5.49 highlight that firms are responsible for putting in place sufficient resources. All 8 of the larger banks and building societies have increased capacity in their arrears and financial difficulties’ departments to meet the increased demand. These firms account for approximately 40% of both the 1st and 2nd charge mortgage markets, and 75% of the credit card and loan market.

Figure 3: Methods used to boost capacity

All 8 of the larger banks and building societies included in this review planned for a significant increase in demand from customers in financial difficulty and recruited staff through 2020. All firms have also reported that demand has been lower than expected during Q4 2020 and into Q1 2021 with the result that many teams have considerable capacity.

Almost all firms we sampled were able to set up home working for their agents and provide online, remote training for the new teams. Where home working was not possible at the firm or an outsourced provider, 2 mortgage firms and 14 credit firms reported an impact to their service levels caused by lockdowns and increased sickness affecting staff availability.

As set out in MTSG 5.44 and CTSG 5.60, firms should ensure that staff are adequately trained for their roles to meet current and anticipated demand from customers who require financial assistance and would remind firms of the requirements set out in COND 2.4 in relation to the Adequate Resources Threshold Condition.  

Assurance and oversight of forbearance offered

Section 5 of both the MTSG and CTSG recognises that firms may need to recruit extra and less experienced staff to meet the increased demands for forbearance and that these staff may be working remotely. It is important therefore that firms have appropriate oversight arrangements in place for these new staff to help ensure that fair outcomes are provided to customers.

All firms in our sample undertake some form of quality assurance (QA) or checking of customer collection cases. Some use a thematic approach to select cases for review considering specific cohorts of customers or agents, while others have chosen cases specifically linked to payment deferrals and post deferral forbearance.

However, we also identified that some firms have low levels of QA rates and that despite the higher number of new, less experienced staff helping customers, volumes of checks have not been increased.

Where firms provided us with outputs from QA and more detailed oversight, we identified that the higher numbers of newer collections staff appeared to have caused a higher rate of failed cases. Typical issues identified by the firms and measured against their own standards included a lack of probing when trying to understand customer’s circumstances, poor record keeping and inadequate disclosures of important information. Training and support for less experienced staff is important to help ensure that customers are given fair and sustainable forbearance solutions.

Both the MTSG 5.40 and CTSG 5.62 highlight the benefits to firms of adopting an end-to-end quality assurance process. We saw this end-to-end approach being used to varying degrees with 65% of mortgage and 43% of credit firms adopting this approach and 35% of mortgage firms and 57% of credit firms still relying on reviewing individual forbearance actions in isolation. Typically, this would include listening to 1 call or reviewing how an arrangement was agreed.

We encourage firms to undertake end-to-end QA to build up an understanding of what has occurred before and after a particular piece of engagement, to ensure a full understanding is reached when assessing the outcome achieved.

For automated approaches, we found that all 9 firms considered customer outcomes to be largely pre-determined by the design of the automated approach and had not documented automated approaches in their QA process. Only 2 firms within the sample reviewed the appropriateness of end-to-end customer journey achieved wholly via the automation. For all other firms, we found customer outcomes were typically only tested if a customer had interacted with an agent during the process.

All firms had some form of regular monitoring of the data feeds (e.g. from CRA or Open Banking) that input into the firm’s understanding of customers’ circumstances at different steps in the automated approach. Additionally, 3 of these firms offer the customer the opportunity to complete a survey at the end of the process to drive improvements. 

5 of the 8 largest firms use third parties to provide collections and recoveries support. Many of the smaller firms we reviewed also use these third parties to provide forbearance to their customers. Both MTSG 5.46 – 5.48 and CTSG 5.65 – 5.67 remind firms of the importance of good oversight and this applies equally to the relationship with third parties who are engaged in delivering forbearance on behalf of the firm.

We encourage firms to ensure they have adequate oversight in place including of third parties. As per MTSG 5.40 and CTSG 5.62, adopting a quality assurance approach that reviews the end-to-end process, rather than focusing on individual interactions in isolation, enables firms to evaluate better the fairness of customer outcomes overall, and helps with robust root cause analysis. This may be done by carrying out end-to-end reviews of a sample of customers who receive forbearance and assess all aspects of their journey whether completed with an agent and/or via an automated solution.

As many firms have increased the level of new resources, higher levels of oversight may be needed for less experienced staff. Additional training and support should be provided where evidence of potential and actual harm is identified.

Where firms use third parties, they should ensure appropriate oversight arrangements are in place to comply with applicable rules and guidance on outsourcing in SYSC, MCOB and CONC. 

Incentive schemes

MTSG 5.45 and CTSG 5.61 set out our expectations around how incentives and staff objectives should be aligned with delivering forbearance that is appropriate for customers’ individual circumstances. From our review, we identified no mortgage firms and 24% of credit firms who had financial value collection targets and/or efficiency targets linked to variable pay. We are concerned that schemes which incentivise agents to collect payments from customers may encourage poor behaviour and lead to unfair outcomes through unsustainable arrangements being made. We remind credit firms of our rules and guidance on remuneration in CONC 2.11.

Firms are encouraged to have due regard to Principle 6 and may wish to consider whether any incentive schemes in place may lead to poor behaviour. For example, staff may be influenced to achieve a high number of calls rather than take the time the customer needs or prioritise the collection of payments rather than agreeing fair and sustainable forbearance options. Firms should review their incentive schemes and assure themselves that they are aligned with delivering forbearance that is appropriate in customers’ individual circumstances.

Firms stated that many customers contacting them for further support face uncertain financial situations. Firms indicated that it was difficult to establish a long-term view of their customers’ circumstances and as a result, they were providing temporary help through short-term forbearance. 

We are encouraged that firms are supporting customers with short-term arrangements but as these arrangements end, firms should consider whether these short-term arrangements are appropriate and whether other options may enable customers to recover over the longer term could be offered (MTSG 5.17 & 5.23, CSTG 5.17 & 5.44).

Options observed

We asked firms to tell us how they were helping customers who needed further help after their deferrals had ended.

Firms had a wide range of options available. We found that mortgage firms helped customers over the short term with interest only concessions and reduced payment concessions of up to 3 months frequently being used. Zero payment concessions including breathing space were also available for both mortgage and credit customers who had the most severe financial difficulties. When we spoke with firms, 94% of the mortgage firms and 97% of credit firms had helped their most financially impacted customers with zero payment arrangements, in effect extending the previous payment deferrals but as an arrangement reported to the credit file.

Offering automated forbearance

We found that 2 of the 9 firms offered the same options via the automated tool as those available through a non-digital channel. The remaining firms had segmented their customers to identify groups more suited to an automated approach. Firms tended to use automation to offer shorter-term and typically standardised forbearance options. For example, a fixed 3 or possibly 6 month reduced payment plan for customers who held a single lending product with the firm, and who were generally up to date with their payments, not including the amounts accrued through payment deferrals.  

We saw limitations across all 9 firms in terms of the flexibility of the automated approach. Customers with multiple product holdings with a single firm had to follow separate processes. 2 of these firms using third parties lacked access to information provided by customers which may make it more difficult to maintain records as described in MTSG (Section 5.48) and CTSG (Section 5.67).   

For all 9 firms, if a customer’s circumstances changed after a payment plan had been agreed, customers needed to re-enter information. It was not always clear that this could be resolved by speaking to an agent. MTSG 5.27 confirms the importance of firms keep clear records of customer interactions as does CTSG 5.48. Further, 7 firms only provided customers with the opportunity to set up a payment plan after missing a payment.  

More concerningly, we also observed that 2 of the firms had presented leading questions or default repayment plans that they had not identified were appropriate to the customer’s individual circumstances (MTSG 2.9 or CTSG 2.11). This may direct customers towards an inappropriate outcome.

Communications

Firms have adopted a range of methods (website, letters, emails, SMS and calls) to reach and inform customers of their options as payment deferrals granted under the PDG end. We acknowledge that firms have had to move at speed to produce and update written customer communications relating to Covid-19 related deferrals.

However, we found in a small number of cases letters from the same firm which lacked a consistent approach, suggesting that some firms may not have undertaken a full review of their messages to customers.

While all firms referred to Covid-19 financial support on their website, the quality and accessibility of information varied. Many of the firms’ websites had dedicated pages which contained lots of easy-to-read information explaining how both the firms and external agencies could help. Frequently asked questions covering a range of topics from Covid-19 specific help to more general financial issues were seen. Unfortunately, in 18% of cases we noted that firms had not updated their websites consistently following changes to the guidance. Having up to date and easy to read information available to customers on websites would not only be beneficial for customers but also for firms as it can reduce the amount of inbound telephone contact, thereby reducing pressure on telephone capacity.

We observed that 39% of credit firms and 87% of mortgage firms gave customers access to digital tools and/or I&E forms with guidance on how to complete these ahead of any conversations. This gives customers time to prepare and think about their finances ahead of a conversation with their lender.

In MTSG 2.11 and CTSG 2.13 we asked that firms provide details of how customers can ask for support through non-digital channels. We found in 4 of the 9 firms where we reviewed their automated approaches that the details of these alternative, non-digital contact details were not prominent in the tool. 4 of these firms had the ability to track customer progress during the automated journey. They sent emails and/or SMS messages to remind customers to complete the process and gave customers the relevant contact details to speak to an agent if preferred (CTSG 2.12). Firms were confident that this re-engaged customers who had dropped out of the automated approach.

We would remind firms of the requirements of Principle 7 which states that ‘a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.’

Signposting to debt advice

We saw that all firms referred to debt advice within their communications and on their website. The extent to which debt advice was discussed within the calls we reviewed varied considerably. Some agents were able to integrate a discussion about debt advice into the call while others simply appear to mention it as an add on at the end of the conversation with no discussion of the benefit to the customer.

Both MTSG 8.2 and CTSG 7.2 set out our expectation that firms can help customers understanding of what types of debt help or money guidance are available. This could include providing links to debt firms. In the automated journey, 8 firms included hyperlinks to debt firms from within the tool. 3 firms using automated approaches were able to electronically share I & E information directly with a debt advice company. One firm offered access to well-being content with links to external support.

We encourage firms to present information about debt advice in a helpful manner which enables customers to understand alternative sources of assistance available.