How the Consumer Credit Industry Can Tackle the Issue of Forbearance and Adapt to the Changing Regulatory Landscape

  • Mike Ward, Executive Chairman at Armalytix

  • 14.09.2023 05:45 am
  • #RegTech

Legislation for the wider financial services sector is ever-changing, with the transformations over the past decade being driven by rapidly advancing technological and social landscapes. 

Notably, the Financial Conduct Authority (FCA) has recently introduced new Consumer Duty regulations that have far-reaching implications for consumer credit firms, especially in relation to loan forbearance - a vital aspect of helping borrowers facing financial difficulties. The FCA has made it clear through direct interactions with firms that the issue of forbearance is a critical area of focus and substantial ongoing regulatory changes are to be expected. 

So, what exactly do these new regulations entail, and how can firms navigate this evolving landscape effectively? 

Under the new regulations, consumer credit firms are now required to take proactive steps to explore loan forbearance options for borrowers encountering financial hardship. One key aspect of these Consumer Duty obligations is that firms must provide a comprehensive range of options to support customers beyond basic repayment plans for outstanding debts. This means that firms must carefully consider each customer’s unique financial and personal circumstances and identify any characteristics of financial vulnerability. Most importantly, firms must ensure that any arrangement put in place is practical and tailored to the borrower’s financial capacity. 

The enhanced regulations also require the regular monitoring and review of all customer arrangements - firms can no longer consider the matter solved after the initial arrangement is made and must continue to oversee, monitor, and adapt accordingly. 

Companies must not only establish suitable forbearance arrangements but also ensure that ongoing due diligence is undertaken in the assessment of sustainability. Should there be any indication that an arrangement is no longer maintainable, firms are expected to initiate a review and take proactive measures to address the situation. 

In order to effectively tackle these forbearance requirements and ensure compliance, firms will need to focus on customer-specific information that properly facilitates the well-being of borrowers in the lending industry. A one-size-fits-all approach will be insufficient when it comes to supporting customers facing financial challenges. Technologies powered by Open Banking that provide accurate, up-to-date and individual customer data will be critical, allowing each customer to safely share the data needed to deliver the financial insights to firms that are necessary to make the right decision quickly. Without these insights, the principles of flexibility, adaptability, and empathy that firms will need will be hard to achieve and leave firms open to fines, reputational damage, and the costs of cumbersome internal systems. 

These regulatory changes are not just about compliance. They are an opportunity for firms to demonstrate their commitment to helping customers in challenging financial situations, ensuring their financial wellbeing, while aligning with the changes in the financial landscape. This is timely, especially given the current global economic challenges and the financial hardship faced by many customers.

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