The FCA published a final notice yesterday (17th February 2020) imposing a fine of £2.77 million on a car finance provider, for the unfair treatment of customers that fell into arrears between 1st April 2014 and 4th October 2017 (‘the relevant period’).
The FCA established that during the relevant period, the provider’s arrears management practices fell below the FCA’s Principles for Businesses, notably Principle 6 (i.e. a firm must pay due regard to the interests of its customers and treat them fairly) and Principle 7 (i.e. 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).
The FCA found that the finance provider’s arrears management practices in the relevant period breached Principle 6 in that:
- the car finance provider, in agreeing payment plans with customers that fell into arrears, typically set up short-term payment plans (i.e. to clear their arrears balance within three months) without assessing how realistic and sustainable the payment plan was for the affected customers.
- The provider failed to explore the suitability of a range of forbearance options at its disposable and assess the suitability of the same to customers’ individual circumstances. Based on the customer files reviewed by the FCA, it appeared that the majority of customers in the relevant period were only presented with a short-term payment plan as a forbearance option.
- The provider terminated customers’ credit agreements when the customer ultimately defaulted on the agreement (typically because the customer could not keep up with the short-term payment forbearance option).
The FCA found that this car finance provider’s arrears management practices did not address the information needs of its customers around termination options in that:
- It only communicated termination options (e.g. voluntary termination, voluntary surrender, settlement) to customers by telephone without following up in writing. The failure to communicate termination options to customers in writing made it difficult for customers to fully consider the options available to them.
- The provider’s arrears telephone calls were guided by an ‘exit script’ which (1) contained misleading information about voluntary terminations (e.g. suggesting that it was only available to customers who had repaid, at least, half of the debt owed under the credit agreement contrary to the Consumer Credit Act 1974), (2) promoted one termination option over others when the same would not have been suitable for all customers and (3) did not contain sufficient and accurate information on the different termination options and the consequences associated with choosing each option (or not choosing an option).
Root cause analysis
The failings identified by the FCA highlights the impact that deficiencies in a firm’s systems and controls can have on undermining the FCA’s consumer protection operational objective and, for a firm, on its reputation and, ultimately, pockets.
The FCA requires all firms to satisfy its minimum requirements (the threshold conditions) in order to obtain and retain authorisation. The third threshold condition, appropriate resources, requires firms to have appropriate non-financial resources (including systems and controls (i.e. business processes)). Appropriate in the this context refers to the quality, quantity and availability of a firm’s resources. One of the areas that is covered by systems and controls, as set out in SYSC 3.2, is business strategy.
The car finance provider failed to conduct a risk assessment to identify the consumer risks in its business strategy and ensure that adequate risk controls were embedded into its business processes during the relevant period. The Provider’s target customers are non-standard/credit-impaired customers who have ‘thin’ credit files or adverse credit histories. The apparent failure to conduct a risk assessment meant that the Provider did not adequately identify that its target market are likely to be vulnerable (i.e. more susceptible to harm) due to personal circumstances that relate to their credit-impaired status such as ill-health, irregular income and adverse life events. An adequate risk assessment would have influenced the development and maintenance of appropriate practices.
The FCA, following an inspection of the provider’s forbearance policy, collections policy, forbearance procedure and dealing with customers in arrears procedure, found that the aforementioned documented processes and statements of principle were suitable in that it created a ‘theoretical’ framework for it to appropriately exercise forbearance and due consideration, taking into account the individual circumstances of each customer. For example, the finance provider’s forbearance policy in the relevant period emphasised on ensuring any payment plan was sustainable for the customer. However, in practice, the FCA found (upon reviewing 209 customers files) that there was a policy/practice gap and, in reality, a number of customers in arrears were entering into unsustainable short-term payment plans without an exploration of other potentially suitable forbearance options.
The FCA’s findings indicate a potential deficiency in the provider’s internal audit setup during the relevant period (which is another area that is covered by the systems and controls requirement). An internal audit function should assess adherence to and the effectiveness of a firm’s internal systems and controls (i.e. business processes as documented in its policies and procedures). An effective internal audit function should pick up on any policy/practice gaps and encourage expeditious rectification of any gaps to minimise the risk of consumer harm.
Governance and culture
The FCA’s final notice includes some striking Management Information (‘MI’) relating to the relevant period. For example, the FCA set out that (1) 51% of customers in the sample customer files reviewed by the FCA had their arrangements terminated by means of a default termination (the option which had the greatest financial impact on a customer) and (2) only three customers in the 209 files reviewed by the FCA showed evidence of a payment plan extending beyond three months. It is unclear from the final notice whether the car finance provider, during the relevant period, had arrangements to furnish its governing body with such MI to give it visibility on potential consumer risks/harms.
The final notice set out that the FCA “…has not found that [the business] acted deliberately or recklessly.” The final notice is silent on what the FCA established to have been the drivers behind the malpractices identified during the relevant period. For example, the final notice is silent on whether the provider’s Customer Service Agents, who were responsible for agreeing short-term payment plans, were incentivised to do so. It is interesting to note that the FCA considers that the business derived a revenue of £49, 544, 417 during the relevant period.
A crucial lesson to be learnt is that firms (particularly those that build a business model on dealing with potentially vulnerable customers) should genuinely have a culture that places consumers at the heart of its business and develop its business processes so that, even in the absence of FCA intervention, it creates a framework for the fair treatment of customers. Ultimately, a firm’s governing body should be satisfied that the firm’s business processes ensure that its customers are treated in the same way as the firm’s governing body would want their own spouse, children, parents or grandparents to be treated should they be customers of the firm.
We regularly conduct audits with our clients and know from experience that it is an invaluable way to help in avoiding the issues experienced which can lead to such heavy fines.