New rules mean will mean changes to collection policy and procedures warns James Baird
The FCA is taking over responsibility from the OFT for the regulation of consumer credit in the UK from 1 April 2014. The FCA will be interventionist.
It places the consumer at the centre of its regulatory principles and expects funders to do likewise. Principle 6 of the overarching principles states "a firm must pay due regard to the interests of its customers and treat them fairly".
The FCA will have regard to principles when assessing whether or not a firm is acting in the interest of its customers.
The FCA has drafted a detailed sourcebook for credit-related activities which is known as CONC.
CONC "builds on and adds to the high-level obligations in PRIN, GEN and SYSC and the requirements in, or under, the Consumer Credit Act 1974 (as amended)."
The rules within CONC are legally enforceable by both the regulator and private individuals. Firms and intermediaries must ensure they comply with the specific guidance and rules of CONC or face sanction from the regulator or borrower.
CONC states that firms must ensure employees, agents and other persons acting on its behalf comply with CONC (1.2.2 R). This provision coupled with rule 7.3.4 R mean a firm must treat customers in default or arrears difficulties with forbearance and due consideration, and represent a potent mixture for collections managers and the boards to which they report.
Furthermore 7.2.1 R states a firm must establish and implement clear and effective and appropriate policies and procedures for dealing with customers whose accounts fall into arrears.
CONC guidance says a firm is likely to contravene principle 6 and CONC 7.3.4 R where the firm does not allow for alternative affordable payment amounts to repay the debt due in full, and that a firm should, under principle 6, allow unmade payments to be made within the original term of the regulated credit agreement.
The above rules guidance and the overarching principles dramatically change the context in which funders operate in respect of default.
Policies must be clear, effective, proportionate and implemented. Staff must be trained and understand such policies.
The relevant managers and board members must adopt and endorse such policies so that it drives appropriate behaviour from the top towards customers in arrears.
These policies must include a forbearance policy. This means giving customers time to repay when they go into arrears.
It will mean in practice delaying taking recovery action while the firm obtains as much relevant information as possible from customers regarding their circumstances.
Categorisation of debt in terms of value or age will not necessarily be an appropriate way of organising collections in the future. Bespoke solutions will be needed for individual consumers who are in arrears.
Remuneration and incentive schemes for staff collection managers and directors need to be reviewed. Rewarding a collection manager for the amount of money collected in the shortest possible period of time does not fit with principle 6 and the forbearance rule and consequently will have to be redefined.
James Baird is a partner at Gateley