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BBA - The newly formed Lending Code Standards Board is also planning to introduce further guidance around the treatment of consumers in financial difficulty and the use of the right of set off. We are acutely aware that any pre-notification of balance transfers must be carefully couched to avoid the funds disappearing altogether. It is hoped that the pre-emptive work by the LCSB will be enough to persuade the FSA - who are also looking at right of set off - to rely on self regulation in this area.
Lending Code newsletter - We have been aware of concerns raised over the past year about the
increasing use of the right of set-off by firms, which in some cases
has led to or exacerbated a customer’s financial difficulties. Set-off is
the process where banks exercise their right to apply a customer’s
credit balance in one account against unpaid or overdue amounts on
other accounts in that customer’s name.
These concerns prompted an investigation by the LSB and we found a
number of issues about the way that set-off is being used:
o The number of set-off transactions undertaken by firms differs
widely.
o Although the possibility that set-off might be used is mentioned
in account terms and conditions, customers are generally not
aware when set-off is likely to occur and are therefore unable to
prepare for it.
o Complaint volumes are low, typically running between 0.1% and
0.4% of transactions, but the impact of set-off on a customer in
financial difficulties or on a low income, can be severe. There are
no consistent policies on whether amounts set-off will be
refunded if a customer complains.
o Customers who are already recorded by lenders as being in
financial difficulties and co-operating with their banks are
generally excluded from set-off processes but debt advisers have
advised us that this is not always so. For such customers it can
leave them without sufficient money to meet pressing domestic
expenditure and bills and therefore severely disadvantaged.
o Most firms that operate set-off do so after making an allowance
for priority payments and day-to-day living expenses. However
this varies widely and there is no consistency.
We recognise that for many consumers, the application of set-off in
respect of overlooked and missed payments saves their accounts
from getting into arrears, which could damage their credit file. While
we are not seeking to remove this benefit, we have been discussing
ways with the industry of preventing vulnerable customers being
negatively impacted.
We propose to write to firms shortly with a set of minimum standards
that should be applied when considering the use of set-off. Although
they have not yet been finalised, we expect the standards to cover,
where appropriate, such issues as:
o Limitations on the use of set-off where customers are in or on the
fringes of financial difficulties and are co-operating with their
lenders.
o Attempting to contact borrowers before set-off is used for the
first time to discuss why a payment has been missed, offer
alternatives such as payment by direct debit and explaining how
set-off is used.
o Ensuring that the use of set-off will not lead to or exacerbate
financial difficulties.
o Giving notice to customers where set-off has been used.
o Prompt investigation of customer claims that set-off has led to
financial difficulties.
We believe that these standards should be relatively easy to apply
and will address the detriment suffered by some customers but leave
others with a helpful safety net following missed payments.
Monitoring of these standards will be included in our forward work
plan.
Also the LSCB are looking at Interest and Charges in Hardship situations
Our reviews over some years of the way that firms treat customers in
financial difficulties have identified a range of good and not so good
practices. In most cases we find that subscribers genuinely engage
with their customers through early arrears teams, advice centres and
managing the relationship with their debt collection firms in order to
be sympathetic and to help the customers find a way through their
difficulties. There is also strong evidence of customer referrals being
made by lenders to independent sources of money advice. This is all
in keeping with the Lending Code’s requirement to treat customers
who are in financial difficulty sympathetically and positively and to
explore a range of options to help them set up a workable repayment
plan.
Some lenders provide customers who are unable to meet their
contractual repayment obligations with concessions on interest and
charges. However we have identified inconsistent approaches to the
way these are allowed, with some firms allowing them as soon as
they become aware that a customer is unable to cover contractual
interest and charges while others adopt a more rigid stance limiting
these terms for a fixed period, often unrelated to the customer’s
circumstances. We have also found that customers who use fee-free
advice are treated more favourably than those who do not.
To address these concerns we have agreed guidelines with the
Lending Code sponsors that should apply to customers who have
demonstrated that they are unable to pay and are willing to cooperate
with their lender(s). These guidelines describe what we
believe would meet the fairness requirements of the Code and
indicate what we would consider falls short of it.
Full details are in the Dear Compliance Officer Letter number 2, dated
18 January 2010 and they include:
o Giving consideration to concessions where a customer who is in
financial difficulty provides evidence (typically but not always via
a Common Financial Statement) that they are unable to meet
their full contractual terms after payment of day to day living
expenditure and priority debts.
o It would be inappropriate for interest and charges to continue to
be taken where the result would be that the repayment period for
the customer becomes excessive. In forming a judgement on
what might be excessive, we would expect subscribers to take
into account the type of product and the individual circumstances
of the borrower.
o If concessions are to be withdrawn or reduced, this should reflect
the ability of the borrower to pay. This does not rule out regular
reviews which are provided for in the Code and if a customer’s
position has improved then appropriate interest and charges can
be taken.
o Where possible, firms should operate policies that are consistent
for the customer rather than determined purely by account type.
In all cases where a customer is unable to make repayments that are
sufficient to meet a lender’s minimum requirements for a debt
repayment plan, the customer must be given clear information on the
effect this will have on their position and the options available.
However this should never be in a way that is designed to encourage
or pressurise a customer to pay more than they can afford as
demonstrated by an income and expenditure statement.
We would ask firms to review their training and monitoring processes
to ensure that these standards are applied both at in-house
collections units as well as by outsourced third party collections firms.
Lending Code newsletter - We have been aware of concerns raised over the past year about the
increasing use of the right of set-off by firms, which in some cases
has led to or exacerbated a customer’s financial difficulties. Set-off is
the process where banks exercise their right to apply a customer’s
credit balance in one account against unpaid or overdue amounts on
other accounts in that customer’s name.
These concerns prompted an investigation by the LSB and we found a
number of issues about the way that set-off is being used:
o The number of set-off transactions undertaken by firms differs
widely.
o Although the possibility that set-off might be used is mentioned
in account terms and conditions, customers are generally not
aware when set-off is likely to occur and are therefore unable to
prepare for it.
o Complaint volumes are low, typically running between 0.1% and
0.4% of transactions, but the impact of set-off on a customer in
financial difficulties or on a low income, can be severe. There are
no consistent policies on whether amounts set-off will be
refunded if a customer complains.
o Customers who are already recorded by lenders as being in
financial difficulties and co-operating with their banks are
generally excluded from set-off processes but debt advisers have
advised us that this is not always so. For such customers it can
leave them without sufficient money to meet pressing domestic
expenditure and bills and therefore severely disadvantaged.
o Most firms that operate set-off do so after making an allowance
for priority payments and day-to-day living expenses. However
this varies widely and there is no consistency.
We recognise that for many consumers, the application of set-off in
respect of overlooked and missed payments saves their accounts
from getting into arrears, which could damage their credit file. While
we are not seeking to remove this benefit, we have been discussing
ways with the industry of preventing vulnerable customers being
negatively impacted.
We propose to write to firms shortly with a set of minimum standards
that should be applied when considering the use of set-off. Although
they have not yet been finalised, we expect the standards to cover,
where appropriate, such issues as:
o Limitations on the use of set-off where customers are in or on the
fringes of financial difficulties and are co-operating with their
lenders.
o Attempting to contact borrowers before set-off is used for the
first time to discuss why a payment has been missed, offer
alternatives such as payment by direct debit and explaining how
set-off is used.
o Ensuring that the use of set-off will not lead to or exacerbate
financial difficulties.
o Giving notice to customers where set-off has been used.
o Prompt investigation of customer claims that set-off has led to
financial difficulties.
We believe that these standards should be relatively easy to apply
and will address the detriment suffered by some customers but leave
others with a helpful safety net following missed payments.
Monitoring of these standards will be included in our forward work
plan.
Also the LSCB are looking at Interest and Charges in Hardship situations
Our reviews over some years of the way that firms treat customers in
financial difficulties have identified a range of good and not so good
practices. In most cases we find that subscribers genuinely engage
with their customers through early arrears teams, advice centres and
managing the relationship with their debt collection firms in order to
be sympathetic and to help the customers find a way through their
difficulties. There is also strong evidence of customer referrals being
made by lenders to independent sources of money advice. This is all
in keeping with the Lending Code’s requirement to treat customers
who are in financial difficulty sympathetically and positively and to
explore a range of options to help them set up a workable repayment
plan.
Some lenders provide customers who are unable to meet their
contractual repayment obligations with concessions on interest and
charges. However we have identified inconsistent approaches to the
way these are allowed, with some firms allowing them as soon as
they become aware that a customer is unable to cover contractual
interest and charges while others adopt a more rigid stance limiting
these terms for a fixed period, often unrelated to the customer’s
circumstances. We have also found that customers who use fee-free
advice are treated more favourably than those who do not.
To address these concerns we have agreed guidelines with the
Lending Code sponsors that should apply to customers who have
demonstrated that they are unable to pay and are willing to cooperate
with their lender(s). These guidelines describe what we
believe would meet the fairness requirements of the Code and
indicate what we would consider falls short of it.
Full details are in the Dear Compliance Officer Letter number 2, dated
18 January 2010 and they include:
o Giving consideration to concessions where a customer who is in
financial difficulty provides evidence (typically but not always via
a Common Financial Statement) that they are unable to meet
their full contractual terms after payment of day to day living
expenditure and priority debts.
o It would be inappropriate for interest and charges to continue to
be taken where the result would be that the repayment period for
the customer becomes excessive. In forming a judgement on
what might be excessive, we would expect subscribers to take
into account the type of product and the individual circumstances
of the borrower.
o If concessions are to be withdrawn or reduced, this should reflect
the ability of the borrower to pay. This does not rule out regular
reviews which are provided for in the Code and if a customer’s
position has improved then appropriate interest and charges can
be taken.
o Where possible, firms should operate policies that are consistent
for the customer rather than determined purely by account type.
In all cases where a customer is unable to make repayments that are
sufficient to meet a lender’s minimum requirements for a debt
repayment plan, the customer must be given clear information on the
effect this will have on their position and the options available.
However this should never be in a way that is designed to encourage
or pressurise a customer to pay more than they can afford as
demonstrated by an income and expenditure statement.
We would ask firms to review their training and monitoring processes
to ensure that these standards are applied both at in-house
collections units as well as by outsourced third party collections firms.
