Article

Conduct, Collections & Recoveries

Financial Services Internal Audit Planning Priorities 2021

Below we highlight new areas relevant to Internal Audit but also those areas we believe will have greater focus in 2021. We hope this informs your 2021 planning and assurance approach.

5.1. Collections and Recoveries



Why is it important?

The risk of consumer harm is inherently greater for customers that are experiencing financial difficulties and the FCA have consistently championed the importance of consumer protection in this area, and the requirement to agree payment arrangements that are affordable and forbearance solutions that are appropriate. The wider economic impact of the COVID-19 pandemic has increased the scrutiny placed on a firm’s Collections arrangements as the regulator and organisations alike anticipate a significant increase in the number of customers that are likely to fall into arrears. It will be critical that organisations are able to respond effectively to an increase in the volumes of customers entering the Collections and Recoveries customer journey and ensure that these customers receive fair outcomes throughout all their interactions. 

What’s new?

  • The COVID-19 pandemic is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The FCA has announced several temporary measures in response to the pandemic that focus on supporting consumers whom are experiencing financial difficulty as a consequence of the pandemic.
  • Throughout the UK individuals continue to be affected by job losses, contract adjustments or furlough, and the FCA’s COVID-19 guidance is clear that it expects lenders to support customers throughout this period through the offer of payment holidays and placing a halt on repossession and litigation action until 31 October 2020.
  • The FCA has been actively liaising with firms, including requesting customer files for review, to understand the approach to the implementation of temporary measures and it has taken steps to understand what forbearance options are being offered to those customers that are unable to resume payments when a payment holiday comes to an end.
  • The FCA have also issued a call for input regarding ongoing support for customers who have benefited from the temporary measures introduced as a result of COVID-19 but remain in financial difficulties.
  • In addition, Collections and Recoveries has been the subject of recent enforcement activity with areas of focus including; policy and procedures, agent competency, MI and oversight and outcomes testing. 

What should Internal Audit be doing?

Assessing affordability and suitability of forbearance arrangements:

  • Review amendments made to firm’s policies and procedures as result of the COVID-19 pandemic to ensure customers are being supported in line with the FCA’s expectations.
  • Assessment of the firm’s Income and Expenditure process to ensure that these are being performed for those customers that have requested payment holidays and that they are being used to determine whether other forms of forbearance should be offered.
  • Review of the MI in place to ensure it provides adequate oversight of those customers falling into arrears, the forbearance treatments applied and whether fair outcomes are being delivered.
  • Internal Audit should also continue to assess customer outcomes at each stage of the customer life-cycle: pre-arrears, early arrears, late arrears and litigation.

Tailored vulnerability management: Lenders will need to be flexible in their approach to forbearance, particularly for Vulnerable Customers. Oversight of this will be key. Assess whether consideration has been given to any enhancements that may be required to the policies, processes and controls that are in place such as system flags, mandate structures and appropriate MI.

Staff competency: Review the resourcing arrangements in place to deal with a potential spike in volumes of Collections and Recoveries and ensure teams are adequately skilled and trained in the provision of repayment plans, forbearance treatments and vulnerable customers in the event of a material increase.


Key contacts: Lyndsey Fallon and Alastair McGeorge

5.2. Government Debt Schemes (CBILS)



Why is it important?

The COVID-19 pandemic has, almost overnight, emerged and disrupted organisations across the globe. To support smaller and medium sized businesses (SMEs), who may have, and continue to, lose revenue and see their cash flow disrupted during this outbreak, the UK Government introduced two debt programme schemes for SMEs: Coronavirus Business Interruption Loan Scheme (CBILS), and the Bounce Back Loan Scheme (BBLS) in March 2020. These schemes are part of a wider package of Government support for UK businesses and employees. There are large number financial service providers (including high-street banks, challenger banks, asset-based lenders and smaller specialist local lenders) who are accredited by the British Business Bank (BBB) for providing CBILS and BBLS loans. As at 2 August 2020 over £47 billion worth of loans were originated by the accredited lenders as part of CBILS (£13bn) or BBLS (£34bn). All accredited lenders will need to demonstrate how their business has met the criteria for issuing CBILS and BBLS loans and how they continue to service these customers in-line with the relevant scheme requirements. 

What’s new?

  • CBILS guarantees facilities up to a maximum of £5 million, available on repayment terms up to six years (for term loans and asset finance) and up to three years (for overdrafts and invoice finance facilities). The first 12 months of interest payments is covered/payable by the Government to the lender.
  • BBLS guarantees facilities up to a maximum of £50,000, available on repayment terms over six years at fixed interest rate of 2.5% per annum. The borrower does not have to make any repayments for the first 12 months. In addition, the borrower does not have to pay any set-up fees and the first 12 months of interest payments is covered/payable by the Government to the lender.
  • These two schemes provide lenders with a Government-backed guarantee against the outstanding balance of the facility, however, the borrower remains fully liable for the debt.
  • Accredited lenders must be able to demonstrate that all of their potential customers meet the eligibility criteria under the relevant scheme rules before being approved to receive a loan under CBILS or BBLS.
  • Accredited lenders must be able to demonstrate that they have relevant customer-facing and bank office staff in their organisation and any intermediaries are trained appropriately to apply and administer debt programme schemes.
  • Accredited lenders will be required to accurately register customer data on all the loans originated under CBILS and BBLS on BBB’s required platform in a timely manner. 
  • Accredited lenders will potentially undergo periodic audits to check that the relevant scheme eligibility rules and processes have been complied with, including whether the economic benefits of the debt programme guarantee scheme have been proportionately passed on to borrowers in the form of lower borrowing costs than would otherwise have been charged.
  • As a result of the principal repayment holiday being offered under these schemes, going forward effectively designed arrears management strategies will need to be implemented within Collections/Financial Assistance or Restructuring functions.

What should Internal Audit be doing?

Phase 1: Internal Audit focus areas for testing of these schemes should include:

  • Adherence to BBB’s accredited lender’s criteria and contract.
  • Design effectiveness and operational effectiveness of the processes and key controls (including lender fraud controls) put in place as a result of participation in the CBILS and BBLS schemes.
  • Appropriateness of the systems and IT infrastructure in place to help ensure accurate implementation of the lending process.
  • Pricing strategy to ensure that adequate proportion of the economic benefit has been passed to the customer.
  • Effectiveness of the controls put in place to ensure accuracy of customer data submitted to BBB required platforms.
  • Effectiveness of the controls put in place by the business to ensure accuracy of the credit reference agency (CRA) data used for making lending decisions. If other approved lenders are not accurately and consistently recording BBLS and CBILS data in their submission files to CRAs then the customer’s serviceability and debt status could be based on an inaccurate data.

Phase 2: Internal Audit will need to focus on:

  • Undertaking substantive testing of live cases where CBILS or BBLS have been issued and provide proactive feedback on whether lending criteria (based on scheme rules) has been appropriately adhered to and evidenced, and ongoing servicing of the facility is operating effectively.
  • Testing integration of the CBILS and BBLS data into the core banking platform whilst also providing assurance over product classification and accurate reporting to CRAs within the submission file.
  • Reviewing the updates made to lending policies and procedures as a result of lending under CBILS or BBLS schemes.
  • Reviewing accuracy of the data in core banking systems by undertaking comprehensive review of BBLS and CBILS records on core banking platform vs. external reporting (i.e. CRAs).


Also read our blog about Government Debt Schemes (CBILS)

5.3. COVID-19 Regulatory Internal Audit Considerations 



Why is it important?

The COVID-19 pandemic is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The UK Government has set in place social-distancing measures aimed at preventing the spread of COVID-19 and the pandemic has already had a significant impact on the UK and the global economy. Due to the ever-changing risk landscape shaped by COVID-19, it is imperative at this time that Internal Audit continue to consider the retail conduct risks that are emerging as a result. We have summarised some of the key retail conduct considerations that Internal Audit teams should consider when determining how to plan and shape its response to COVID-19.

What’s new?

The FCA has reacted quickly to the current crisis issuing a number of temporary and targeted measures lenders should consider in order to support customers that may be experiencing financial difficulty. The FCA’s COVID-19 guidance is clear in that it expects lenders to make use of any flexibility within its rules to support customers, bearing in mind customers’ individual circumstances, and that it welcomes lenders taking initiatives that go beyond usual business practices. Lenders are, however, expected to notify the FCA of any initiatives that go beyond usual business practice to allow it to “consider the impacts and offer support as appropriate”.

The expectation is that lenders take reasonable steps to ensure they are prepared to meet the current and evolving challenges which COVID-19 could pose to customers, staff and the business. To manage the likely increase in customer contact, organisations are leveraging staff from other teams and departments. To quickly mobilise and empower staff to make appropriate decisions at all stages, they will need to ensure their approach, policies and procedures are clear.

What should Internal Audit be doing?

Area of Focus

Vulnerability

Description

  • Has the VC policy been reviewed in light of COVID-19?
  • Has the impact of an increased volume of VCs been considered to ensure adequate resources are in place to meet customer contact demands, and that quality assurance (QA) will be sufficiently resourced and targeted on the right areas?
  • Does VC MI provide adequate visibility of the number and categories of VCs, and whether this is COVID-19 related?
Financial difficulty and Forbearance
  • If pre-arrears triggers have been identified and considered in light of COVID-19, is MI in place to support how these are monitored and tracked?
  • How is information on temporary measures such as payment holidays and freezes being captured?
  • Is analysis on customer cohorts taking place in order to determine effective customer contact and/or collections strategies when payment holiday/freezes comes to an end?
  • Is there robust governance and oversight in place regarding how key decisions are being made in relation to customer cohort analysis, and ensuring effective forbearance is in place?
  • Are plans in place to help manage an increase in arrears taking into account resource capacity and capability?
  • What are the arrangements in place to determine if fair customer outcomes are being delivered? Does QA and/or check the checker provide adequate visibility of this?
Effective communication
  • Is the communication strategy, as it relates to the FCA’s temporary measures, documented and clear? Has it considered the key operational and conduct risks that could arise, such as where customers hold multiple products and / or an increase in complaints? and is there appropriate oversight?
  • If digital programmes are being accelerated such as online portals, is there appropriate oversight and governance in place?
  • If aspects of the customer journey rely on face-to-face contact, are plans being put in place to adapt these communication strategies in light of COVID-19?
Governance​
  • Ensure governance, controls and internal reporting are effective in the new environment, with an emphasis on overlay/post model adjustment governance processes.​


Also read our blog about COVID-19 Regulatory Internal Audit Considerations

5.4. Retail Conduct – Consumer Affordability



Why is it important?

The FCA has acknowledged that creditworthiness and affordability assessments are not an exact science, and that implications outside of normal controls, such as a change in the customer’s circumstances or wider economic events can impact affordability. In normal times, firms are expected to have effective processes in place aimed at eliminating lending that is foreseeably unaffordable, without having a process that may be so conservative as to decline applications where credit would be affordable. The wider economic impact following the COVID-19 pandemic will bring additional scrutiny on the affordability controls that firms have in place for new lending to ensure that funds are being lent responsibly and whether this has resulted in fair outcomes for consumers. Whilst this remains important for banks and building societies, this is a particular area of focus for the FCA within the consumer credit sector due to certain products that are on offer in segments like the High Cost Short-Term Credit market.

What’s new?

  • The FCA published their findings from the Mortgage Market Study in March 2019 which has led to the introduction of new rules within MCOB in October 2019. These rules relate to modified affordability assessments for customers that are considered mortgage prisoners and are experiencing difficulties in switching to a new mortgage provider despite being up-to-date on their mortgage repayments.​
  • The FCA have also followed up on its Portfolio Strategy Letter that was issued in March 2019 regarding the risks posed to consumers in the high cost lending market. Within this letter the FCA identified that consumers may experience harm by being caught in a cycle of high-cost credit where they are borrowing to repay loans they have previously taken out. Firms should take appropriate steps to ensure that any relending leads to fair customer outcomes and does not cause harm.

What should Internal Audit be doing?

Area of Focus

Assessing affordability

Description

  • When considering a customer’s affordability the regulator expects firms to make a reasonable assessment, not just of whether the customer will repay, but also of their ability to repay affordably and without this significantly affecting their wider financial situation. In light of the existing COVID-19 pandemic, this should include an assessment of whether the customers use of a payment holiday/freeze has been adequately and fairly factored into the affordability process and whether this has resulted in a fair outcome. Internal Audit should ensure processes that are in place to assess affordability can adequately demonstrate this.
Performance of outcomes testing​
  • Review a sample of customer files in order to provide assurance that fair customer outcomes are being delivered across the customer journey. 
Vulnerability
  • Review the Vulnerable Customer journey in light of the recent FCA Guidance Consultation (GC20/3: Guidance for firms on the fair treatment of Vulnerable Customers) issued on 29 July 2020
High cost credit
  • Review and consider the processes and controls in place for repeat lending and ensure that affordability assessments being conducted are updated to reflect the latest income and expenditure position. Appropriate customer outcome testing should also be conducted to ensure that any consumer harm is identified and remediated. 


Key contacts: Lyndsey Fallon and Alastair McGeorge

5.5. Vulnerable Customers



Why is it important?

Vulnerability continues to be high on the agenda of the industry and the regulator and whilst progress is being made there remains a number of challenges. Vulnerability is a ‘state’ not a ‘trait’ – many people will experience some form of vulnerability at a point in their lives and firms have to be flexible and forward-thinking in their approach to identifying these changing vulnerabilities and have operations that are designed to address them. Given the existing circumstances surrounding the COVID-19 pandemic, there may be enhanced volumes of customers that are in a ‘state’ of vulnerability and therefore require enhanced levels of support from firms.

What’s new?

  • The FCA 2020 Financial Lives survey showed that just under half of UK adults, aged 18 and over (24.1 million people), display one or more characteristics of potential vulnerability.
  • The FCA have published their Guidance Consultation (GC20/3: Guidance for firms on the fair treatment of Vulnerable Customers) on 29 July 2020 following their initial consultation in July 2019. Vulnerability continues to be of paramount importance to the regulator and was highlighted once more as one of their key areas of focus in the 2020/21 Business Plan to ensure that the most vulnerable are protected. The FCA want to use this guidance to help drive change by providing clarity and focusing firms’ attention on what they should do to comply with the FCA’s Principles and to make sure the fair treatment of Vulnerable Consumers is properly embedded by firms in their culture, policies and processes throughout the customer journey. 
  • The COVID-19 pandemic is likely to lead to an increase in the number of Vulnerable Customers and many of those customers may have multiple drivers of vulnerability. In light of this firms need to ensure that they have adequate levels of staff in place to deal with the increased volume alongside robust MI to track and monitor the outcomes delivered for these customers.

What should Internal Audit be doing?

Area of Focus

Policy and procedures

Description

  • Assessing whether the firm’s policy and procedures have been reviewed in light of the COVID-19 pandemic to ensure the fair treatment of Vulnerable Customers that have been impacted as a result of the pandemic. This will also include an assessment of the firm’s current policy and procedures against the guidance that has been launched by the FCA as part of GC20/3 (Guidance for firms on the fair treatment of Vulnerable Customers) on 29 July 2020.
Management information
  • Ensure that appropriate MI is provided to senior Management and the Board so that they can continually monitor the fair treatment of Vulnerable Customers across the firm. Consideration should be given to whether the existing MI suite provides adequate visibility of the number and different categories of Vulnerability and whether there is sufficient MI in place to assess any changes to the conduct risk profile at firms due to the impact of COVID-19. 
Quality assurance
  • Review the robustness of Quality Assurance and Compliance Monitoring frameworks to ensure there is appropriate coverage of Vulnerable Customers and that any treatment of Vulnerable Customers that falls below the FCA or firm’s expectations is identified and escalated accordingly.


Key contacts: Lyndsey Fallon and Alastair McGeorge

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