banking: dealing with customers in financial difficulty

Financial difficulties can arise for a number of reasons. Customers may find they are unable to sustain the level of borrowing they have built up. Or the problems may have come about because of some unforeseen event – such as unemployment or illness.

Matters are often compounded by the sense of shame that many customers feel, even when their difficulties came about as a result of events that were entirely outside their control.

The types of complaint that are most commonly brought to us by customers in financial difficulty are where the lender:

	has been unnecessarily harsh in its approach to the debt;
	has been responsible for maladministration that adds to the debt problem; or
	has suggested a re-financing package that turned out to be inappropriate for the customer’s circumstances, or more expensive than the customer expected.

The Banking Code identifies a lender’s duties, when dealing with customers in financial difficulties. The over-riding principle (set out in section 13.10 of the Code) is that the lender will consider cases sympathetically and positively.

Where it appears that there is a problem (for instance, when payments are missed on a loan or credit card), the lender’s first step will be to contact the customer. Clearly, if customers know in advance that they are unlikely to be able to make a particular payment, it will help if they tell their lender. But some customers simply wait for their lender to notice missed payments – or perhaps hope that it will not do so.

The lender should always give the customer details of free and reputable advice agencies that could help. And if the customer decides to deal with the problem though an advice agency rather than direct with the lender, the lender should respect that decision and not press the customer direct. The lender should also accept that some customers prefer to communicate in writing rather than by telephone, or vice versa. Wherever possible, and provided that the customer stays in regular contact, the lender should use the customer’s preferred means of communication.

Lenders should undertake to work with the customer in developing a plan to help overcome the difficulties. For the plan to be successful, the lender and the customer must work as a partnership. The more information that customers give their lender about their financial situation, the more likely it is that a workable plan will result. The lender will confirm any agreement in writing, and both lender and customer must keep to what is agreed.

When assessing what is a reasonable repayment, lenders can only look at what money is left over after the customer’s priority payments have been met. Priority payments are those that – if left unpaid – would cause customers to lose their:

	home (payments such as mortgage, rent or secured loan payments);
	liberty (payments such as council tax, child support payments or payments due to the Inland Revenue); and
	utility supplies (payments such as water, gas and electricity).

Priority payments also include essential goods or services (such as food, payments on a cooker or fridge, and the cost of travelling to and from work).

To help work all this out, the lender is likely to ask the customer to complete a statement of income and outgoings. This will probably be in the form of the Common Financial Statement, developed by the British Bankers’ Association in consultation with the Money Advice Trust. Some customers may feel that the questions they are asked are somewhat intrusive, but setting out their financial position in detail in this way is the first step to arriving at a solution.

Lenders must take into account whether the customer has other debts that need to be repaid, and they should not ask for repayments that are disproportionate to those agreed by other creditors. If the lender holds the current account into which the customer’s wages are paid, it must not abuse its position by taking all the money that comes in.

Where the customer's problems are severe, the lender may suggest transferring the customer’s account to a central department that specialises in dealing with payment problems. Many customers resist this suggestion initially, perhaps because they fear they will be stigmatised as debtors, particularly since some lenders' specialist departments have rather negative titles such as 'Debt Recovery'.

However, these specialist departments are often able to make concessions that ordinary branches cannot, such as freezing interest, or reducing it. They may also agree nominal repayments, pending an expected improvement in the customer's financial situation.

In exceptional cases, where the customer's circumstances make it unlikely that they will ever be able to repay what they owe, a lender may consider writing off some or all of the debt. A lender is not obliged to agree to a customer's request to write off a debt, but it must – if asked – give its reasons for declining the request.

As well as working with the customer to find a realistic repayment plan, lenders must help by taking practical steps that will avoid making things worse. For instance, if the customer’s account cannot support the direct debits and standing orders set up on it, the lender should offer to cancel them, rather than incurring charges on the account by repeatedly returning them unpaid.

The customer should be given full information about the implications of any payment arrangements – for instance, the effect on the customer's credit reference file. And once any repayment plan is agreed, lenders should not normally try to change it until the agreed review point. The only exception might be where there is an unexpected change in the customer’s situation – for better or worse – that makes it appropriate to review arrangements ahead of time.

Where appropriate, the lender may suggest re-financing borrowings – for instance, by putting a high-interest overdraft on to a short-term loan, at a lower rate. But any new arrangements should be to the customer's advantage. The lender should not treat the situation as an opportunity to sell new financial products to someone who is already financially stretched. If the lender undertakes to advise about re-financing, it will be liable to the customer if its advice turns out to disadvantage the customer.