During the pandemic, more than five million payment deferrals were made for borrowers, split between 1.8 million mortgage payments and 3.4 million consumer credit agreements.

Since March 2021, regulator, the Financial Conduct Authority (FCA) has been monitoring lenders’ approach to borrowers in financial difficulty.

While it found examples of firms delivering good outcomes, it revealed just 30% of firms (15 out of 50) sufficiently explored customers’ specific circumstances, which meant that for the majority of borrowers, repayment agreements were often “unaffordable and unsustainable”, the FCA said.

As such, seven unnamed firms have voluntarily agreed to pay £12.38m in compensation to 59,491 customers.

It has told 32 firms to improve the way they treat customers, including in the way they engage with them and provide money guidance and debt advice, and details surrounding fees and charges. 

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The FCA said it would review an additional 40 firms in the coming months to make sure they are meeting expectations and protecting borrowers from harm. 

It comes as the regulator expects more customers to need support from their lender as pressure on household finances continues amid the current cost-of-living crisis. A recent survey by the FCA revealed nearly eight million people are finding paying for the basics a heavy burden which is two and a half million more than in 2020.

Firms put up ‘unreasonable barriers’

The FCA found instances where there was “excessive friction or unreasonable barriers”, such as customers being transferred between departments where information was not collected adequately so they had to constantly repeat their circumstances. 

It said there was inadequate signposting to independent, not-for-profit debt advice and said most firms communicated through online and written communications which meant opportunities to discuss benefits of support were missed. 

The regulator said firms should consider the fees they charged, including the impact this had on customers as well as whether fee charging was fair and cost-reflective. 

It also said firms should consider a range of forbearance such as reducing, waiving or cancelling fees and charges. Switching to interest-only payments or extending repayment terms were also suggested.  

The FCA found that firms typically did not show they had considered how circumstances could change for customers over time. 

‘Debt spiral’

Laura Suter, head of personal finance at AJ Bell, said: “While the pandemic was often described as ‘unprecedented’ we’ve now immediately rolled into another crisis, with even more people expected to struggle with their bills than during the peak of the pandemic.

“We’re already seeing more people turn to debt to afford rising bills and it’s imperative that those who are struggling to make repayments are offered support and solutions, rather than being left to struggle to pay and ending up in a debt spiral.

“The regulator also found that lots of people don’t want to contact their lender when they miss a payment, thinking that they either won’t be helpful or won’t be able to help. If someone is struggling to pay their mortgage or debt repayments it’s best to contact your lender as soon as possible to flag the difficulties and find a solution. While it’s often a scary prospect to admit that you’re having difficulties, it’s far better to address it head-on than bury your head in the sand.”

Action on lenders may be taken 

Sheldon Mills, executive director of consumers and competition at the FCA, said: “While many firms did well in supporting customers in difficulties during the pandemic, with our support and guidance, others sadly failed their customers.  

“Given the current cost-of-living challenges, it’s vital that the sector continues to learn lessons to make sure they support struggling customers.  

“We will take action to restrict or stop firms from lending to people if they fail to meet our requirements that consumers in financial difficulties should be treated fairly.” 

Anyone who is currently struggling is urged to contact their lender at the earliest opportunity. Alternatively, get in touch with the government backed MoneyHelper service for tips on living on a squeezed income and to access free, expert debt advice.