Market conduct supervisors play an integral role in supervising financial products and services providers’ conduct and promoting appropriate financial consumer protection practices. A fundamental aspect of financial consumer protection, specifically relating to credit and banking, is considering how financial firms prevent and manage arrears. This is particularly relevant given the current context, in which, many consumers have recently exited credit moratoria and are facing a sudden rise in inflation and interest rates. Examining the management and prevention of arrears is of utmost importance to supervisors globally.
This FinCoNet report presents findings on the supervisory approaches regarding the prevention and management of arrears, with a special focus on exit strategies from payment holidays. The findings of this report are based on 21 responses collected from participating FinCoNet member jurisdictions. This report seeks to provide information on policy development and the use of supervisory tools and approaches in the prevention and management of arrears, debt advice services and the exit strategies from credit moratoria. Additionally, it examines consumer focused risks and outcomes and includes examples and case studies to illustrate the various approaches adopted in different jurisdictions.
Almost all the respondents have rules and/or principles in their jurisdictions regulating how financial firms monitor borrowers’ credit risk to prevent arrears on credit agreements. In most jurisdictions, these rules and principles apply to a comprehensive set of credit products, including housing loans and mortgages, car loans and personal loans and other unsecured consumer loans. Usually, these rules and/or principles require financial firms to monitor credit risk regularly and identify early signs of payment difficulties.
In most jurisdictions, the existing rules and/or principles on the prevention of arrears on credit agreements require financial firms to assess the financial situation of borrowers with early signs of payment difficulties. In some jurisdictions, financial firms must also monitor the effectiveness of the solutions that have been agreed upon by the financial firm and borrower to prevent arrears. Almost all the responding jurisdictions have rules and/or principles in place relating to the procedures to be followed by financial firms to assist borrowers in arrears in their credit agreements. These rules and/or principles range from supervisory guidelines/memorandums to regulatory requirements, including consumer protection and prudential guidance.
In most of the responding jurisdictions the rules and/or principles apply to a comprehensive set of credit products available to consumers, including housing loans and mortgages and unsecured consumer loans. In most of the responding jurisdictions rules and/or principles are in place regarding the provision of debt advice to borrowers in pre-arrears or arrears in their credit agreements and the specific entities in charge of providing those advice services.
All the respondents have oversight powers over financial firms’ application and compliance with the rules and/or principles relating to the prevention and management of arrears on credit agreements. Most respondents’ supervisory scope includes all financial firms involved in the prevention and/or management of arrears on credit agreements.
In order to oversee financial firms' compliance with those rules/principles, the responding supervisory authorities make use of a wide set of oversight tools. Most of the respondents conduct on-site and off-site inspections, perform analyses of the data reported by the financial firms and hold regular meetings. Complaints handling and analysis of data on credit default are other frequently used tools.
In response to the COVID-19 pandemic, measures were implemented to mitigate its impact on consumers of credit products and help them endure this critical period. The most common measures implemented were payment deferrals, either through public or private credit moratoria, and the restructuring of repayment terms (for example, loan periods or interest rates).
In anticipation of the exit from credit moratoria, almost all the responding jurisdictions implemented temporary measures to mitigate the impact of the term of credit moratoria on borrowers. These included classifying borrowers according to their credit risk and enhancing systems and procedures to that end, alerting borrowers of the term of credit moratoria and offering forbearance solutions, including pre-approved forbearance solutions.
In most of the responding jurisdictions these measures were implemented through legal or regulatory means, issuing recommendations or setting supervisory expectations on financial firms on how to monitor credit agreements in order to prevent borrowers from entering into arrears following the end of credit moratoria.
The majority of jurisdictions stated that an extension on the suspension of payments was frequently offered to borrowers. Financial firms in most jurisdictions indicated that the option to extend loan maturity was frequently offered to borrowers. Financial firms also deferred the principal of instalments, applied interest rate reductions and presented debt refinancing solutions.
It is important to build on the lessons learned during the COVID-19 pandemic, in order to better prepare supervisors to deal more swiftly and effectively with any future adversities that may jeopardise financial consumers. Integrating quick and flexible vulnerability and financial hardship arrangements into financial consumer protection frameworks will support financial resilience and longer-term recovery as well as prepare jurisdictions for future crises. Regulators and supervisors need to be vigilant in order to keep up with the changing economic conditions and adequately respond to the challenges ahead.
