Banking Code Change Focuses on Customers in Financial Difficulty

Location: New York
Author: Michael Atack
Date: Thursday, March 6, 2008

Following an independent review of the British Banking Code conducted last year, the code sponsors announced a series of changes to be introduced to the personal and business codes. The three principal sponsors comprise the British Banker's Association (BBA), the Building Societies Association (BSA), and APACS - U.K.'s payments association. The banking code represents a voluntary code that sets the standards of good banking practice for banks and building societies to follow whendealing with personal customers in the U.K.

The majority of the accepted recommendations will be incorporated within the code from this month (March 2008). Exceptions to this will be those provisions that require a longer implementation period owing to planned legislative changes or systems development. Among the key changes being adopted by the banking code are the following: (1) more help for customers who may be heading towards financial difficulties; (2) strengthened credit assessment practices to enhance responsible lending; (3) greater transparency for communications to customers about products and services; (4) prohibition of account closure solely because a customer has made a valid complaint; (5) information on the forthcoming unclaimed assets (dormant accounts) schemes; (6) greater certainty in cheque clearance; and (7) greater transparency of information for credit cards and credit card cheques.

Against the backdrop of overall concerns on U.K. indebtedness and latent impacts of the credit crunch, it will be particularly interesting to see how the industry responds to the first of these new measures. At the heart of this change is the requirement placed upon lenders to proactively identify customers that are getting into financial trouble and provide them with further information on how to address their situation.

For many lenders the key challenge will exist in their ability to identify those customers in difficulty before they appear as part of a delinquent work queue. Traditionally, proactive customer contact has been used to support marketing strategies and campaign management activity. The proactive identification and contacting of customers exhibiting signs of financial strain requires lenders to utilize their customer data very differently and challenges traditional debt management strategy.

Whilst the code now obligates banks to take actions to prevent customers from getting into trouble, the required approach is one that ideally benefits the bank and customer and consequently, requires sensitive customer management. This is somewhat in contrast with Egg's, the Internet bank, decision earlier last month to cancel the credit cards of over 160,000 customers following a one-off review of its card portfolio by its owner Citigroup. To combat the adverse press that ensued, Egg justified its decision by explaining that certain customers presented an unacceptable risk profile to the bank.

Although lenders have been more prudent in setting credit limits over recent years, this was the first time a U.K. bank has undertaken such a large 'culling' of customers. Perhaps of more interest is that certain industry commentators suggest that other lenders could follow suit if the current credit environment worsens. Although its action was defended by the chief executive of the BBA, it does question whether such an approach presents a viable strategy for others, especially those that target multi-product relationships.

Even though the recent code change has prompted an increased focus on financial difficulty, certain lenders acknowledged the need to adopt a more proactive approach in the aftermath of the bad debt losses suffered in 2005 and 2006. Borrowing principles and capabilities traditionally found in marketing, several U.K. lenders established pre-delinquency management (PDM) capabilities. PDM represents a significant departure from the traditional collections practice as it targets customers far earlier in the debt management lifecycle (i.e., before default) and is often branded and positioned as a customer service function. Core to PDM is the expanded use of customer data (i.e., transactional, behavioral scorecard, external data) to support the early identification of customers showing an increased likelihood of financial stress. Following rules-based identification, this segment is targeted for proactive contact to allow for a discussion of their financial affairs and, if a problem is detected, to offer a targeted assistance through a range of possible product, account, and/or educational actions.

Alongside key benefits such as reduced impairment charges, customer satisfaction, positive branding, and reduced marketing spend (i.e., increased alignment of marketing and risk initiatives), PDM also provides lenders with the opportunity to deliver tangibly on wider and increasingly important objectives such as treating customers fairly (TCF), corporate social responsibility, and responsible lending.

Given the heightened concerns around indebtedness and margin pressures, new capabilities are required that reflect more accurately the current economic environment. Lenders will need to refine their current strategies by: reviewing the debt management lifecycle (i.e., point of interaction); focusing more on customer management (not debt management); expanding their use of internal and external data; and promoting closer integration between marketing and risk functions. It is such capabilities that will enable lenders to respond and adapt more effectively to the changing economic and regulatory landscape.