Consumers’ ability to repay credit agreements is high on every lender’s agenda, but what can telecoms providers learn from financial services’ affordability assessments?
As we begin to see new opportunities ahead and more optimising in the market after a challenging two years, in this article, we will provide market insight on emerging practise, discuss regulatory challenge and provide practical advice on how to approach affordability assessments for telecom providers.
In the face of the cost-of-living challenge, several regulators have reminded organisations of their obligation to assess customers’ circumstances and provide support for those struggling to pay. Financial service providers already have well established processes to assess affordability (FCA – CONC handbook 5.21). In addition, the FCA’s highly anticipated Consumer Duty has been developed to cement this further to drive good customer outcomes.
Although inflation is falling, with interest rates continuing to rise, the pressure on households is likely to continue. In May, UK Finance reported increases in mortgage arrears and repossessions2. With more than 2.2m3 households on variable rate mortgages already facing higher mortgage payments the pressure on households will ensure that affordability remains in the spotlight. However, as we well know, rising costs are not limited to mortgage rates and supermarket checkouts. The latest handset starting prices continue to rise and there’s now increasing capability to bundle accessories into the basket; it’s not uncommon to see basket values exceeding £1500 (excluding data, talk time etc.). It’s not surprising that more customers than ever are paying for their mobiles via contract covering either handset and airtime or handset finance. Our insights show steady growth in volumes of customers using credit to finance mobiles. However, despite the challenging economic backdrop and increase in basket values, the approach of telecom providers towards affordability assessment remains, at least for now, unclear.
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How is the cost-of-living challenge affecting telecoms customers?
Delving into our unique credit insight for customers with telecoms products shows an interesting trend. The percentage of telecoms customers who had fallen one or more months behind on their telecom obligation had been rising since early 2021. However, as the cost-of-living crisis intensified throughout 2022 the rate of increase reduced and has flattened in 2023. It’s also important to contextualise this rise. The current arrears levels remain below the levels experienced prior to the pandemic. Higher than most other sectors, however, c.50% of telecoms customers who fall 1 or more months behind on their telecoms payments have historically defaulted fully on their obligation (i.e. have reached the most severe state of arrears registered at a Credit Reference Agency). This rate is highly variable and shows no discernible trend over the last couple of years.
Ultimately, although the cost-of-living challenge has impacted some consumers more than others, overall the impact on the telecommunications sector has been limited and consumers ability to keep on top of payments for mobile contracts has improved when compared to the status quo prior to the pandemic.
What do the Regulators say about support for telecoms customers struggling to pay?
Ofcom’s latest research in April 23 indicates that around 3 in 10 households struggle to afford their communications services4. Like most other regulators, Ofcom are calling for more to be done across the industry to support struggling households in the face of the cost-of-living challenge5. They repeatedly call for more organisations to offer social tariffs and ‘make sure it’s swift and simple for customers to sign up’ as they estimate that 4.3m households are eligible but only 220,000 homes have taken advantage of the discounted rates as of Feb 23. Ofcom also updated their ‘Treating vulnerable customers fairly’ guide in September 2022 to include further practical steps firms can do to help customers in difficulty, including proactively offering support and strengthening links to the free debt advice sector.
Are telecommunications providers required to undertake an affordability assessment at the point of sale of a mobile phone and / or airtime contract?
Whether consumers are looking to purchase a handset, mobile phone contract, accessories or broadband services, the use of credit reference agencies by telecoms providers to verify identity, check for fraud and undertake credit checks is standard practice. However, when it comes to assessing affordability the picture is complicated. Mobile phones (that aren’t paid for in entirety up front) are often financed by a loan to cover the cost of the handset and a separate agreement covering the mobile service. As such they are typically regulated under the FCA (Financial Conduct Authority). Under 2018 CONC rules the FCA require ‘lenders’ to undertake a credit assessment covering both credit risk (to the lender) and affordability (to the consumer). Under these circumstances telecoms providers should, therefore, be undertaking an appropriate affordability check.
However, some handset inclusive deals are ‘bundled’ contracts covering both the purchase of the handset and airtime i.e. the consumer signs a single agreement. The consultation on Buy Now Pay Later (BNPL) issued in Feb 236 has the potential to add to the ambiguity in this sector as it appears that a telecommunications company enabling customers to purchase accessories and consumer electronics in instalments via their telecoms bill may continue to be exempt in certain circumstances. In such situations the requirement to assess affordability may not be as clear.
Given the current cost-of-living challenge continues with emphasis likely to be focused on customers facing increased mortgage payments, the regulatory pressure to ensure affordability is appropriately assessed is likely to continue. Therefore, given the current market dynamics it’s vital for telecoms firms to review their affordability capabilities and ensure there is a clear strategy to implement proportional checks where required.
What should an affordability assessment look like for telecoms?
The FCA’s principles-based approach indicates that the extent that a consumer’s affordability needs to be assessed has to be proportionate to their circumstances and the risk of the product. They indicate that firms must take ‘reasonable steps’ to assess the consumer’s ability to make repayments in a sustainable manner, without incurring financial difficulties or experiencing significant adverse consequences. Along with the FCA CONC Handbook, additional guidance has been provided7. However, it’s challenging to find specific answers to the key questions facing many telecommunications suppliers using credit to increase sales such as, given monthly repayment values ranging from £10 to around £250 pm over periods up to 3 years; Do we need to capture and verify customers’ income? Do we need to take account of expenditure? How deep do affordability assessments need to go?
The Financial Ombudsman Service (FOS) guidance to reviewing ‘unaffordable lending’ complaints (which looks to the FCA CONC framework) starts to provide some clarity in that it states that an affordability check “would need to be more thorough;
- the lower a customer’s income (reflecting that it could be more difficult to make any loan repayments to a given loan amount from a lower level of income);
- the higher the amount due to be repaid (reflecting that it could be more difficult to meet a higher amount from a particular level of income);
- the longer the term of the loan (reflecting the fact that the total cost of the credit is likely to be greater and the customer is required to make payments for an extended period); and
- the greater the number and frequency of loans, and the longer the period of time during which a customer has been given loans (reflecting the risk that repeated refinancing may signal that the borrowing had become, or was becoming, unsustainable).
Reviewing recent FOS cases relating to device financing (of which there continues to be very few) or where the loan amount / monthly repayments / term are similar to those offered by telecoms provides an interesting insight as to how the Ombudsman interprets the FCA’s affordability regulations. They suggest that all components of affordability (income, verification and expenditure) could be required for some customers. In one mobile phone example, a complaint was upheld where multiple loans were offered to finance various devices and airtime contracts were also taken. A credit check was undertaken but not an affordability assessment. Given the customers’ previous history of missing payments this lack of affordability assessment was found to be insufficient. In a different case of a retail credit loan of c.£2000 over 24 months, for example, as the complainant had a low income, the Ombudsman found that an assessment of expenditure should have been made. In another a retail credit facility of £1000 was given to a consumer who had some historic evidence of payment distress. On this case the Ombudsman said that a reasonable check ought to have included an income verification and assessment of expenditure.
Our work across telecoms and comparable sectors, which has included speaking to providers who have had interaction with the FCA on affordability, coupled with a review of telecom’s websites, suggests that the market approach to affordability is varied. Few organisations are initially asking for income, the majority are taking a proportional approach with some leaving this as an option depending upon internal and external credit data available. Where income is captured, it should be validated and where that’s not possible a proportionate adjustment applied. Open Banking doesn’t appear to be widely adopted to supplement affordability assessments. Where it is used, it’s only where there’s a high risk identified.
Putting all of the above together, the decision regarding affordability approach in telecoms is clearly one for individual organisations’ compliance teams. However, what appears to be emerging is that telecoms providers would be wise to develop an affordability strategy that is tailored and proportional based on the customers’ circumstances and product risk. Where the contracts are credit agreements (e.g. credit to finance a handset) it’s imperative this is done quickly and adheres to the requirements under the FCAs CONC. The FCAs Consumer Duty may drive further pressure in this area when the spotlight is turned on good customer outcomes8. In order to maximise sales, minimise friction and prevent an overly prolonged and unnecessary affordability assessment involving I&E capture and verification for all telecoms providers need the capability to flex the affordability journey for different customer segments. Telecoms credit applicants who have shown signs of previous payment distress or on low incomes will need a more thorough approach. Whereas consumers on higher incomes with clear disposable income and no signs of payment stress could receive a lighter touch affordability approach. Consideration also needs to be given to ongoing affordability assessments for existing customers.
Any opportunity to increase connections and revenue?
Another theme that appears to be developing is whether the use of affordability data, in combination with traditional credit risk data, can be used to improve connection rates as opposed to ‘just’ thinking about it as a necessary step to meet compliance requirements and remove potential connections (i.e. where customers may be unable to afford repayments). The key area being ‘challenged’ is whether customers who previously may have been rejected or made conditional offers on the basis of a credit risk score could now be offered the telecom product if the data available indicates that they have considerable robust affordability.
Where can telecommunications providers get help with their affordability approach?
What is clear is that affordability assessments are a complex area.
Our team of experienced consultants are well-versed in guiding providers through the options and working with your compliance teams to help define a proportional strategy to leverage data to limit friction in an affordability assessment. Get in touch today to discuss your organisation’s affordability needs.
How can we help?
Affordability assessment solutions, such as Experian’s Affordability IQ can support organisations to better understand customer ability to pay, and support organisation’s strategies towards Treating Vulnerable Customers Fairly.
AIQ can be used by telecom providers to support Ofcom’s recent directive to firms to provide social tariffs as it could identify or verify customers income as well as provide valuable insight on customers personal circumstances to support key decisions signposted in Ofcom’s latest announcement regarding amendments to Treating Vulnerable Customers Fairly.
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 CONC 5 – FCA Handbook, Financial Conduct Authority
 Arrears and Possessions, UK Finance
 UK interest rate rise: how will it affect you?, The Guardian
 Affordability of communication services, Ofcom
 Millions of low-income families missing out on £144 annual broadband saving, Ofcom
 Regulation of Buy Now, Pay Later: Consultation on draft legislation, GOV.UK
 Creditworthiness and affordability: common misunderstandings, Financial Conduct Authority
 Implementing the Consumer Duty in Mainstream Consumer Credit Lenders (MCCL), Financial Conduct Authority