A customer falls behind on a loan, a device contract, or a utility bill. They call in, or an agent calls them. In the space of a few minutes, that single conversation might need to cover an income and expenditure assessment, a vulnerability check, and a decision between several very different paths forward: a short-term payment deferral, a structured repayment plan, a referral to a debt adviser for Breathing Space, or, if nothing is agreed, the start of a formal pre-action process that could end up in court.
Banks and lenders, telcos financing customer handsets through instalment agreements, energy and water suppliers, and any business recovering a debt owed by an individual all sit inside some version of this moment. Each one carries its own legal requirements, its own paperwork, and its own consequences for getting it wrong. Manual, agent-led handling of this moment is inconsistent by nature. No two agents remember every step the same way, and it is genuinely hard to audit at scale.
This guide sets out what each of these mechanisms actually means, how they differ, and what a well-run arrears process needs to get right at scale, when thousands of cases are moving through the same conversation every month.
Key takeaways on UK arrears compliance
- Mismatched forbearance is the costliest mistake in this space: offering the wrong tool for a customer's actual circumstances is the recurring failing behind FCA enforcement action against firms in this sector, most of it tied directly to poor income and expenditure assessment.
- FCA Consumer Duty requires firms to evidence fair treatment for every arrears customer, not just assert it. Manual, agent-led handling makes that evidence inconsistent by design, and that inconsistency is precisely what regulators have been fining firms for.
- Breathing Space freezes enforcement and interest for up to 60 days, but it's legally distinct from a payment holiday (Hansard, House of Lords). Firms that treat it as one risk mishandling both the moratorium and what happens once it ends.
- The Pre-Action Protocol for Debt Claims requires a Letter of Claim, a 30-day wait, and 14 days' notice before litigation (justice.gov.uk). A court can penalise a firm on costs for skipping a step, even when the firm wins the underlying claim.
- Case volumes are rising, not falling, with 89,130 Breathing Spaces registered in 2025 alone, the highest total since the scheme began (Insolvency Service). Structuring these decisions into a guided digital journey rather than leaving them to individual memory is how VodafoneThree improved compliance by 30% across more than 25,000 arrears cases a month (Lightico case study); the comparison table and vendor-evaluation checklist below set out what to look for.
Why manual arrears handling creates FCA compliance risk
Under the FCA's Consumer Duty, firms are expected to treat every customer in arrears as potentially vulnerable and to be able to demonstrate fair treatment outcomes, not simply to have followed a script. That's a high bar for a process that, in most contact centres, still runs on individual agent judgement: what to ask, when to ask it, which form to send, and which of several possible outcomes actually fits the customer's situation.
The cost of getting this wrong is well documented. The FCA fined firms a total of £90 million in 2020 alone for failures in how they treated customers in arrears, with firms paying out more than £570 million in compensation to affected customers (FCA). The FCA's findings across these cases point to a consistent pattern: forbearance offered without properly understanding a customer's circumstances, and systems and controls that weren't adequate to secure fair outcomes for customers in financial difficulty. These aren't edge cases. They're what happens when arrears handling depends on individual agents getting a complex, multi-step process right, consistently, under pressure, without structural support.
The scale of the underlying problem is growing, too. The Insolvency Service recorded 89,130 Breathing Space registrations across 2025, the highest annual total since the scheme began in 2021 (Insolvency Service), and both StepChange and Citizens Advice reported record numbers of debt-advice clients in early 2026, according to research compiled by the House of Commons Library (House of Commons Library).
Key regulations governing UK arrears: FCA Consumer Duty, Breathing Space and the Pre-Action Protocol
Three frameworks sit underneath almost every arrears conversation in England and Wales.
FCA Consumer Duty sets the overarching standard: firms must act to deliver good outcomes for retail customers, including those in financial difficulty, and must be able to evidence that they've done so, not just assert it after the fact (FCA).
The Breathing Space scheme (formally the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020) came into force on 4 May 2021 and gives eligible individuals in problem debt a period of legal protection from their creditors (legislation.gov.uk).
The Pre-Action Protocol for Debt Claims (PAPDC) governs what happens if arrears aren't resolved and a business creditor is considering court action against an individual debtor (justice.gov.uk).
A jurisdictional note worth getting right. Both Breathing Space and PAPDC are England and Wales instruments. Scotland has its own, longer-standing scheme, the Debt Arrangement Scheme (DAS), which combines a short moratorium with a statutory repayment plan, and its own separate court system, so PAPDC doesn't apply there either (House of Commons Library). Northern Ireland has historically had no direct equivalent to Breathing Space, though Northern Ireland's Department for Communities has stated it is working with HM Treasury to extend the scheme via a UK statutory instrument (Department for Communities NI). Firms operating across the UK need arrears processes that can flex by nation, not a single England-and-Wales process applied everywhere.
What is the Pre-Action Protocol for Debt Claims?
The PAPDC has applied since 1 October 2017 to any claim by a business, including sole traders and public bodies, against an individual (also including a sole trader) for an unpaid debt (justice.gov.uk). It doesn't apply to business-to-business debts unless the debtor is a sole trader.
Before starting court proceedings, the creditor must send a detailed Letter of Claim setting out the amount owed, how the debt arose, and any interest being claimed, along with a Financial Statement and a Reply Form for the debtor to complete. The creditor must then wait at least 30 days before issuing proceedings, and must give the debtor 14 days' notice if it intends to proceed after a failed attempt to agree a resolution (justice.gov.uk). If the matter does reach court, judges take compliance with the Protocol into account when managing the case and awarding costs, meaning a creditor who skipped steps can be penalised even if they ultimately win.
The Protocol's stated aims are to encourage early, reasonable engagement between the parties and to resolve as many debts as possible, through an agreed repayment plan or alternative dispute resolution, without a claim ever reaching a courtroom.
What is the Breathing Space scheme?
A standard Breathing Space moratorium gives someone in problem debt up to 60 days of legal protection, with a review at the 30-day mark (Insolvency Service). During that period, most enforcement action and creditor contact is paused, and interest, fees, and charges on qualifying debts are frozen. A separate Mental Health Crisis moratorium offers the same protections for as long as someone is receiving mental health crisis treatment, plus 30 days afterwards, and, unlike the standard version, can be used more than once.
Access runs only through an FCA-authorised debt adviser. A customer can't self-certify into Breathing Space, and a creditor can't put someone into it either. HM Treasury has been explicit on one point that's commonly misunderstood: Breathing Space is not a payment holiday. The obligation to pay doesn't disappear during the moratorium. What pauses is enforcement action and interest accrual, not the underlying debt (Hansard).
A gap worth flagging for anyone assuming the scheme is complete: the Debt Respite Scheme was originally designed with two parts, the Breathing Space moratorium, live since 2021, and a Statutory Debt Repayment Plan (SDRP) that would let people repay what they owe over an extended period with similar creditor protections. The SDRP has still not been implemented in England and Wales (House of Commons Library).
What is an income and expenditure form?
An income and expenditure form, now standardised across the UK as the Standard Financial Statement (SFS) and maintained by the Money and Pensions Service (MaPS), sets out a person's income, essential outgoings, and existing debts in a single, consistent format (MaPS). It's used throughout the debt advice sector and is recognised by FCA-regulated lenders, utilities, and public sector creditors alike, which means a customer's SFS produced with one organisation should be broadly usable with another.
The SFS matters well beyond debt advice charities. It's the document referenced in the PAPDC's own Annex 2 Financial Statement (justice.gov.uk), and it's the basis on which most repayment plans and forbearance decisions get made. An affordability assessment is only as good as the income and expenditure data underneath it.
Payment deferral vs. repayment plan: what's the difference?
These two terms get used interchangeably in practice, but they solve different problems.
A payment deferral is a short-term pause or reduction in payments, typically used when a customer's difficulty is expected to be temporary, such as a change in circumstances that will resolve itself. Interest may continue to accrue during the deferral period, and it's usually agreed directly between the firm and the customer under the firm's own forbearance policy.
A repayment plan is a structured schedule, informed by an income and expenditure assessment, designed to clear existing arrears over an agreed period. It's a longer-term commitment than a deferral, and because it's built on an affordability assessment, it's meant to be realistic and sustainable rather than simply the smallest payment a customer will agree to under pressure. That distinction is precisely what the FCA's arrears-related enforcement findings, cited above, point to as a recurring failure across the industry.
Using a deferral where a repayment plan is needed, or the other way round, is a recurring theme in FCA enforcement findings. Forbearance that isn't matched to the customer's actual circumstances tends to fail, and failure shows up later as unsustainable arrears, unaffordable "solutions," or repeat contact that erodes trust on both sides.
Payment deferral vs. repayment plan vs. Breathing Space vs. hardship arrangement: how they compare
| Payment Deferral | Repayment Plan | Breathing Space | Hardship Arrangement | |
|---|---|---|---|---|
| What it is | Temporary pause or reduction in payments | Structured schedule to clear arrears over time | Statutory 60-day protection from enforcement | Bespoke support for financial difficulty |
| Legal basis | Firm's forbearance policy under Consumer Duty | Agreed contractually, informed by an income and expenditure assessment | Debt Respite Scheme Regulations 2020 | Firm's forbearance policy |
| How it's accessed | Agreed directly with the creditor | Agreed directly with the creditor; requires an income and expenditure form | Only via an FCA-authorised debt adviser | Agreed directly with the creditor |
| Interest and fees | May continue to accrue | Continues on the remaining balance | Frozen for most qualifying debts | Varies by firm and product |
| Firm's documentation requirement | Record of the agreed terms and the customer's stated circumstances | Completed income and expenditure assessment (SFS) underpinning the schedule | Confirmation from the debt adviser; no separate I&E required from the firm itself | Vulnerability assessment and rationale for the specific support offered |
| Compliance risk if mismatched | Offered for a problem that isn't actually temporary, leading to repeat arrears | Set without an accurate I&E, risking an unaffordable plan, the exact failing behind the enforcement cases outlined above | Treated as a payment holiday rather than a protection, so obligations and subsequent enforcement are mishandled | Vulnerability not identified or evidenced, a core Consumer Duty exposure |
Source for legal basis and access route: legislation.gov.uk, Debt Respite Scheme Regulations 2020; justice.gov.uk, PAPDC. These are firm-wide enforcement outcomes rather than penalties tied to a single mechanism; see "Why manual arrears handling creates FCA compliance risk" above for the specific cases and figures.
What compliant arrears handling requires under FCA Consumer Duty
Across all four of these tools, the same underlying requirements repeat: a structured way to identify vulnerability early, a consistent method for capturing income and expenditure data, a clear and auditable record of what was offered and agreed, and forbearance options that are matched to the customer's real circumstances rather than whichever option is quickest to close the call. None of that depends on which specific software a firm uses, but all of it depends on the process being built into the interaction itself, rather than left to what an individual agent remembers to do.
How Lightico supports compliant arrears, collections and repayment plan management
Lightico turns a firm's arrears process from a script agents are expected to remember into a guided digital journey that gets it right by default. The platform sits above a firm's existing core systems, such as a CRM, LMS, or CCaaS, orchestrating each interaction, identity check, vulnerability screening, income and expenditure capture, and resolution, through the correct sequence in real time. The right forms, disclosures, and document requests surface at the right moment, steps can't be skipped, and every interaction generates a timestamped audit record automatically, as a by-product of the conversation rather than a separate compliance exercise. The approach applies across regulated sectors handling consumer arrears, including banking, lending, auto finance, and utilities, not just telecoms; VodafoneThree's deployment below is the documented example used throughout this guide, not the only sector it's built for.
VodafoneThree, the UK's largest mobile network operator, deployed Lightico across its regulated arrears support operation, handling up to 25,000 cases a month, to embed Borrowers in Financial Difficulty (BIFD) and Ofcom requirements directly into every advisor conversation. The results: a 30% improvement in compliance, with QA scores peaking at 93.62% and sustained above 91% month-on-month, alongside a 13-point rise in Net Promoter Score and a 10-point improvement in Customer Effort Score (Lightico case study). Natasha McIntyre, Performance Manager for Risk and Compliance at VodafoneThree, has described the shift as moving the team away from compliance depending on individual memory and judgement, and toward a process where, in her words, "the right conversation happens every time."
That shift is visible in how quality assurance itself changed. Tina Montgomery, Estate Change Specialist at VodafoneThree, has described how the audit trail Lightico generates moved QA away from checking compliance after the call and toward building it into the conversation itself, a record created automatically rather than assembled after the fact. Deployment ran without disrupting live operations, too: because Lightico sits above VodafoneThree's existing systems rather than replacing them, there was no need to rebuild the underlying CRM, LMS, or CCaaS to get there (Lightico case study).
Lightico's documented use cases for this stage include structured support for Breathing Space enrolment, referring and evidencing a customer's move into the moratorium, and pre-litigation notice acknowledgement, capturing a timestamped, auditable record that a pre-action notice was delivered and acknowledged. That's where the platform's real value sits: making early intervention, accurate income and expenditure capture, Breathing Space referral, and well-matched forbearance consistent enough that fewer accounts drift into arrears serious enough to warrant a Letter of Claim in the first place, and creating a clear evidential record whenever one is required.
Questions to ask when evaluating a vendor for customer arrears processes
Whether the search is framed as debt collection software, debt collection technology, or arrears management technology, the same core questions apply:
- Can the platform enforce the correct sequence of steps, such as a vulnerability check, income and expenditure capture, and forbearance options, without allowing an agent to skip ahead?
- Does every interaction generate an audit trail automatically, or does evidencing compliance still depend on retrospective QA sampling?
- Can forbearance options (deferral, repayment plan, hardship, referral to debt advice) be adjusted in real time based on what the customer discloses mid-conversation?
- How quickly can the journey be updated when FCA guidance or a specific regulation changes, and does that require an IT project or a business-team update?
- Does the platform sit on top of existing core systems, or does it require replacing what's already in place?
- Does it run consistently across every channel customers actually use, including voice, chat, web, app, and in-store, or only the contact centre?
A recurring question at this stage is whether to build this capability internally rather than buy it. The honest answer depends on how much ongoing maintenance a firm is prepared to take on. FCA guidance changes over time, so the compliance logic embedded in an arrears journey needs to be revisited on a similar cycle, and an audit trail that needs to hold up to a regulator or a court has to be built to that standard from the outset, not retrofitted later. VodafoneThree's deployment ran without disrupting live operations or replacing its existing CRM, LMS, or CCaaS, and the programme is already expanding in phases, from Device Finance arrears to Airtime arrears next, which is a useful reference point for the kind of timeline worth weighing against an internal build before committing engineering resource to either path.
Bottom line: choosing the right tool for UK arrears compliance
Pre-action protocol, Breathing Space, income and expenditure forms, payment deferrals, and repayment plans are five distinct tools that solve five distinct problems. Treating them as interchangeable is where both customer harm and regulatory exposure tend to start. Getting arrears handling right means building a process that applies the correct tool consistently, evidences that it did so, and adapts as a customer's circumstances change mid-conversation, rather than one that depends on an individual agent recalling the right sequence under pressure.
Frequently asked questions about UK arrears compliance
What is the Pre-Action Protocol for Debt Claims?
It's the set of steps a business creditor must follow in England and Wales before taking an individual to court over an unpaid debt, in force since 1 October 2017 (justice.gov.uk). It requires a formal Letter of Claim, a Financial Statement, and a Reply Form, a minimum 30-day wait before issuing proceedings, and 14 days' notice if court action follows a failed attempt to agree a resolution.
What is the Breathing Space scheme, and how long does it last?
Breathing Space is a statutory moratorium that pauses most creditor enforcement action and freezes interest and fees on qualifying debts for up to 60 days, with a review at day 30 (legislation.gov.uk). It's accessed only through an FCA-authorised debt adviser and can only be used once every 12 months, except for the separate Mental Health Crisis version.
What is an income and expenditure form (Standard Financial Statement)?
It's a standardised UK-wide document, maintained by the Money and Pensions Service, that records a person's income, essential outgoings, and existing debts in a consistent format recognised across debt advice organisations and creditors, including FCA-regulated lenders, utilities, and local government (MaPS).
What's the difference between a payment deferral and a repayment plan?
A payment deferral is a short-term pause or reduction in payments, usually for a temporary difficulty. A repayment plan is a longer-term, structured schedule built on an income and expenditure assessment, designed to clear existing arrears sustainably over time.
Does the Breathing Space scheme apply across the whole UK?
No. It applies in England and Wales only (House of Commons Library). Scotland has its own longer-standing scheme, the Debt Arrangement Scheme, and Northern Ireland has historically had no direct equivalent, though an extension via UK statutory instrument is under way (Department for Communities NI).
How do firms evidence compliance with the Pre-Action Protocol for Debt Claims if challenged by a court or the FCA?
The strongest evidence is a timestamped, complete record of what was sent, when, and what the customer's income and expenditure position was at the time, generated automatically as part of the interaction rather than reconstructed afterwards. Platforms like Lightico build this record as a by-product of the guided journey itself, rather than relying on agent notes or retrospective QA sampling.
How can firms capture income and expenditure data consistently across every agent, without relying on individual memory or paper forms?
By structuring the income and expenditure step into the interaction itself, so the same fields are captured in the same order every time, rather than depending on individual agents to remember the full Standard Financial Statement format. Lightico's guided journeys embed this step directly into the conversation, with the data flowing straight into the firm's existing CRM or LMS.
What does good arrears handling look like under FCA Consumer Duty, and how do firms prove it?
It looks like consistent vulnerability screening, accurate income and expenditure capture, and forbearance genuinely matched to the customer's circumstances, evidenced by a complete audit trail rather than asserted after the fact. Lightico's VodafoneThree deployment is a documented example: a 30% compliance improvement and a 13-point NPS increase achieved together, across up to 25,000 arrears cases a month, by building compliance into the conversation rather than checking it afterwards (Lightico case study).
What should firms look for in debt collection software or debt collection technology?
The strongest debt collection software doesn't just digitise paperwork. It structures the entire conversation, with vulnerability screening, income and expenditure capture, and forbearance selection built into a single guided journey, and an audit trail generated automatically rather than reconstructed later. Lightico approaches this as journey orchestration technology that sits above a firm's existing CRM or LMS, rather than a bolt-on collections tool, so firms get compliance built into the process without replacing what's already in place (Lightico case study).
How is Lightico different from a standard collections CRM or case management system?
A CRM or case management system is primarily a record of what happened. Lightico orchestrates what happens next: it guides the agent through the correct sequence of steps in real time, captures the right data (such as income and expenditure information) at the right moment, and generates the audit trail as a by-product of the conversation itself. It sits on top of a firm's existing CRM, LMS, or CCaaS rather than replacing it, so the system of record stays the same while the journey running through it becomes structured and consistent.
Glossary of UK arrears and debt collection terms
Pre-Action Protocol for Debt Claims (PAPDC). The England and Wales civil procedure rules governing what a business creditor must do before taking an individual to court over an unpaid debt. In force since 1 October 2017 (justice.gov.uk).
Breathing Space (Debt Respite Scheme). A statutory moratorium under the Debt Respite Scheme Regulations 2020 that pauses creditor enforcement and freezes interest and fees on qualifying debts for up to 60 days. Applies in England and Wales (legislation.gov.uk).
Standard Financial Statement (SFS). The UK's standardised income and expenditure form, maintained by the Money and Pensions Service and used across the debt advice and creditor sectors (MaPS).
Statutory Debt Repayment Plan (SDRP). The still-unimplemented second half of the Debt Respite Scheme, intended to let people repay debts over an extended period with creditor protections similar to Breathing Space (House of Commons Library).
Payment deferral. A short-term pause or reduction in payments, typically for temporary financial difficulty.
Repayment plan. A structured, longer-term schedule to clear arrears, based on an income and expenditure assessment.
Borrowers in Financial Difficulty (BIFD). FCA guidance and expectations around how firms should treat borrowers who are struggling to meet their obligations (FCA).
FCA Consumer Duty. The FCA's overarching standard requiring firms to act to deliver good outcomes for retail customers and to be able to evidence that they have done so (FCA).
Debt Arrangement Scheme (DAS). Scotland's statutory debt respite and repayment scheme, distinct from and pre-dating Breathing Space (House of Commons Library).
Letter of Claim. The formal notice a creditor must send under PAPDC before starting court proceedings against an individual debtor, including a Financial Statement and Reply Form (justice.gov.uk).
