Wednesday, November 24 2021

The Financial Conduct Authority (FCA) has issued two waves of guidance addressing the near term impact of Covid-19 on the consumer credit universe. The FCA has also issued guidance on payment holidays in relation to residential mortgages under the mortgage conduct of business rules regime.

The consumer credit guidance notes apply to regulated firms that issue personal loans that fall within the scope of the Consumer Credit Act 1974 (as amended) (CCA). The guidance covers regulated credit agreements, including those secured (on land) or unsecured, overdraft facilities on personal bank accounts, credit card facilities, high-cost short term credit agreements, log book loans, buy-now pay-later agreements and hire purchase agreements (including the significant motor finance sector). The guidance also applies to firms that did not originate such loans but have subsequently acquired them.

The three month payment deferral

As covered in our previous note, the headline measure in the guidance notes is an expectation that firms should provide a temporary payment deferral for up to three months (with the exception of high-cost short-term credit agreements for which the relevant guidance note proposes a one month deferral). The FCA sees this as fair treatment for borrowers facing payment difficulties owing to circumstances arising out of Covid-19. The regulator expects firms to treat the temporary period of non or partial payment as a “payment deferral” that, crucially, should not (i) be treated as the customer being in arrears (with a view to avoiding negative future inferences as to a customer’s creditworthiness) and (ii) preventing lenders from having recourse to customers’ guarantors (where loans are guaranteed) during the deferral period. The FCA states that a firm may decide to put in place an option other than a three month payment deferral, if it is appropriate to do so in the individual circumstances of the case and the firm reasonably considers that it needs to do this to treat the customer fairly.

Is there scope for confusion between the FCA’s new guidance and firms’ CCA obligations?

The FCA’s guidance is technically issued as guidance to firms on how to comply with one or more provisions of the FCA rules – here, the FCA points to Principle 6 (the obligation on firms to treat customers fairly and pay due regard to their interests) of its Principles for Business as the rule to which the guidance relates. Many firms may see the FCA’s use of guidance to elaborate an overarching obligation to treat customers fairly as (i) having the potential to alter the contractual arrangement between the firm and its customers in a significant way and (ii) an example of regulation by expectation. However, the regulator would likely point to the exceptional nature of the circumstances and the fact that the guidance is expressed to be temporary in nature to justify its action.

Nevertheless, what this guidance does not do, and could not do, without legislation passed by parliament, is to amend the CCA itself. This is significant because, as firms active in the sector will be well aware, the regulatory landscape for UK consumer credit lenders now rests on twin pillars since the transfer of the regulation of consumer credit from the Office of Fair Trading to the FCA in 2014: the FCA rules and guidance in respect of licensing and many aspects of conduct of business on the one hand and the specific loan-level requirements of the CCA on the other.

This dual regulatory landscape is perhaps best illustrated in the choice that some disaffected borrowers potentially find themselves with (i) either seeking redress through the courts (often by seeking to argue that their loan should not be enforceable due to breaches of the CCA) or (ii) seeking redress through a complaint to the firm itself followed (if not resolved to their satisfaction) by a referral to the Financial Ombudsman Service (FOS). Under sections 86B and 86C of the CCA, firms are required to send notices of sums in arrears to debtors for both fixed sum and running account credit when an account is the sum of two contractual payments in arrears – often after two months in practice (less than the three month period payment holiday period suggested by the FCA guidance notes for most forms of consumer credit). This is likely to leave a number of firms in the position of agreeing to a payment deferral and yet still being required to serve an arrears notice on the borrower – which could lead to great confusion for borrowers if not managed carefully.

The FCA’s guidance seems to implicitly acknowledge this challenge in stating that:

Where statutory notice and statements are required to be sent under the CCA, firms should provide suitable explanations or context within these statutory notices and statements if they consider that they might otherwise lead to confusion.

However, the guidance does not elaborate on precisely what “suitable explanations or context” might look like. Firms might reasonably consider book-ending the statutory notice with an acknowledgement that the firm has agreed a payment deferral with the customer and noting that the contents of the notice do not alter the terms of that payment deferral, with the notice being sent to enable the firm to comply with its statutory obligations under the CCA. Firms might then suggest a means of contacting the firm should a customer have any questions relating to the content of the notice.

What the FCA guidance does not address is the question as to whether “suitable explanations or context” may subsequently be relied on by a debtor to challenge the degree of CCA compliance achieved in the notice of sums in arrears sent after two months of missed payments. Both the courts and FOS adjudicators may struggle to balance competing interests in relation to the arguments that present themselves in relation to these mixed messages.

Could this dual regulatory regime be changed?

These issues will inevitably raise in many firms’ minds the linked question of whether the CCA-sourced obligations of the consumer credit regulatory regime should be replaced by obligations under the FCA rules (and, in particular, the CONC sourcebook) to create a single set of rules with which consumer credit firms must comply and in respect of which the FCA could directly issue guidance. However, this is a topic on which the FCA has already undertaken detailed work, publishing the final report of its review of retained provisions of the CCA in March 2019 (the FCA review). In the FCA review, the regulator split the CCA framework into three key strands: rights and protections; information requirements; and sanctions for non-compliance with the CCA.

The FCA concluded that the rights and protections afforded to consumers under the CCA remain important and should be retained in some form, but that some provisions could in principle be replaced by FCA rules. In relation to information requirements, the FCA’s view was that that there may be merit in replacing the CCA level obligations with corresponding FCA rules and that further consideration should be given to the substance of some of the information requirements in the process of any such exercise. Finally, on sanctions, the FCA remained of the view that the “self-policing” nature of the sanctions of unenforceability and disentitlement to interest and default sums contributes significantly to ensuring key customer information needs are met.

Since the CCA is primary legislation, any changes to the statute itself would need to be taken forward by the government, as the recipient of the FCA review. No formal proposals are currently being actively taken forward and it seems unlikely that this work would be at the forefront of parliamentarians’ minds in the midst of the Covid-19 epidemic. However, it is possible that anomalies such as the mismatch between the need to exercise forbearance under the FCA guidance and the statutory CCA duty to notify debtors of their arrears could lead to calls for some form of rationalisation of the consumer credit regulatory regime in future.

What else should firms be alive to in the new guidance?

Beyond the headline of the payment deferral obligation itself, there are other material points in the FCA’s guidance notes. First, the guidance is expressed to apply “where customers are already experiencing or reasonably expect to experience temporary payment difficulties as a result of the coronavirus” rather than more generally. The FCA states that where a customer was in pre-existing financial difficulty, firms should instead have regard to the existing forbearance rules and guidance in the CONC sourcebook of the FCA rules. The FCA also intends to review the temporary guidance after three months, with the first wave of guidance notes formally coming into force on 14 April 2020 and the second wave from 27 April 2020, but with firms being free to comply with the guidance notes in draft form from earlier consultation dates in April 2020 should they choose to do so.

Furloughed or redundant?

Where a borrower is furloughed the payment difficulty may, at least to begin with, be seen as temporary. For a borrower who has been made redundant or who is a gig economy worker in a sector that has been closed, whether a payment holiday is simply postponing the inevitable default situation ought to be considered by a lender. This is a tall order for lenders who may be faced with hundreds if not thousands of borrowers seeking relief from payment difficulties. These first versions of the FCA guidance notes do not address these distinctions. Lenders may need to revise current call centre scripts to address these points as well as engaging in refreshed affordability determinations: many borrowers may have multiple sources of indebtedness confronting them and a payment holiday for which interest continues to accrue may actually be unfair to such borrowers.

The guidance notes contemplate that a payment deferral may not be in all customers’ best interests. The FCA acknowledges that:

In determining whether a three month payment deferral is obviously not in customers’ interests, firms should consider both customers’ need for immediate temporary support and the longer-term effects of a payment deferral on the customers’ situation, in particular the customers’ ability to repay any accrued interest once the payment deferral ends, and over what period.

This also reflects the fact that firms will be permitted to continue to charge interest during the payment deferral period so there is, in that sense, a cost to customers of the deferral, although the FCA makes clear that a customer should have no liability to pay any charge or fee in connection with the permitting of a payment deferral or a different solution where a payment deferral has been deemed not in the customer’s interests under the guidance. If a firm determines that a three month payment deferral would not be in a customer’s best interests, it is nevertheless expected without delay to offer other ways to provide temporary relief to the customer in accordance with treating the customer fairly.

Linked to the fact that the FCA expects that payment deferrals will not be treated as a form of arrears, the FCA also states that the payment deferrals should be regarded as being offered in exceptional circumstances outside of the customer’s control. In accordance with the coronavirus data reporting guidance published by the credit reference agencies, firms are expected not to report a worsening arrears status on the customer’s credit file during the payment deferral period. However, additional forbearance such as waived interest and charges can be treated in the usual manner by firms.

Finally, the FCA makes clear that, where customers have been unable to reach timely agreement with firms for a payment deferral because of firms’ operational difficulties and subsequently miss a payment which is reported to their credit file, the FCA expects firms to work with customers and credit reference agencies to ensure that any necessary rectifications are made – including ensuring that default/arrears charges are not levied.

What has the FCA proposed for motor finance and high cost credit customers?

Going beyond the guidance discussed above, the FCA has announced a package of measures directly to support customers facing payment difficulties due to Covid-19, as covered in our previous blog post. These measures cover motor finance and high cost credit agreements, including high-cost short-term credit (including payday loans), buy-now pay-later, rent-to-own and pawn-broking.

Motor finance

The FCA has announced that it expects firms to provide a three month payment freeze to customers facing “temporary difficulties” meeting motor finance or leasing payments due to Covid-19. In particular, the FCA has made clear that it expects firms not to repossess vehicles or take steps to end their agreement where customers are experiencing temporary financial difficulties due to the virus. The FCA expects that firms should not change customer contracts in a way that is unfair giving the example of using temporary depreciation of car prices to recalculate balloon payments at the end of contract terms (for example, Personal Contract Purchase payments). The FCA also expects that firms should work with customers who wish to keep their vehicle at the end of such a contract to find a solution to help the customer to cover the balloon payment where that customer does not have the cash at that time due to Covid-19 related reasons.

High cost credit customers

Firms providing high cost credit products (including pawnbrokers; buy-now pay-later arrangements; and rent-to-own products) will be expected to provide a three month payment freeze to customers facing payment difficulties due to Covid-19. Like other consumer credits within the scope of the general guidance discussed above, firms within this category will be able to continue to charge interest during the payment freeze (except for high-cost short-term credit, where a one month interest free payment freeze is provided for under the finalised measures), however they will be expected to waive that interest where a customer requires full forbearance. As with firms subject to the general guidance, these new measures are specific to customers facing financial difficulty as a result of Covid-19, rather than customers with pre-existing financial difficulty, where the FCA’s existing forbearance rules will continue to apply. It is possible that this distinction may give rise to debates between firms and customers in financial difficulty as to whether their financial difficulty is Covid-19 related or pre-existing – particularly perhaps if a customer faced some degree of pre-existing financial difficulty which was then exacerbated by Covid-19. However, it seems likely that an industry approach will evolve with experience of the FCA’s new guidance.

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