Britain’s financial regulator has confirmed a three-month payment freeze for those struggling to repay some of the more expensive forms of debt due to the current pandemic. It comes in response to calls to “bridge the gap” between consumer protection with different types of borrowing.
Following similar moves on mortgages, credit cards and overdrafts, the Financial Conduct Authority (FCA) this week introduced a package of measures to provide additional support to consumer credit customers with a credit freeze. three months for auto finance, buy now-pay. later, rental agreements with option to buy and pawnshop.
The Financial Conduct Authority (FCA) will present the package of measures outlined last week to support consumer credit clients facing payment difficulties due to the coronavirus.
The targeted temporary measures implemented are a three-month payment freeze for auto finance, immediate buyback (BNPL), lease with purchase option (RTO) and pawn shop agreements. For high cost short term credits (including payday loans), payments will be frozen for one month with no additional interest to charge.
“We have been working quickly to introduce temporary financial relief tailored to a range of specific credit products,” said Christopher Woolard, interim CEO of FCA.
“Many companies are already working with their customers, but these measures ensure that all consumers affected by the coronavirus emergency can request a temporary freeze on their payments.”
However, these can be complicated financing deals, and while the FCA has made it clear that it expects companies to “act fairly when conditions are adjusted” in light of the measures, consumers are cautioned to be clear about the implications of requesting freezes such as as well as the actions that lenders can take in response.
Starting this week, auto finance providers will have to grant a three-month payment freeze to customers who are having “temporary difficulties” in dealing with finance or lease payments due to the coronavirus. Customers will need to actively request the freeze as this, like other measures announced to help consumers cope with the financial fallout, will not be universally applied.
Companies have been warned not to take action to terminate the agreement or repossess the vehicle if the customer needs to use the vehicle and, most importantly, lenders cannot unfairly modify the purchase agreements of the vehicle. personal contract (PCP) or personal contract rental (PCH).
For example, companies cannot recalculate PCP balloon payments based on a temporary drop in car prices caused by the coronavirus situation.
And when a customer wants to keep their vehicle at the end of their PCP contract, but doesn’t have the cash to cover the lump sum payment due to payment difficulties related to the coronavirus, companies are urged to work with the customer to find a Solution.
Due to the greater risk of difference between the balloon payment and the value of the vehicle at the moment, companies are warned that they must find solutions that could unfairly create problems for the borrower here, too, such as refinancing. of the balloon. Payment.
Mark Turner, Managing Director in Duff & Phelps’ Compliance and Regulatory Consulting Practice, said:
“It is now crucial that senior executives at auto finance companies ensure they start the changes now, as even short delays could put customers at risk.”
“The payment holidays will be a great relief as many customers are faced with an unexpected change in circumstances.”
“However, transferring debt from consumers to businesses has the potential to create additional pressure in these volatile times. As such, appropriate government support might be needed to protect consumers and businesses, to avoid creating a ripple effect for the auto industry. “
“It’s important to consider that a payment freeze may not always be the best option for everyone. Often times, it may be better to pay off certain debts, such as higher cost debts, to avoid the accumulation of additional interest that will eventually have to be repaid.
“While a three-month payment holiday will be welcomed by many struggling people, there is a real risk that some clients who could afford to continue with their payments will see savings as an opportunity to increase their spending, and later find themselves in greater financial difficulty. down the line. There is no ‘one size fits all’ approach and businesses need to be careful when granting payment freezes and will need to take steps to assess each individual case on its own merits.
We know that even after the regulator’s crackdown on fees and rates, expensive payday loans are still a bad idea at the best of times. Some consumers, however, believe that they are the only option open to them, and for them, the FCA has announced that high-cost short-term credit providers of all types will have to offer a month-long payment freeze to customers. faced with Covid-19. cash flow problems.
The shorter period and higher interest rates charged on these loans mean that the FCA has taken the extra step of deciding that no additional interest is charged to the client due to the payment freeze – unlike others. measures which do not prevent interest from being charged. during this period.
Like all lenders, payday loan companies and other short-term loan companies will also need to “interact with their customers” to understand if and when repayments will resume, including the ability to revert to other established procedures – designed to further help people facing debt problems. generally – to work with clients who cannot repay their loans.
“The new measures introduced today by the FCA will bring a much needed sense of relief at a time of heightened concern for many,” said Anthony Morrow, CEO of digital financial advisory service OpenMoney.
“Payday loans, along with other forms of high cost credit, have always been an incredibly risky way to lend, but should be avoided more than ever. The exorbitant interest rates charged by these companies are wreaking havoc on those experiencing financial difficulties and in need of an instant solution.
“With companies offering a one-month interest-free payment freeze under new FCA guidelines, there is a silver lining and an opportunity for people to better understand their money if they are in this situation. .
“Having said that, it’s important to remember that this is a freeze, not eradication. The money has to be paid back and the economic conditions could get worse for people. Make sure you use this extra time to be extra vigilant with spending and working to build up the funds needed to pay off the loan. ”
Rent to own (RTO), buy now pay later (BNPL) and pawn shops will also offer a three-month payment freeze to customers in financial difficulty due to Covid-19.
They will also have to extend repayment or repossession deadlines and pawn shops will have to extend the repurchase period for the same three-month freeze period. If the buyback period has already elapsed, they must agree not to serve a formal notice to sell an item or to suspend the sale during the freeze.
In the meantime, if a BNPL customer is in the promotional period, companies extend it by three months. And RTO companies will not be able to repossess the goods during the reference period.
If social distancing means that pawn shops and RTO companies are unable to accept payment, collect or repossess goods, they shouldn’t pass on any additional fees or charges to the consumer. And if a payment freeze is not in the best interests of the client, usually due to the accumulation of interest and the remaining term of the agreement, companies should offer an alternative solution, possibly including waiving the payments. interest and fees or rescheduling the term of the contract. to lend.
Meanwhile, bailiffs have been banned from visiting people’s homes during Covid-19 restrictions, although other non-face-to-face actions, such as telephoning debtors, may continue.
Anyone facing financial hardship during the pandemic should seek support from their financial service providers, such as their bank, and charities offering advice like the Money advice service.
The FCA website provides further details on all measures introduced to help consumers cope with the financial impact of the pandemic on their income and expenses.