9th April 2020
Read our most recent article on this topic here.
The Financial Conduct Authority (FCA) have confirmed a proposed range of relief measures for consumer credit customers impacted by the Covid-19 outbreak. These measures came into force on 14 April 2020. The FCA have acted quickly in bringing this new guidance in and it is imperative for regulated firms to ensure this guidance is operationalised immediately.
The new guidance includes measures for the most popular forms of consumer credit, namely credit cards and revolving credit, arranged overdrafts, and personal loans. Further guidance on motor finance and High Cost Short Term Credit is anticipated shortly.
Any customer who is currently experiencing, or reasonably expects to experience, temporary payment difficulties due to the outbreak of Covid-19 should, upon request, be granted a payment deferral of three months. During this period the customer will be effectively granted a payment holiday and will not be viewed as being in arrears. Guarantor lenders are advised that on this basis there should not be enforcement against guarantors. The FCA has clarified that firms are required to offer payment deferrals to customers over a three-month period in respect of all credit products which are covered by its guidance and that consumers should be able to request a three month payment deferral at any point during the 3 months after 14 April; in effect giving a six month maximum timescale for the implementation of payment deferrals.
Firms should take into account both personal and household reductions in income when judging whether such difficulties are associated with Covid-19. The new measures still place a requirement on firms to offer a payment deferral even in the absence of an explicit request from the customer, namely where it is reasonably apparent during a customer’s interaction with a firm that the customer is experiencing, or likely to experience, financial difficulty due to the pandemic.
A firm is permitted to charge interest to a customer during the period of deferred payment. Particular care should be given however to those customers who, due to pre-existing financial difficulties, were already entitled to forbearance measures under CONC 7. Despite the FCA’s statement that firms can continue to charge interest to customers who have deferred payments, for those who were already in difficulties firms should consider suspending, reducing, waiving or cancelling any further interest or charges, deferring payment of arrears or accepting token payments for a reasonable period of time.
Customers who avail of credit deferrals under the temporary Covid-19 measures will not suffer any adverse credit reporting with credit reference agencies.
While payment deferrals are likely to be the most favoured form of relief for customers, the guidance does not preclude firms from offering alternatives or more favourable relief measures. The underlying principle that guides any decision by a firm should be whether such measure is in the best interests of the customer.
The FCA has commented that “There is no expectation under this guidance that the firm makes enquiries with each customer to determine the circumstances surrounding a request for a payment deferral” so customers should not be put to extensive proof as to their circumstances. However the FCA has also made it clear that customers should continue to pay their credit commitments where they can afford to do so.
Echoing the above in respect of the personal loan market, credit card and retail revolving credit customers who are experiencing, or who reasonably expect to experience, temporary payment difficulties due to the outbreak of Covid-19 should be granted a three month payment deferral by the firm where requested. Again, even if no explicit request has been received but it is reasonably apparent that the customer is currently experiencing, or likely to experience, financial difficulty then a payment deferral should be offered. Any reduction in personal or household income should be considered by a firm when assessing payment difficulties.
Firms can continue to charge interest during the payment deferral period but where a customer who has received a payment deferral, or an alternative solution for a period as a result of circumstances relating to coronavirus, is entitled at the end of the deferral period to forbearance under the FCA’s existing rules, the FCA has confirmed that as part of this, it expects any interest accrued during the relevant period to be waived.
The FCA has also confirmed that the persistent debt rules under CONC 6.7 will be temporarily suspended during this period. This will allow for the customers, whose circumstances are not so severe that a deferral of payment is required, to make nominal repayments to their credit cards.
There is an expectation that credit card firms should undertake a price review exercise to determine whether the interest rates set are fair “in light of the exceptional circumstances”. Clearly this will be of particular importance to those firms whose customer market is that of customers on low incomes or who have a poor credit history. These customers are likely to be the most disproportionately impacted by the crisis and therefore this should be taken into account.
Where a firm receives a request from a customer with an arranged overdraft, who find themselves in financial difficulty or reasonably expect to find themselves in financial difficulty, the firm will be required to waive payable interest up to a balance of £500 for a period of three months. In cases where a customer’s overdraft balance exceeds £500, no interest should be payable on the first £500. This measures applies equally to any arranged increases of a customer’s overdraft, though the FCA note that such increases should still be subject to the normal affordability and creditworthiness rules.
Much in the same way these measures apply in the personal loan and credit card markets, if a firm reasonably suspects a customer to be experiencing, or likely to experience, financial difficulty then a firm is bound to implement the pause of interest payable, even in the absence of an explicit request.
Further measures unique to overdrafts include the requirement for firms who have recently changed their overdraft pricing structure to review this in light of the pandemic. Similarly the repeat use rules around overdrafts required relevant firms to develop strategies around identifying and helping customers reduce their reliance on overdrafts. The FCA has suggested that, given the circumstances, firms may wish to reassess how they implement this strategy.
It is clear from the FCA’s guidance that the immediate focus for firms over the next three months, and indeed possibly beyond, should be ensuring positive customer outcomes are achieved.
Firms should still be mindful to ensure that any payment deferral, or indeed any other relief measure offered, is in the interests of the customer. For customers with longer term financial problems, a wider forbearance package may be more appropriate. Similarly for customers where it is obvious that the payment difficulties will not last three months, a shorter payment deferral period can be offered.
It is imperative that firms have a clear and defined communications strategy with customers for the next three months and beyond. Given the uncertainties surrounding the pandemic, many customers may still be experiencing difficulties beyond three months. In these scenarios, firms should not wait for payments to be missed beyond the 3 month mark and should instead proactively work with affected customers to come to an agreement as to how these difficulties can be resolved. Ongoing communication with customers, particularly those you suspect may further support after 3 months, is important in managing expectations. Informing customers of next steps and options, with as much notice as possible, can help mitigate your complaint risk further down the line.
The FCA guidance is clear that communications issued to customers that payment deferrals are available for those customers that require it. Equally, it would be good practice to set out to customers other potential options that can be taken and highlight accordingly the risks associated with those options and indeed deferring payments.
The FCA has made it clear that modifying agreements should not be required to effect the payment deferrals in line with its guidance where the lender is showing forbearance and not varying the terms of the contract by agreement with the borrower. This is absolutely the common sense approach given that a modifying agreement is effectively a new agreement requiring a new affordability assessment and any suggestion this is required in each case would place an untenable burden on lenders and borrowers in this time of crisis. However the knock-on effect of this is that, although the FCA has stated that such customers should not be viewed as being in arrears, and not suffer adverse credit reporting where they are afforded a payment deferral, the law requires that borrowers who miss the sum of the last two repayments (4 for home credit loans) must be served with a Notice of Sums in Arrears every 6 months whilst ever they remain behind with their repayments. Failure to serve such notices in the prescribed form and on time renders agreements unenforceable and precludes the charging of interest by reference to the period of non-compliance.
So lenders must continue to serve such notices during deferral payment periods, albeit confusing to customers. A practical solution to protect lenders and reassure customers is to continue to serve such notices under cover of an explanatory letter confirming they do not affect the payment deferral arrangements and are a technical legal requirement.
It is vital that firms understand the impact of reporting on a customer’s credit file during this period. The FCA guidance is clear that where a customer has utilised the payment deferral relief, that this is not recorded with a credit reference agency as a detrimental arrears. Similarly, if a customer has asked for a payment deferral but a missed payment has already been recorded with a credit reference agency before the relief measure could be applied, it is good practice for a firm to retrospectively fix this report.
A particular difficulty for firms will lie in how they manage those customers who have not formally requested a payment deferral. Any missed payment in these circumstances should technically be registered appropriately with credit reference agencies but in the interests of TCF we would suggest that firms may wish to use this as a trigger contact customers and offer a payment deferral and no adverse credit report to those who are or may be experiencing financial difficulties.
Maintaining records and a paper trail of decisions made, both at executive level and at operational level, will become increasingly more important as time goes on.
Firstly, there remains a risk of an increase in complaints from customers who do not feel they have been treated fairly in the current circumstances. It will be vital that firms can clearly explain why certain decisions were taken in respect of that customer, particular where a complaint has reached the stage of the Financial Ombudsman (FOS). The difficulty for firms will be balancing the FCA’s guidance, which explicitly states that firms are under no obligation to investigate a customer’s specific circumstances to determine whether a payment deferral is appropriate, and the approach by FOS which will, to an extent, consider each the circumstances of each customer and their complaint in isolation.
Secondly, it should be assumed that there will be a level of increased scrutiny from the regulator in the aftermath of the crisis. Firms should therefore be well prepared to respond to any future regulatory interaction. Any response can clearly be made more robust where a firm can demonstrate effectively how a particular strategy or decision was reached.
Many regulated firms will offer both regulated and unregulated loans to customers. The FCA’s finalised guidance specifically applies to regulated credit agreements however firms should be mindful of the approach they taken in respect of unregulated loans. Even before the Covid-19 outbreak, the FCA have increasingly scrutinised the conduct of firms in their unregulated activities which impact on their ability to satisfy threshold conditions. It would like be seen as disingenuous and not in the spirit of the guidance if regulated firms did not use the FCA guidance to inform the principles of their approach in the unregulated lending sector.
We have extensive experience in advising financial services firms, particularly in times of crisis. Our team can help you navigate the regulatory expectations and provide invaluable advice to help you address both present and future issues. Call Jeanette Burgess on 07968 114901 for further advice.