FCA guidance on supporting customers impacted by coronavirus in the high-cost credit marketPrint publication
The FCA has announced a package of measures to help protect consumers in the high-cost credit (HCC) market. This guidance has been published alongside guidance for customers in the motor finance market and follows on from finalised guidance issued last week in relation to the protection of customers in the personal loan, credit card and overdraft markets. The confirmed guidance is intended to be temporary, in place for three months from the date of the measures coming into force. However the FCA has indicated that the guidance will be reviewed at the end of this period and may seek to extend its application period for longer if circumstances warrant it.
Given the urgency surrounding the coronavirus pandemic, the FCA has confirmed that the guidance will apply from the 27 April 2020. Firms impacted by this guidance therefore have a short amount of time to ensure the guidance is fully implemented.
Which types of high-cost credit are in scope of this guidance?
The HCC market involves a number of different types of agreements. The list below sets out exactly which types of agreements the FCA intends to be captured under the finalised guidance:
- High-cost short-term credit (HCSTC)
- Rent-to-own (RTO)
- Buy-now pay-later (BNPL)
The FCA has clarified the application of retail revolving credit products which include a BNPL promotional period. These specific products will straddle both this guidance and the FCA’s previously published guidance on retail revolving credit in light of the pandemic. Firms offering these products should ensure the correct guidance is followed depending on the customer’s circumstances, as set out below:
- For customers still within the BNPL, the guidance in relation to high-cost credit should be applied.
- For customers outside of the BNPL period, the guidance published in relation to retail revolving credit should be applied.
You can read our briefing on the FCA’s guidance in respect of other consumer credit products, including retail revolving finance, here.
What does the guidance say?
Granting of payment deferrals
Customers who are experiencing, or reasonably expect to experience, financial difficulties brought on by the coronavirus pandemic can make a request to the firm for a payment deferral. Similarly, where it is reasonably apparent through a firm’s interaction with a customer that they are experiencing, or likely to experience, financial difficulties due to the coronavirus pandemic, the firm must ask whether the customer wishes to be granted a payment deferral even in the absence of an explicit request from the customer.
Given the range of products in scope, there are slight variations on the FCA’s expectations on the exact terms of payment deferrals. The table below sets out the expectations in respect of each type of product:
- High-cost short-term credit – A firm should grant a payment deferral of one month on the basis it is in the customer’s best interests to do so. The FCA has justified this shorter deferral period due to the short term nature of the lending however it does expect firms to implement a longer payment deferral if a customer’s particular needs warrant it.
- Rent-to-own – A firm should grant a payment deferral of three months on the basis it is in the customer’s best interests to do so.
- Buy-now pay-later – Where a customer remains within the promotional period of not having to repay, the firm should extend the promotional period by a further three months on the basis it is in the best interests of the customer to do so. Such an extension should be granted irrespective of when a customer’s promotional period is due to end.
- Pawnbroking – A firm should extend the redemption period for three months or, if such redemption period has ended, agree to not give notice of intention to sell an item taken in pawn for a period of three months. Such an extension should be granted irrespective of when a customer’s redemption period is due to end. Where notice has already been given prior to the guidance coming into force, a firm should suspend the sale of the pawned item for a period of three months.
Firms should be prepared to receive payment deferral requests for the next three months. While firms will be expected to act in line with the guidance when considering these requests for the next three months, the period over which a payment deferral will likely often go beyond the deferral period set out above for which the guidance applies. Therefore a BNPL customer who requests a payment deferral on the penultimate day of the guidance being applicable must still be granted a three month payment deferral as opposed to a payment deferral of one day. Such an example assumes that this payment deferral is in the customer’s interest.
Determining what is in the customer’s best interests
When deciding whether to grant a payment deferral, firms must pay sufficient regard to the best interests of a customer. While there is no overarching expectation in the guidance that firms will conduct further enquiries or investigations into a customer’s specific circumstances, firms are required to balance the customer’s immediate short-term need for support and any longer-term implications on a customer’s situation. Particular consideration will need to be given to the interest rate and remaining term. It may be that for some customers, a payment deferral may create a greater overall debt burden when compared to other measures that could be taken to support the customer.
Where a firm determines that a payment deferral is not in the best interests of a customer, a firm should not unfairly prevent that customer from receiving alternative forms of relief. The FCA suggests firms may wish to consider reducing or suspending interest, a reduction in payments or rescheduling the term. There is nothing preventing a firm from ultimately offering a more favourable payment deferral, and the FCA has specifically indicated that it welcomes firms who look to go above and beyond for customers in light of the guidance. Equally, in some circumstances it may be appropriate to offer a payment deferral of a shorter period than that proposed by the FCA. These circumstances may be rare but should be reasonably apparent, for example it is evident that a customer’s reduction in income will only last for a month. Although the guidance does not oblige firms to conduct specific enquiries into each customer who requests a payment deferral, good practice would suggest that firms document the rationale as to why an alternative form of relief was offered to demonstrate that the customer’s best interests were acted upon. This may well involve some further enquiries but will also take account of the firm’s existing relationship with each customer.
Application of interest during the deferral period
For RTO, pawnbroking and BNPL agreements, firms are permitted to allow interest to accrue during the deferral period. Firms should assess on a case-by-case basis the most appropriate method of the customer repaying this interest. This could include repayment in a lump sum or allowing the deferred interest to be repaid over an extended period that may in some cases go beyond the original term of the agreement. Any decision should be made with consideration as to what is affordable for each particular customer.
In respect of BNPL products, it is the FCA’s expectation that many customers will use the extension to make the voluntary payments they would have made during the original term of the promotional period. Given that firms are permitted to backdate interest for the entire promotional period, including any extension to the period granted, this will still allow customers to avoid having to pay significant sum of backdated interest.
This is not the case for HCSTC agreements, whereby the FCA has stated that no interest should accrue during the deferral period. Firms should be mindful that, while the FCA guidance states that deferral periods should last for one month, where more favourable terms have been offered to a customer due to their particular circumstances, interest should not accrue for the entire period even where it is beyond one month.
Interest should not be charged, however, where repossession, collection or redemption of goods which would otherwise occur cannot be carried out as to do so would breach the Government rules on social distancing and self-isolation.
Warranties and insurance sold on RTO products
Many products sold via RTO agreements will include warranties and insurance policies packaged with the product. The FCA expects firms in these instances to permit customers to be able to rely on the warranty or insurance policy for the extended period. Where this is not possible, a firm should disclose to a customer the implications. Even in circumstances where a warranty or insurance policy has been purchased entirely separately, a firm should still bring to the customer’s attention the wider implications of the extension of the repayment period brought on by the payment deferral.
Repossession, collection or redemption of goods
Firms should not undertake repossession proceedings against a customer who is experiencing payment difficulties as a result of the coronavirus pandemic. The FCA has been clear in its guidance that any repossession in these circumstances would almost certainly contravene Principle 6 of the FCA’s Principles for Business (namely, the duty to act in the customer’s best interests and treat them fairly).
Repossession proceedings against customers whose circumstances do not relate to the coronavirus pandemic may still be impacted given the Government’s rules on social distancing and self-isolation. It will likely be that many repossessions are simply not feasible in the current climate. As such, firms may wish to consider suspending repossessions across their entire portfolio.
Where a customer is unable to make a payment or redeem an item taken in pawn at a store due to the social distancing and self-isolation rules, a firm should not charge any interest, fees or other charges to the customer. This will be particularly important for firms who do not currently have the capability to take payments remotely (such as over the phone or via the internet). Other payment arrangements should be attempted to be made; however, if they cannot, the customer should not be placed at a disadvantage due to circumstances outside of their control.
Communications to customers
All firms impacted by this guidance should begin to make customers aware of their eligibility to receive a payment deferral. This may be best achieved through clear statements on websites, dedicated social media campaigns and letters to customers. Firms should begin developing a consistent and clear communications strategy to help bring these relief measures to the attention of customers. Many customers may have erroneously cut off direct debit repayments before making contact with a firm. In such circumstances it would be good practice to proactively contact these customers to make them aware they need to request formal relief measures otherwise they risk harming their credit record with missed repayments.
Customers must be made aware of the consequences of a payment deferral, namely the accumulation of interest over the period which will affect the customer’s total amount to be repaid. While not explicitly specified in the guidance, a firm which offers alternative relief measures to a customer should also ensure any consequences or implications are clearly set out to the customer prior to the customer entering into the relief arrangement. This will certainly represent good practice and is within the spirit of the guidance and regulation.
For BNPL customers, further disclosures under CONC 6.7.16A may be required. Under this rule firms must give notice to the customer that they are required to meet certain conditions in order to benefit from a promotional period in good time before such period ends. A disclosure in these instances should contain a statement explaining the possibility of deferring the period and set out any consequences or implications this might have in a clear and easily understandable manner.
Systems and controls limitations on the promotional period of BNPL products
Further clarification has been added by the FCA to the finalised guidance in respect of firms whose systems and controls prevent an extension of a customer’s BNPL promotional period. In such circumstances, the FCA has confirmed that a firm can put in place an alternative approach to assist the customer, so long as it delivers the same economic outcome for the customer.