FCA guidance on supporting customers impacted by coronavirus in the motor finance marketPrint publication
Following on from the package of relief measures offered in the personal loan, credit card and overdraft markets, the FCA has confirmed a range of measures to protect customers in the motor finance market. The guidance is intended to be of a temporary nature, and will apply for three months from the date of the measures coming into force however the FCA has stated 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 agreements are in scope of this guidance?
The motor finance market involves a number of different types of agreements. The list below sets out which types of agreements will fall into the scope of the finalised guidance:
- Hire purchase agreements (including personal contract purchase agreements, commonly known as PCP agreements);
- Personal contract hire agreements (PCH)
- Conditional sale agreements
- Any other credit agreements where the creditor is also the supplier of the vehicle (including credit-sale agreements)
What does the guidance say?
Granting of payment deferrals
Any customers who are experiencing, or reasonably expect to experience, financial difficulties brought on by the coronavirus pandemic can make a request to the firm of a payment deferral in relation to their specific credit agreement. The FCA expects firms to grant a three month deferral upon receiving such a request on the basis that it is in the customer’s interest to do so. 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.
Where payment deferrals are granted, firms should not seek to recover such sums from any guarantor. A customer will not be held out to be in arrears throughout the length of the deferral period therefore firms will not have the right to invoke any guarantor clause in the agreement.
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 payment amounts or rescheduling the term. There is nothing prevent a firm from ultimately offering a more favourable payment deferral, for example one which exceeds three months. In some circumstances it may be appropriate to offer a payment deferral of less than three months. These circumstances may be rare but should be reasonably apparent, for example where 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.
Customers should not be charged a fee in connection with either the granting of a payment deferral or any other alternative relief measure the firm determines as being in the best interests of that particular customer. Firms can however still continue to allow interest to accrue on the unpaid sums during the payment deferral period.
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 initial three month period for which the guidance applies. Therefore a 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, provided that such deferral is in the customer’s interest.
The FCA has deliberately not given specified guidance to firms as to their treatment of customers whose agreement term is coming to end and have requested a payment deferral. Under the feedback statement published together with the finalised guidance, the FCA has indicated that it may be necessary for the firm to extend the customer’s term of the agreement or reschedule the remaining balance over the remainder of the term. Customers with a short period left on their agreement should be dealt with fairly and it may be that a payment deferral is clearly not in their best interests. In line with the guidance, the firm should be willing to offer an alternative form of relief, including a shorter payment deferral period.
PCP agreements which end during the guidance period
The FCA has attempted to address the practical difficulties around PCP agreements in which the term of the agreement comes to an end during the guidance period.
Some customers will simply wish to return the vehicle upon the conclusion of the agreement term. Where such a return cannot be achieved or is reasonably impractical in light of the government’s social-distancing rules, a firm should inform the customer that they are no longer entitled to use the vehicle once the agreement has ended. The firm and the customer should then seek to agree on the next steps to be taken.
For customers who wish to retain the vehicle, there may be difficulties in being able to afford the balloon payment due to the pandemic. The FCA’s guidance on this scenario is not detailed and merely states that a firm should “work with the customer to find an appropriate solution”. Particular care should be paid towards the relationship between the value of the customer’s balloon payment and the risk of the value of the vehicle not meeting the amount of the balloon payment due to the current economic outlook. Any agreement reached with the customer should be guided by the FCA’s Principles for Business, particularly the duty to pay due regard to the customer’s interests and treat them fairly.
Definition of ‘refinance’ during this period
From a technical perspective, an extension of the period over which a customer makes one or more repayments will not fall into the scope of the definition of refinance. The FCA has confirmed its intention to not apply CONC 6.7.18 and CONC 6.7.19 in these circumstances. The disapplication is however incredibly narrow and applies only in circumstances where the firm extends the period over which repayments are to be made purely in order to follow this guidance. Any such extension which occurs outside of the circumstances relating to the coronavirus pandemic will still be caught by the rules on refinancing. Firms should therefore take particular care with any refinancing arrangements that are in the process of being agreed during this period, but relate purely to historical financial difficulties that hold no relationship with the coronavirus pandemic.
Entering new agreements to vary aspects of an original PCP or PCH agreement
Firms may need, when granting a payment deferral or another relief measure, to enter into a new agreement in order to vary the original PCP or PCH agreement. The FCA is clear that firms should not take advantage of customers in this situation by attempting to recalculate the Guaranteed Minimum Future Value (GMFV) or the Residual Value (RV) of the vehicle based on current economic conditions in order to recover more of the original car value through repayments. Such an act is likely to breach section 140A of the Consumer Credit Act 1974 (CCA) in relation to unfair relationships.
The guidance is not intended to introduce a blanket ban on adjusting the GMFV or RV of a vehicle but it specifically seeks to address an adjustment based on current economic conditions. The FCA’s feedback statement has clarified that any adjustment should be done fairly and should be done to reflect the expected depreciation value of a vehicle prior to car values being affected by the pandemic.
The guidance is particularly strict in respect of repossessions. Firms are expected to not undertake any repossessions over vehicles which a customer still has the right to use and who is experiencing financial difficulties due to the pandemic. The FCA has been clear in the 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 interest and treat them fairly).
Only exceptional circumstances may dictate that a repossession may take place, for example if the customer explicitly requests for the repossession to be undertaken, however the reality is that for the vast majority of firms all repossessions should cease. The practicalities of any repossession in exceptional circumstances may also fall foul of the government’s social distancing and self-isolation rules and as such it becomes unfeasible to carry out.
Within the guidance the FCA draws attention to the potential of an unfair relationship under section 140A of the CCA by virtue of the manner in which a firm may enforce its right to repossession. It is highly likely that the vast majority of repossessions would, in current circumstances, not be in the spirit of the guidance and regulation, and therefore would be classed as an unfair relationship.
Reporting to the credit reference agencies
Firms must not report arrears to credit reference agencies in respect of customers who are granted a payment deferral due to the pandemic.
For customers who require additional forbearance due to particular circumstances, firms are expected to continue to report this in the usual manner.
The FCA does not believe that any of the expectations set out in the guidance will prevent firms from complying with statutory requirements under the CCA to send post-contractual notices (for example a NOSIA). Clearly any statutory notice must include the prescribed wording, however there is nothing prevent a firm from including additional wording or a second communication which sets out a suitable explanation or context as to why the notice is being sent in the current circumstances.
Communication and disclosures with 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 that they need to request formal relief measures otherwise they risk harming their credit record with missed repayments.
Customers must also 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.