The FCA’s guidance for mortgage lenders in light of the coronavirus pandemicPrint publication
The Financial Conduct Authority (FCA) have published guidance on the treatment of mortgage customers during the Covid-19 outbreak, namely those customers who are struggling to meet mortgage repayments. The guidance issued seeks to build upon the principle of a firm’s obligation to pay due regard to customers and treat them fairly and the rule under MCOB 2.5A.1 which holds that firms must act honestly, fairly and professionally in accordance with the best interests of customers. Both the principle and rule remain fundamental in guiding a firm’s behaviour and treatment of customers, particularly as the crisis continues into the months ahead.
The guidance is effective immediately and applies to mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators. The FCA have been explicit in stating that for firms who carry out unregulated lending secured on land, failure to follow this guidance may result in a breach of the Threshold Conditions. Therefore irrespective of the regulated nature of the lending, lenders should heed this guidance carefully.
What does the guidance say?
Customers who are experiencing, or are likely to experience, financial difficulties brought on by the Covid-19 outbreak may request a payment holiday. The guidance expects firms, upon receiving such a request, to grant a three month payment holiday unless to do so would be unreasonable and outside of the customer’s best interests. There is an onus on firms to equally grant a three month payment holiday in circumstances where it is reasonably apparent that a customer is in financial difficulty, even where no explicit request for a payment holiday has been made. Firms should not levy any charge or fee upon a customer for the arrangement of a payment holiday.
While the FCA have stated that three months should be the starting point for a payment holiday, there is nothing preventing a firm from offering more favourable terms to a customer. Likewise, a payment holiday of less than three months is not necessarily prohibited but as is discussed below, it must be in the best interests of the customer and be reasonable to their circumstances.
Despite the FCA’s intention that the guidance does not oblige firms to conduct their own investigations into the circumstances surrounding a customer’s payment holiday request, in some cases it may be prudent to do so to ensure that such a request is in the customer’s best interests. This investigation becomes vital in circumstances where a payment holiday request is rejected or an alternative form of relief is offered to a customer. It can reasonably be assumed that such actions will likely attract potential scrutiny from the regulator or even the Financial Ombudsman should a complaint be made. Therefore a robust investigation into a customer’s circumstances coupled with clear and recorded rationale should be actioned by the firm to ensure it can effectively demonstrate that the firm’s actions were in the best interests of the customer.
For the majority of firms, most circumstances will dictate that a three month payment holiday should automatically be granted but care, and in some instances independent advice, may be needed on borderline cases.
Customers already experiencing payment shortfalls before the crisis
Customers who are already in a payment shortfall before the Covid-19 outbreak should not be disadvantaged because of their existing position. It is likely that many of these customers will experience further financial strain because of the outbreak. In such circumstances, a firm must considered whether further support and relief should be offered to these customers in light of the FCA’s guidance.
A firm may wish to develop a standalone approach as to what manner of further relief will be offered to this subset of customers. Failure to treat these customers in the same manner as those not in a payment shortfall will almost certainly fail to meet the standards of treating a customer fairly and will likely leave the firm open to complaints.
Communicating with payment holiday customers
Prior to granting a payment holiday, or indeed any other form of relief a firm must explain to the customer the implications of taking a payment holiday, particularly around the impact on future monthly instalment amounts, the total amount that will need to be repaid by the customer and the term of the mortgage. Firms should avoid unilaterally accepting a payment holiday request and only providing the implications and consequences of a payment holiday after the payment holiday period has begun. This will fall far short of the standards set out in the guidance and will likely open the firm up to regulatory scrutiny.
Many firms may benefit from drafting a dedicated Covid-19/payment holiday communication which clearly explains customers’ rights to requesting a payment holiday in light of the ongoing situation and sets out the impact of taking a payment holiday. This could be provided to all customers even before a request has been made to clearly satisfy the requirement under the guidance. Any communication issued should still meet the clear, fair and not misleading principle although further tailored disclosures may be necessary to certain customers who have particularly unique circumstances.
Recovery of sums covered during a payment holiday
Under the guidance there is nothing preventing a firm from charging interest on the unpaid sums that accrue during the payment holiday however the unpaid sums and interest clearly cannot be recovered until the customer’s payment holiday has concluded.
Where a firm wishes to capitalise the unpaid sums, it must disclose in advance to the customer of the impact of doing so on the customer’s mortgage and inform the customer of an alternative means of repaying the unpaid sums, such as through a lump sum. This disclosure must be made in good time and good practice would dictate that such information is provided at least 30 days’ in advance of any intended capitalisation. Firms may therefore wish to start developing a defined and consistent recovery strategy in advance of the conclusion of the three month period. Such a strategy should place the interests of customers at its core. It may well be that some customers continue to suffer the shock of financial difficulties beyond any guidance period. In these circumstances firms should ensure these customers are dealt with on a case by case basis and any measures offered to them meet their specific needs and circumstances. Should subsequent guidance be released extending the three month period, any recovery strategy implementation would need to be delayed in line with revised guidance.
Suspension of repossessions
While the payment holiday relief measure has garnered the most attention, it is not the only relief measure announced in the regulator’s guidance. The FCA expect firms to suspend all forms of repossession against customers for the next three months. This suspension applies to all stages of the repossession process, including those repossessions currently in progress. Where a firm had already obtained a possession order from the courts before the outbreak of the crisis, this order should not be in enforced. Under the Civil Procedure Rules (CPR), Practice Direction 51Z has been introduced which confirms that all new possessions proceedings, including applications to enforce a possession order, are to be stayed from the 27 March 2020 for a period of 90 days.
The FCA expect that only repossessions in exceptional circumstances will occur, namely where a customer requests that the repossession commences. Therefore almost all firms will likely need to halt all current and planned repossession proceedings immediately.
While the suspension of repossessions may seem relatively easy to achieve. There is still an expectation in the guidance that firm’s will communicate with customers to not only state that an intended or existing repossession has been paused, but to go further and explain to customers the implications of the repossession not taking place. This includes the growth of the debt due to interest continuing to be charged and the possibility that property prices may fall meaning that, once repossession can recommence, any sale of the property may be for less than the customer owes.
Short term behaviour will impact long term regulatory relationships
With the Senior Managers & Certification Regime now fully embedded within the mortgage sector, this is likely to be seen as the first major test for senior managers in their handling of a crisis. The guidance is explicit that actions taken here will be assessed in any future applications to the regulator.
It is vital that a firm’s governance maintains a proactive approach in dealing with the crisis. The use of Management Information (MI) to inform relevant senior managers and board committees will become increasingly important when decisions are taken. As alluded to earlier, the need for record-keeping and documenting rationale is imperative to show that any decision taken by a firm is done so in a thorough and diligent manner which seeks to uphold the interests of customers.
Firms may wish to temporarily implement an emergency committee or increase the number of times senior managers or board members meet during the crisis. Given the wider social distancing measures that have been put in place by the UK government and the move of many firms’ entire workforces to remote based working, such measures may not work as smoothly as they would have before. Clearly the availability of technology will go a long way in minimising this disruption and it is unlikely that the FCA will look favourably upon firms whose governance framework is hindered completely.
While the crisis may be rapidly changing day-to-day, this will not absolve the firm nor individual senior managers from demonstrating that reasonable steps were taken.
What are the next steps from the regulator?
The FCA have committed to reviewing the guidance three months from the date of publication (March 2020). The regulator has confirmed that this review will comment on whether an extension to the payment holiday period is required, but it is also reasonable to assume that there will be a statement concerning the extension of the suspension of repossessions.