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Coronavirus - FCA proposes temporary financial relief for consumer credit customers - UK

  • United Kingdom
  • Coronavirus
  • Financial services and markets regulation
  • Financial services

06-04-2020

On Thursday 2 April 2020, the FCA issued draft guidance and Handbook changes to address the impact of Covid-19 on consumer credit customers who have credit cards, store cards and catalogue credit, personal loans and overdrafts.

There is a short window in which to provide feedback by Monday 6 April and the measures would come into force on Thursday 9 April 2020. The guidance is intended to be reviewed in 3 months’ time.

The aim of the guidance is to provide ‘exceptional and immediate support’ to those consumer credit customers facing financial difficulties due to Covid-19 and is intended to build on the principle of Treating Customers Fairly and existing guidance in CONC around customers in financial difficulty. Firms are required to consider in particular the needs of vulnerable customers. Where customers already face financial difficulty, other than due to Covid-19 the existing CONC guidance and forbearance rules continue to apply.

The customer must not be reported to CRAs as having detrimental arrears as a result of the measures proposed in the guidance.

Credit card rates

The guidance requires firms to consider whether their rates are consistent with the obligation to treat customers fairly, particularly in respect of low income customers or those with poor credit ratings.

Payment deferral guidance

The guidance sets out that a firm should grant a customer a payment deferral of 3 months where the customer is ‘experiencing or expects to experience temporary payment difficulties’ due to Covid-19 and wishes to have a deferral. The expectation is that the customer makes no payments in this period and is not considered to be in arrears. The guidance recognises however that in some situations, the deferral period can be longer or shorter than 3 months or that reduced payments could be accepted instead.

Firms should make clear on their website that payment deferrals are available and in any interactions with the customer which suggest the customer may be in financial difficulty, a payment deferral should be suggested. 

Although the guidance states that firms can continue to charge interest in relation to the payment deferral period, if the customer is entitled to be treated with forbearance under existing rules then interest must be waived.  

Credit card or retail revolving credit customers should not have the use of their cards or credit facility suspended as a result of a payment deferral.

Our Comment

The FCA does not stipulate how payment deferrals are to be effected in practice. This could be in one of the following ways:

Unilateral variation of the customer’s terms: this may be an option where the credit agreement gives the lender the right to make the required changes to payments under the agreement. The disapplication of the minimum repayment amount rules would facilitate this approach but  ultimately is limited to the situation in which the agreement permits it.

Variation by agreement: in the context of CCA regulated agreements this will involve a ‘modifying agreement’ and would need to be documented compliantly in order to avoid the resulting agreement being unenforceable.

Indulgence: waiving the right to collect the contractual payments at the dates scheduled under the agreement.

Key considerations for firms in putting in place payment deferrals, will be:

  • to understand the effect of any communications on the terms of the credit agreement  - whether the agreement has actually been varied, whether interest is to be charged in respect of the deferral period and in the case of loans, the duration of the agreement.
  • the impact on sending post-contractual notices under the Consumer Credit Act. The guidance on personal loans highlights that where CCA notices are required to be sent, firms should avoid customer confusion by providing explanation and context in the relevant notice, which seems to acknowledge the issue. The credit card and retail revolving credit guidance does not refer to this, although the position in relation to CCA notices will need to be considered equally for these accounts.

Handbook changes

In relation to credit cards and revolving credit, the following changes are proposed: 

  • Persistent Debt: applicable to all credit cards, store cards and catalogue credit. A new CONC 6.7.26A R disapplies the Persistent Debt rules to firms in respect of customers for the period of deferment
  • Minimum Repayment Amount: applicable to credit and store cards only. A new CONC 6.7.5.(4) R disapplies the obligation in CONC 6.7.5 to set a minimum repayment amount.

Our comment

It is not clear how the persistent debt (‘PD’) rules will be disapplied for customers with deferred payments: For example, will the period of deferment be disregarded for the purposes of the PD timeframes so that the clock stops and re-starts at the end of the deferral period; and will this be the case whether the deferral is a 3 month period or a longer period and whether it is contractual or non-contractual?   

We continue to work with industry bodies in relation to these outstanding questions.

Overdrafts and coronavirus: draft guidance for firms

The FCA acknowledges steps which some firms have taken to introduce fee and interest free buffers for all arranged overdraft customers. The proposed measures are as follows: 

Interest free buffer of £500 on arranged overdrafts

If the customer requests, they should be given an interest free buffer of up to £500 on an arranged overdraft for a period of no less than three months. If the customer’s overdraft limit is less than £500, this should all be interest-free. If the customer has an overdraft exceeding £500, the interest-free amount can be limited to £500 but the firm can offer interest-free overdrafts of more than £500. Any new or increased overdrafts must be assessed in light of the creditworthiness rules. The FCA notes that the customer’s future position can be considered if it is reasonable to expect it to improve.

As with the payment deferrals measures, this option should be communicated on the firm’s website and raised in discussion with the customer if they provide information which suggests they may be in financial difficulty due to Covid-19.

Overdraft interest rate pricing

The FCA notes that some firms have recently increased their overdraft prices in response to the rules set out in PS19/16 and requires firms to review their prices to ensure they are consistent with the obligation to treat customers fairly in the light of the exceptional circumstances arising out of Covid-19 and demonstrate to the FCA that their rates are consistent with this guidance. It suggests that this could be achieved by any/all of the following:

  • not introducing price increases;
  • reducing published rates and
  • manual adjustments.

Overdraft repeat use

Firms should reassess their repeat use strategies in light of Covid-19 and consider delaying the timing of contact with customers where appropriate.