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Coronavirus: FCA issues guidance on repossessions during COVID-19 “social distancing” period - UK

  • United Kingdom
  • Coronavirus
  • Financial services disputes and investigations
  • Litigation and dispute management

24-03-2020

On Friday 20 March 2020 the FCA issued guidance to supplement the government’s recent pledges of support for mortgage customers.  In this article we:

  • summarise the key guidance relating to payment holidays and repossessions
  • highlight that the provisions for repossessions apply to all FCA regulated lenders even if they are not in a position to offer payment holidays
  • consider what further clarification is required from the FCA.

The FCA article announcing the guidance suggested in its title that it was “for lenders taking part in the Coronavirus Business Interruption Loan Scheme”.  However, the full guidance and accompanying statement to customers makes it clear that the application is much wider.  This distinction is particularly important for lenders currently considering their approach to repossession action.

The guidance will be reviewed in the next three months and the FCA will “issue amended guidance extending the period of the payment holiday if appropriate”.

Payment holidays

The guidance says that it builds on Principle 6 (‘A firm must pay due regard to the interests of its customers and treat them fairly’) and MCOB 2.5A.1R (‘A firm must act honestly, fairly and professionally in accordance with the best interests of its customer’). 

For customers expected to make periodic payments the guidance is clear:

  • where customers experience payment difficulties in the current circumstances and wish to receive a payment holiday, a firm should grant a holiday for the three monthly payments that follow that interaction
  • there is an expectation upon lenders to proactively raise the option of a payment holiday where a customer suggests they are experiencing payment difficulties
  • there is no expectation for lenders to investigate the circumstances of the payment difficulty or to assess affordability
  • lenders are however expected to give customers sufficient information to make an informed decision regarding the payment holiday (e.g. amount of interest accruing, monthly payments etc.)
  • no fees or charges should accrue during the holiday but interest can continue to be debited
  • lenders should ensure that the holiday does not impact on a customer’s credit score.

Some mortgages will allow for payment holidays in their terms and conditions and, where such rights exist, they should be the starting point for lenders’ considerations.  If the contractual terms are more generous, they should be followed but otherwise the FCA guidance should be “read in” to the conditions so that they take precedence.

Insofar as the customer’s credit score is concerned, lenders cannot control the score itself as it will be calculated by Credit Reference Agencies.  We anticipate that lenders are expected to ensure automated Credit Reference Agency reports are modified or suspended during the payment holiday so as to ensure that there is no impact on their credit score.

Repossessions

Unlike the payment holiday provisions, the guidance on repossessions applies to all mortgage customers.  Those reading the FCA’s press briefing alone could be forgiven for thinking that the repossessions guidance applies only to mortgages affected by the payment holiday provisions, but the guidance for firms and customers each state that it has wider application.  The customer guidance says it clearest:

“We…expect lenders to stop repossession action. This applies to all mortgage borrowers at risk of repossession, whether or not their incomes are affected by coronavirus. Many lenders have already committed to this.”

The guidance clearly says that this applies to all stages of the repossession process.  Where a lender has already obtained a possession order they must not enforce it whilst the guidance continues to apply.

For repossessions the FCA guidance is stronger regarding Principle 6 obligations, saying that a breach of the repossessions guidance is “very likely” to suggest that customers have not been treated fairly.  They go on to warn that they will not hesitate to take appropriate action where necessary.

There is an option for firms to continue with a repossession but only where the customer agrees that it is in their best interests.  The FCA expects lenders to ensure that customers are fully informed and to discuss with them the potential consequential impacts of their suspending any moves towards repossession.  As an example, they say that the effect of remaining in the property on the customer’s remaining equity should be explained.  The FCA’s guidance for customers makes it clear that the onus is very much on the customer to opt for the repossession to proceed so lenders should be wary of relying on other factors to justify continuing with enforcement action.

The customer guidance also states that unregulated lenders will be expected to adopt this guidance voluntarily, with the FCA being mindful that many mortgage prisoners are currently engaged with such firms.  The FCA issues a “shot across the bows” to unregulated lenders with references to potential unfair terms challenges and a statement that adherence to the guidance will be a relevant consideration for any future applications for authorisation.  We expect that the FCA has in mind bodies such as inactive lenders and administrators acting for unregulated entities.

Is further clarity required?

The guidance from the FCA is of course welcome after a fortnight of continuously evolving government policy.  However, we anticipate that the manner of its delivery will give rise to a degree of uncertainty.

The press release suggests that the guidance is a package to be read as one but the guidance to firms and customers make it clear that the provisions on payment holidays and those affecting repossessions are distinct.

The payment holiday guidance only applies where a customer is experiencing payment difficulties as a result of the coronavirus.  The repossession guidance however applies to all mortgages administered by FCA regulated firms (and is expected to be adopted voluntarily by others).

The lack of clarity on the distinction is particularly concerning given that it is clear the FCA will view a breach of the repossessions guidance as even more serious than contravention of the payment holiday provisions.  The former is considered to be “very likely” to breach Principle 6 and the latter only “likely”.

We expect that lenders will eagerly await further guidance from the FCA on some points.  For example, the guidance says that a three month payment holiday should run from the date that the request is raised (albeit that a shorter holiday can be agreed).  Will that apply equally to customers requesting a payment holiday at the start of June?  In addition, how should customers who request a payment holiday immediately be treated if a further holiday is required at that time?  What about customers who are already on a payment holiday for other reasons?

Further consideration is also required in relation to the application of the repossession guidance because, as currently worded, there is potential for it to cause customer detriment.  For example, should a lender be expected to delay repossession where the customer is deceased, their estate unrepresented and their home unoccupied?  The property is likely to deteriorate the longer it is left, with the estate’s exposure to interest increasing.  The same concerns will apply for unoccupied properties where customers cannot be contacted.

The guidance also creates question marks as to how repossession litigation which is defended and proceeding to trial should be dealt with.  Are lenders expected to stay such actions indefinitely rather than comply with directions to trial, even though the trial may not take place until much later in the year?  This question may ultimately be nullified by the court’s own approach to these matters.  We have already seen examples of courts proactively staying litigation of their own volition and one court has suggested to us that they are considering imposing a stay on all repossession cases.

The guidance is a welcome first step but it will be important for the FCA to follow the government’s lead in continuing to review its position, issuing regular updates and further clarification.

Update

The FCA updated its guidance on 25 March 2020 and the updated guidance can be found here.  There are important changes to the guidance on repossessions which lenders must be aware of.

Guidance around the three month payment holiday is clarified by examples:

  • payment holidays may be agreed where there is a reduction in household income available to pay the mortgage
  • the holiday may be less than three months if, for example, the expected loss of income is temporary
  • alternative options can include a reduced monthly payment if the loss of income is partial
  • more favourable options such as reducing or waiving interest can also be deployed.

Further clarification on capitalisation of payments missed during a holiday is also provided.  The guidance now says that firms should not capitalise these payments without giving information on the impact of capitalisation and offering the option to choose alternative means of repayment (e.g. a lump sum).

Repossession guidance is now more direct and the FCA appears to prohibit evictions or continuation of repossession proceedings in any circumstances.  There is no exemption for customers who agree that it is in their best interests for a repossession to continue and this is probably a reaction to the recently imposed lockdown.  The guidance still says that customers must be given information about the effect of the hold on their remaining equity and otherwise kept fully informed.  Whether the updated guidance prevents a customer from voluntarily surrendering their property or for vacant properties to be taken into possession remains unclear.