The measures from the FCA:
- Outline its expectations on firms to offer temporary payment freezes of up to three months on loans and credit cards where consumers face difficulties with their finances as a result of Covid-19.
- Require firms to make sure that all overdraft customers are no worse off on price when compared to the prices they were charged before the recent overdraft changes came into force.
- For customers financially affected by Covid-19 already using an arranged overdraft on their main personal current account, they will be permitted to request that it is provided at 0%, up to the value of £500 for up to three months.
- Ensure a customer’s credit rating is not adversely impacted if they utilise the temporary measures.
If implemented, the measures will provide a short-term temporary stop gap for consumers of up to three months, assisting individuals with a minimum level of support who have previously been financially stable. The FCA insist that the measures should not be used for those in serious and pre-existing financial difficulty, and that existing forbearance rules and guidance in CONC should continue to apply. Where consumers can afford to make payments, they should do so, as it is likely be in their interest long-term.
1. Personal loans
The draft guidance is applicable to regulated firms who issue or have acquired personal loans, but this does not include motor finance, high-cost short term credit and buy now pay later agreements. It sets out the FCA’s expectation that firms should provide, for a temporary period, exceptional and immediate support to customers facing payment difficulties due to circumstances arising out of Covid-19. It is intended to provide assistance to customers who may have difficulty in making their personal loan repayments as a result of a loss or reduction in their income (or other members within their household) or who expect to experience such difficulty as a result of Covid-19. When implementing the draft guidance, firms would be expected to take the specific needs of vulnerable customers into account.
The draft guidance is of particular relevance to enforcement cases, and the FCA may take it into account when assessing whether it could reasonably have been predicted or understood at the time that the conduct fell below the standards required by Principle 6 of the FCA Handbook: “A firm must pay due regard to the interests of its customers and treat them fairly”.
Payment deferrals and personal loans
The draft guidance defines a payment deferral as “an arrangement under which a firm permits the customer to make no payments under their regulated credit agreement for a specified period without being considered to be in arrears”.
If a customer is experiencing or reasonably expects to experience temporary payment difficulties due to circumstances relating to Covid-19, and wishes to receive a payment deferral, the draft guidance states that a firm should grant a payment deferral for three months.
Firms must ensure customer communications are clear, stating the circumstances in which a payment deferral can be offered. If a customer discloses that they are experiencing or reasonably expect to experience temporary payment difficulties as a result of Covid-19, firms must offer a payment deferral.
How should interest be applied?
If a customer receives a payment deferral in these circumstances, firms will not be expected to waive interest during this period. If a customer is unable to resume payments after the initial three month period due to payment difficulties, a firm is obliged to work with the customer to resolve them before payments are missed. If a customer is granted a payment deferral related to Covid-19 and is entitled to forbearance under existing rules, the FCA expects a waiver of any interest accrued during that three month period.
The FCA states that a customer should not be required to pay any fee or charge in connection with the granting of a payment deferral.
Can a firm apply alternative options?
Yes, provided customers continue to be treated fairly. Examples include granting a payment deferral for a shorter period if a loss of income is expected to last less than three months. A firm can provide customers with more favourable forms of assistance (such as a longer payment deferral) if appropriate.
What information should be provided to customers granted a payment deferral?
Firms are required to provide customers with adequate information ensuring they understand the implications of a payment deferral, including the consequences of interest accruing during this period and its effect on the balance due under the personal loan, as well as the impact on future payments.
If statutory notices and statements are required to be sent as per the Consumer Credit Act 1974, firms should provide suitable explanations or context to avoid confusion.
Will a payment deferral impact a customer’s credit file?
No. Payment deferrals offered under these circumstances should be regarded as exceptional and outside of a customer’s control, and their account should not be recorded as having any form of detrimental arrears, in accordance with the relevant Steering Committee on Reciprocity Guidance.
2. Credit cards, store cards and catalogue credit
The draft guidance provided for personal loans and credit cards is broadly similar. As well as the provisions above, additional measures relating to revolving credit are included in the draft guidance.
Payment deferrals and credit cards, store cards and catalogue credit
The definition of payment deferral is: “an arrangement under which a firm permits the customer to make no payments (or a token payment not exceeding £1 where firms’ system will not allow a zero payment) under their credit card or revolving credit agreement for a specified period without being considered to be in arrears”. If a customer experiences or reasonably expects to experience temporary payment difficulties due to circumstances relating to Covid-19, and requests a payment deferral, the draft guidance states a firm should grant the customer a payment deferral for three months.
Changes to minimum payments
To facilitate a payment deferral, the FCA rules in CONC 6.7.5R will not apply if the firm decides to vary its contracts to enable it to follow the draft guidance. CONC 6.7.5R currently requires a firm to set a minimum repayment amount equal to at least the interest, fees and charges that have been applied to the account, plus one percentage of the amount outstanding. The FCA is amending CONC 6.7.5R to address this.
Suspension of persistent debt remedies
The FCA also intends to suspend the persistent debt remedies provisions found within CONC for certain customers. Such provisions are applicable where a customer is paying more in interest, fees and charges than they are paying off their outstanding balance. If this happens, firms are required to engage with customers at specified intervals. The suspension will apply to a customer who a firm has allowed to defer payments for the duration set out in this draft guidance, for the period of the deferment. The provisions will then start to apply again to the relevant customers after this period.
Credit card rates – are customers being treated fairly?
Applicable to prices set for credit cards, some rates are particularly high for credit cards usually marketed or offered to low income customers or those with a poor credit rating. Within the draft guidance, firms must review their prices and consider whether they are consistent with the obligation to treat customers fairly in light of the exceptional circumstances arising out of Covid-19. Firms must ensure that unjustifiable burdens are not imposed on customers experiencing payment difficulties.
The FCA acknowledges that given the national emergency caused by Covid-19, coupled with the significant impact on consumer’s finances, it has asked all stakeholders to respond by 9am on Monday 6 April 2020. If confirmed, the measures will begin to come into force from Thursday 9 April 2020.
These broad changes whilst appearing simple may in practice be difficult for firms to implement. Changes to systems and documentation for firms are often not quick fixes, and pose issues for firms already stretched. The draft guidance provides no clarity for firms offering hire purchase, high cost short term credit or buy now pay later products, although that is rumoured to be in the pipeline. Media headlines setting out the proposals may create an expectation that the “payment holiday” is available to all and not explain when it will not apply. No comment has been made about whether the proposed measures can fall within the ambit of forbearance and avoid the necessity of creating a regulated modifying agreement. Whilst the FCA may be reacting rapidly to assist all financially impacted by Covid-19 in the immediate term, it remains to be seen what lens it will view it through in the future should complaints be raised concerning firms’ attempts at ensuring regulatory compliance at such short notice.