The FCA expects firms to provide support to those customers who might currently be experiencing, or reasonably expect to experience temporary payment difficulties as a result of the current pandemic. The guidance is not applicable to those who were already in financial difficulty prior to the pandemic, where existing forbearance rules and guidance in CONC still apply. The proposed guidance is based on FCA Principle 6 (‘A firm must pay due regard to the interests of its customers and treat them fairly’) and requires firms to take account of the particular needs of their vulnerable customers.
The FCA seeks any comments on the draft guidance by Monday 20th April, with a view to publishing the final guidance on 24th April 2020. The guidance is to be reviewed in three months and revised if necessary due to changes in the coronavirus situation. When published, the guidance will complement the package of measures on consumer credit products issued by the FCA on 9th April 2020 (see our previous article here).
Where a customer is in, or reasonably expects to be in financial difficulty and experiences payment problems, and wishes to receive a payment deferral, a firm should grant the customer a deferral for three months, unless the firm, acting reasonably, determines that it is obviously not in the customer’s interests to do so. The customer will not be required to make any payment (or a token payment where zero payment is inapplicable) and must not be considered to be in arrears.
Firms are not prohibited from charging interest during the payment deferral period. Customers should not, however, be charged any fees in connection with being granted a payment deferral or other temporary relief.
The FCA does not expect the firm to make specific enquiries with each customer regarding the circumstances of the payment deferral request, nor whether such a deferral is not in the best interests of a particular customer. However, where a payment deferral is considered inappropriate, firms should consider other ways to provide temporary relief, such as a shorter payment deferral period or lower monthly payments for a period.
The FCA expects firms to make the offer of a payment deferral clear, both on their website and through any communications issued. The firm should also give customers adequate information to understand the consequences of a payment deferral or other relief offered.
Customers should be entitled to request a payment deferral at any point in the three months following the publication of the guidance. As such the payment deferral could continue beyond the current 3-month window for requesting such a deferral.
Where the payment deferral is given the firm must alert the customer to the wider implications of the extension – such as potential knock-on effects on insurance, warranties, breakdown cover or MOT.
The guidance provides that firms should not report a worsening arrears status on the customer’s credit file during the payment deferral period.
In the event that agreement on a payment deferral is not made in time and customers then miss a payment which is reported on their credit file, or where they have entered into a similar temporary payment deferral arrangement with their lender as a result of the coronavirus situation which has resulted in a worsening arrears status being reported, the FCA expects that any necessary rectifications are made to credit files to ensure no worsening arrears status is recorded during the payment deferral period.
The guidance does not grapple with the thorny question of whether forbearance is appropriate as opposed to a modifying agreement. It does provide that when granting a payment deferral or other option for assisting customers affected by coronavirus, a firm may enter into a new agreement with the customer to vary certain parts of the original PCP or PCH agreement. Firms should not by means of such an agreement modify, or seek to unilaterally alter, any aspect of the original agreement in a way that takes advantage of the customer’s necessity, lack of experience or weaker bargaining position or otherwise leads to unfair outcomes.
The FCA makes it clear, by way of example, that firms should not recalculate the residual value in a way that is based on temporarily depressed market conditions due to the effect of coronavirus in an attempt to recover more of the original car value through the periodic payments.
Where a PCP agreement reaches term end during this period, and the customer wishes to retain the vehicle, but cannot afford the balloon payment, the firm should work with the customer to find an appropriate solution. Alternatively, where a customer wishes to return the vehicle, but is unable to do so given the current measures put in place by the UK government, firms should inform the customer that they cannot use the vehicle once the agreement has ended and that the customer must make a Statutory Off Road Notification.
Where a customer is facing temporary financial difficulties as a result of the pandemic and needs to use the vehicle, firms should not seek to terminate the agreement, nor repossess the vehicle. Government advice on social distancing should be considered when considering whether any repossession should take place.
Co-authored by Niresh Sri Rajkumar