Change is on the horizon for consumer credit and mortgage firms

On 25 May 2023, the Financial Conduct Authority published a consultation paper on strengthening protections for borrowers in financial difficulty. The FCA intends to move some of the Tailored Support Guidance (TSG) which was introduced during the coronavirus pandemic into CONC and MCOB so that firms will continue to support customers facing financial difficulty. It will then withdraw the TSG. However, it is not quite as simple as that. The FCA has taken the opportunity to propose a number of additional changes for consumer credit and mortgage firms, some of which will be quite onerous for firms to implement in practice.

This consultation will impact consumer credit and mortgage lenders, including hiring, debt collecting, P2P and premium finance.

Key proposals

1. Supporting customers at risk of payment difficulty

The current rules in CONC 7 and MCOB 13 primarily apply to customers who have already missed a payment.  The TSG goes wider than this and says firms should also support customers before they miss a payment if they indicate that they are experiencing, or reasonably expect to experience, payment difficulties. The FCA proposes to reflect the TSG by expanding the scope of the relevant CONC and MCOB chapters to make clear that they also apply to customers who indicate to a firm that they are at risk of missing a payment, as well as any occasion where this is identified by firms. 

(a) Credit firms

The FCA wants to build on the existing requirements in CONC 6.7.2R and CONC 6.7.3AR and require firms to provide appropriate support to customers approaching arrears where the customer indicates to the firm that they are at risk of not meeting one or more repayments when they fall due. 

For overdraft customers, the FCA will amend CONC 5D to reflect the expectations in its Overdrafts Finalised Guidance that firms should identify customers who are showing a pattern of repeat use as early as possible, taking account of any relevant information held by the firm including information provided by the customer and information from the customer’s personal current account providing the overdraft. 

(b) Mortgages

The FCA wants to expand the scope of MCOB 13.3.1R to make clear that firms must deal fairly with any customer who has or may have payment difficulties. Firms should offer support to a customer where they become aware that the customer is, or may be, at risk of missing mortgage payments, even where the customer has not told them.  For example, if a firm is told by a debt adviser or a customer has multiple products with the same firm and misses payments on them. However, the FCA is not proposing to require firms to take steps to proactively identify such customers. This scope change means that firms will need to consider support for a wider population of customers. Aligned with the TSG, the FCA is proposing to build on the existing requirement that firms give customers adequate information to understand the implications of any proposed arrangement to help customers consider whether such options are right for them.

(c) Reviewing effectiveness of policies and procedures

The FCA is consulting on adding a new rule to both CONC 7 and MCOB 13 to require firms to ensure the effectiveness of any policies and procedures put in place for customers in or at risk of payment difficulty. The firm’s ongoing compliance with them must be reviewed at appropriate intervals. Firms will need to assess whether they are providing customers in payment difficulty with appropriate support, and treating them fairly, while their difficulties remain.

2. Vulnerable customers

The FCA proposes to replace the ‘narrowly drawn expectations’ on vulnerability in CONC 7 and MCOB 13 with new guidance. This new guidance will remind firms to have regard to the expectations set out in the FCA’s Final Guidance (FG 21.1) on the fair treatment of vulnerable customers but firms will need to use their judgement on what each section of the guidance means for them and what they should do to support customers.

3. Forbearance options

The FCA wants firms to be flexible when dealing with customers who have or may have payment difficulties and expects firms to consider a range of forbearance options when providing the appropriate support.  The FCA proposes to add new examples of forbearance for credit (CONC 7.3.5G), overdrafts (CONC 5D.3.3(4)G) and mortgages (MCOB 13.3.4AR). The FCA also proposes to add guidance to MCOB 13 and CONC 5 and 7 to set out examples of how firms are expected to engage with customers and how they should be transparent about the range of options they can consider.

4. Money guidance and debt advice

The TSG asks firms to help customers understand what types of debt advice and money guidance are available and to refer or signpost them to it.  The FCA proposes to move this guidance into the Handbook, along with some additional provisions, to support this aim.  For credit (including overdrafts) this means new provisions in CONC 7.3.7AG and in MCOB 13.3.2AR for mortgage firms.

5. Providing information to customers

Under the TSG, firms are expected to give customers appropriate information before providing forbearance to help them to understand their financial position, their options, and the implications of any arrangements.  The FCA proposes to move this guidance into the Handbook and clarify expectations around the information that should be provided to customers. For credit, this means new provisions in CONC 7.3.13A and CONC 5D and changes to MCOB 13.3.4AR for mortgage firms. The provision in MCOB 13.3.4AR(2) allowing a firm to provide information on any new terms in line with the annual statement provisions will be deleted.

6. Credit-specific proposals

Escalating balances: The FCA proposes to introduce requirements on escalating balances where a firm has put in place a sustainable repayment arrangement as a forbearance measure and the customer is meeting the terms of that arrangement. Guidance will clarify the extent to which the firm should suspend, reduce, waive or cancel any further interest or charges where a sustainable repayment arrangement has been put in place.

Charges: The FCA proposes to supplement CONC 7.7.5R with guidance to help firms determine their necessary and reasonable costs in setting fees and charges applied to customers in payment difficulties. These proposals support the price and value outcome under Principle 12 (Consumer Duty).

Sustainable repayment arrangements: The FCA proposes to introduce a requirement that firms must take all reasonable steps to ensure that any repayment arrangements agreed with customers are sustainable. New supporting guidance will be added to clarify that a repayment arrangement is unlikely to be sustainable in the context of a forbearance scenario if it results in the customer being unable to meet their priority debts and essential living expenses.

Reviewing forbearance measures: The FCA is consulting on a requirement that firms should take reasonable steps to ensure that forbearance measures put in place remain appropriate. Supporting guidance sets out what might be considered ‘reasonable steps’.

Income and expenditure assessments: A new rule (currently reflected in the TSG) is proposed requiring firms to assess income and expenditure in an objective manner.  Further guidance sets out the FCA’s expectation that firms have clear written policies on how they conduct income and expenditure assessments and make available to customers records of these assessments so that they can share them with other lenders and debt advice providers.

Repossessions and voluntary terminations: Reflecting the TSG, the FCA proposes to introduce a new rule (with supporting guidance) that firms must not commence or continue repossession action for so long as the customer is meeting the terms of an agreed forbearance arrangement. Guidance from the TSG on voluntary terminations will be transposed.

Revisions to CONC App 1.2: The FCA proposes to amend the rules in CONC App 1.2 in relation to the assumptions that should be applied when calculating the APR in relation to an open-ended regulated credit agreement. Lenders will be required to include in their calculation of the APR situations where they may exercise their rights under a continuous payment authority to take all of the balance outstanding under the agreement which results in regular redrawing by the customer.

7. Mortgage-specific proposals

Increasing balances: The FCA’s supervisory work has highlighted that some firms do not consider the impact of a forbearance arrangement on the customer’s overall balance. The FCA wants firms to consider whether it is appropriate to reduce the interest rate or apply simple interest in all cases.  The FCA also proposes to make explicit that firms, when considering what may be appropriate in a customer’s individual circumstances, must take into account the effect of any potential arrangements on the customer’s overall balance.

Shortfall statements: The FCA proposes to make changes to existing rules at MCOB 13.4.1R and MCOB 13.5.1R to require firms to give customers more timely disclosure of information on any payment shortfall.

Capitalisation: The FCA proposes to amend the guidance in MCOB 13.3.4DG to make it clearer that firms can take a more balanced approach to considering the benefits and costs of capitalisation and can agree to capitalisation where it is appropriate in accordance with the customer’s best interests. Guidance will set out where capitalisation may be appropriate.

Ensuring arrangements remain appropriate: The FCA is consulting on a new rule that a firm must take reasonable steps to ensure that any arrangement with a customer in payment shortfall remains appropriate. It is also consulting on guidance on what it considers to be ‘reasonable steps’. This will depend upon the customer’s circumstances and the nature of the arrangements.

Taking account of wider indebtedness: Additional guidance will be provided at MCOB 13.3.4CG to clarify that a firm should take account of a customer’s wider indebtedness when considering what options are appropriate.

Sharing income and expenditure assessments: The FCA proposes to add guidance to MCOB 13.3.4CG which says that firms should offer to share income and expenditure assessments with customers where possible so that they can share them with other lenders or debt advice providers.

Record keeping: The FCA proposes to extend the rule in MOCB 13.3.9R which requires firms to maintain adequate records of its dealings with a customer whose account has a payment or sale shortfall to include records of dealing with customer who may have payment difficulties. The FCA proposes to clarify that the requirement in MOCB 13.3.9R to record telephone calls with customers that discuss any amount in arrears or subject to payment shortfall charges includes video calls. The FCA does not, however, propose to extend this provision to customers facing payment difficulties.

Application to home purchase plans: The scope of MCOB 13.4.1R and MCOB 13.5.1R will be amended to include customers who are in shortfall, irrespective of the account attracting charges and so MCOB 13.8 which refers to home purchase plans will also be amended to reflect this change.

Article 3(1)(b) creditors and peer-to-peer platform operators: Some of the proposed changes to MCOB 13 will affect some article 3(1)(b) creditors and some peer-to-peer operators.

Next steps

The FCA’s consultation closes to comments on 13 July 2023. The FCA plans to publish a Policy Statement in H2 2023. It expects the rules to come into force in H1 2024 and proposes to withdraw the TSG at the same time.