As part of its response to the Coronavirus (COVID-19) pandemic, the FCA announced finalised guidance designed to support consumers facing financial hardship and struggling to repay loans. In favour of consumers, lender firms are instructed to avoid repossession up to 1 April 2021 and consider payment holidays exposing lender firms who fail to adhere to enforcement action.
With unemployment rates soaring, the financial impact of the Coronavirus (COVID-19) pandemic has been significant in relation credit extensions and consumer lending.
Initial FCA guidance encouraged firms not to enforce mortgage repossessions or repossessions of goods and vehicles pursuant to a regulated agreement before 31 January 2021, except in exceptional circumstances.
On 27 January 2021 the FCA pronounced that its proposals would be formally adopted to extend the ban of mortgage repossessions up to 1 April 2021 (save in exceptional circumstances) and to only enforce other consumer credit agreements from 31 January 2021 as a last resort where government COVID-19 guidelines (i.e. social distancing) are not undermined (“extended guidance”).
The FCAs extended guidance now runs in tandem with its guidance on repayment ‘holidays’ for regulated loans, for which consumers can apply up to 31 March 2021 and the FCAs Principle 6 (‘a firm must pay due regard to the interests of its customers and treat them fairly’), Principle 7 (‘A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading’) and Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) 2.5A.1R (‘A firm must act honestly, fairly and professionally in accordance with the best interests of its customer’).
The FCA justifies a differentiation between mortgages and other consumer credit agreements by pointing to the inconvenience and harm associated with repossessing a home during the COVID-19 pandemic and its disproportionate effect on vulnerable persons. Indeed, consumer vulnerability is held up as a consideration for lenders when determining whether or not repossession proceedings should be instituted at all, irrespective of agreement type.
With the payment and repossession holiday expiry date fast approaching, if repayments are unaffordable borrowers are advised to contact their lender as a matter of urgency to apply for a repayment holiday or reduction before the 31 March 2021. Borrowers can request a maximum repayment holiday of six months made up of two periods of three months. Lenders can only grant payment holidays of up to three months at any one time.
Despite this, the FCA acknowledges that deferring repossessions in circumstances where payment difficulties are likely to be ongoing “may not be in [the] interests [of consumers].” High interest rates and the depreciating value of goods may mean that prolonging some agreements could be more costly and have long-term detrimental effects on credit ratings.
It is apparent from the guidelines that no cost benefit analysis has been conducted by the FCA to assess the financial impact of such measures on lenders. Indeed, according to the FCA in its mortgage and coronavirus: payment Deferral Guidance dated November 2020 guidance “in considering what is in the customer’s best interests, a firm should not have regard to its own commercial interests”
The advised next steps for consumers will inevitably create an influx of consumer interactions for firms. Despite seemingly supportive guidance from the FCA on behalf of borrowers, the lack of specificity regarding decision making factors means that it remains a judgment call for the lender to determine whether, in the circumstances of each individual case, respite should be given. Such objectivity has the potential to expose lenders to allegations of guideline non-compliance and Principle 6, Principle 7 and MCOB sets a standard and basis upon which the FCA can bring enforcement action.
Given that applications for payment holidays or restructuring of payment terms must be made April 2021, it will not be long before the impact on firms is felt and FCA enforcement cases start to emerge.