This is the latest in a series of blogs looking at the impact on regulators with the intention of shedding light on a particularly significant regulatory event.
On Friday, Financial Conduct Authority (FCA) consulted on another package of temporary measures, this time supporting customers with motor finance and high-cost credit agreements, including high-cost short-term credit (HCST), rent-to-own (RTO), buy-now-pay-later (BNPL) and pawnbroking. When these proposals come into force this Friday, they are likely to require considerable interpretation.
My thanks to Alex Sanger and Eddie Binks for their help with this analysis.
As with the recent proposals for consumer credit forbearance packages, this consultation has a super-short turnaround time, with responses due by 5pm today. This again highlights the considerable pressure the FCA feels to act faster and the consequent speed with which firms will need to adapt their strategies and implement the temporary new rules.
The focus remains on payment freezes and how firms consider the build-up of interest. Where an interest freeze is not in the consumer’s best interest, firms should offer alternative solutions, such as waiving interest and charges, or rescheduling the term of the loan. Where customers do not require full forbearance, apart from HCST, firms can still charge interest during the payment freeze.
Below, we outline the FCA’s proposals and some related areas firms should consider.
Motor finance: The FCA wants firms to provide a three-month payment freeze for customers experiencing difficulties meeting payments as a result of COVID-19. Firms should not seek to end the agreement, take possession of the vehicle, or amend the contract in a manner that is unfair for the customer. They should also work with customers who wish to purchase their vehicle at the end of the term but do not have sufficient funds due to COVID-19.
HCST: The FCA is proposing that payday lenders provide a one-month interest-free payment freeze (instead of three-month), reflecting their shorter loan periods. Following this, they should allow customers to make up the deferred payment in an affordable manner.
Other products: The FCA is also proposing that firms offer three-month freezes to customers with RTO, BNPL and pawnbroking agreements. Pawnbrokers would also extend redemption periods for the duration of the freeze and agree not to serve notice to sell any items for customers whose redemption period has already ended. And RTO firms would refrain from repossessing items customers required during the freeze period.
Other areas to consider
Given the FCA’s continuing need for quick turnaround, firms will have to be flexible in assessing the appropriateness of how it treats individual customers, to ensure fair outcomes and take account of any longer-term difficulties.
Firms will already have processes in place to assist customers who are experiencing financial difficulty but it will be a significant challenge to respond to customer demand for these new forbearance measures. For example, they will need to consider how well they are prepared for a sudden increase in call volumes, and if they have enough compliance and operational support.
Lenders expecting high volumes of their customers to enter a repayment or interest freeze (or both), and/or who are seeing an increase in default levels, may be concerned whether they have enough capital and liquidity. These concerns will continue beyond the immediate crisis and firms will need to review their capital and liquidity strategies accordingly.
We have extensive experience working with consumer credit firms, particularly motor finance and high-cost credit lenders, frequently conducting reviews of firms' collection and arrears' practices. Consequently, we are in a strong position to advise you how to incorporate these changes into your business model and to help you implement them operationally. Later, we can provide comfort to senior management by helping you review whether the new arrangements are delivering fair outcomes to customers.
FCA proposes help for motor finance and high cost credit customers (17th April 2020)