Key takeaway points
The latest draft measures focus on the application of Principle 6 of the FCA’s Principles for Business (“a firm must pay due regard to the interests of its customers and treat them fairly”) and primarily cover (i) motor finance and high-cost agreements which include hire purchase agreements, personal contract purchase agreements, conditional sale agreements or other credit agreements used to purchase a vehicle where the creditor is also the supplier (the measures also apply to personal contract hire agreements, but do not apply to credit agreements where they relate to other types of goods, or to agreements for business purposes); (ii) high-cost short-term credit (HCSTC); and (iii) rent-to-own (RTO), buy-now pay-later (BNPL) and pawn broking agreements.
In respect of the guidance on motor finance agreements, RTO, BNPL and pawnbroking agreements, the measures require lenders to offer a payment freeze for up to three months to customers who are experiencing temporary difficulties meeting payments due to the COVID-19 pandemic. Under the guidance on HCSTC, the FCA expects firms to offer a payment deferral for one month to customers facing payment difficulties, and to allow the customer to repay the deferred payment over a period and in an amount that the customer can afford.
The FCA confirms in the draft guidance that these measures do not replace normal forbearance rules where these would be more suitable for a consumer in serious and immediate financial difficulty.
What is a payment deferral
The draft measures provide that where a customer is experiencing temporary financial difficulties due to the coronavirus and wishes to receive a payment deferral, firms should permit the customer to make no payments (or a token payment where zero payment is inapplicable) under their agreement for a specified period without being considered to be in arrears. Other than for HCSTC, firms may continue to charge interest under regulated credit agreements during the deferral period. However, firms should give customers adequate information to enable them to understand the implications of a payment deferral. The FCA expects that regulated firms will not charge the customer any fees in connection with permitting such payment deferral.
In respect of pawnbroking agreements, the FCA guidance provides that firms should extend the redemption period for three months, unless the redemption period has ended, in which case they should agree not to give notice of their intention to sell an item of pawn for that period. Where a notice of intention to sell has already been provided, firms will be expected to suspend the sale for three months. If a customer is within a promotional period then the FCA expects firms to extend this by the length of the payment deferral. Where pawnbrokers and RTO firms are unable to redeem, collect or repossess goods, they should not pass on any additional charges or fees to the consumer.
The guidance provides that firms should not report a worsening arrears status on the customer’s credit file during the payment deferral period.
PCP agreements
Where a firm enters into a new agreement with the customer to amend the original PCP or PCH agreement in order to grant a payment deferral, it should not change the agreement in a way that is unfair. For example, firms should not try to use temporary depreciation of car prices caused by the coronavirus in an attempt to recover more of the original car value through periodic payments. Firms should have regard to the unfair relationship provisions in the Consumer Credit Act 1974 which are generally very much in the customer’s favour.
At the end of the PCP agreement, where a customer wishes to keep their vehicle but does not have sufficient cash to pay the balloon payments due to the coronavirus pandemic, the FCA expects regulated firms to find an appropriate solution for the customer.
Repossessions
The draft measures confirm that where the customer is experiencing temporary payment difficulties as a result of circumstances relating to the coronavirus and needs use of the vehicle, firms should not take steps to end the agreement or repossess the vehicle. The FCA views terminating an agreement or repossessing a vehicle as likely to contravene Principle 6.
The guidance provided on RTO, BNPL and pawnbroking agreements also provides that where a customer needs the goods during the guidance period, repossession should not take place.
Alternative measures
Where the firm has determined that a three-month payment deferral is not in the best interests of the customer, the firm should offer alternative ways to provide temporary relief to that customer, such as waiving interest or rescheduling the term of the loan.
Additional CONC rule changes
The FCA has published a draft version of the COVID-19 Motor Finance and High Cost Credit Instrument 2020, which makes consequential amendments to the Consumer Credit sourcebook (CONC), disapplying the expectation that a firm should make enquiries with each customer to determine the circumstances surrounding a request for a payment deferral and whether a deferral is in the customer's interests.
Timing
As a consequence of the urgent implication of COVID-19 the FCA requested comments on the draft guidance by 5 pm on Monday, 20 April 2020, with the aim of publishing the final guidance by Thursday, 23 April 2020 and the guidance coming into force immediately thereafter.
Next steps
In our view it is inevitable that the guidance will be published by the FCA later this week largely as drafted. Lenders need to urgently amend their policies and procedures for dealing with borrowers to ensure compliance. We expect that the FCA will be reviewing lenders’ compliance with these new requirements over the coming weeks.
In the context of a securitisation transaction, where receivables and other rights in motor finance agreements and other in-scope credit products are sold to an SPV, the originator or servicer should also review the transaction documents to consider the consequences of complying with these latest FCA measures. For example: would payment deferrals comprise a permitted modification under the documents? What are the consequences of a reduction of income from the portfolio? Would a payment deferral lead to an early amortisation event or event of default? And what steps can be taken to cure any potential issues?
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com.
Client Alert 2020-258
