Out-Law Analysis 5 min. read
31 Mar 2020, 2:00 pm
But firms must also ensure that fair treatment and offers of forbearance are carefully balanced with ongoing regulatory obligations, which can't take a backseat even in times of immense operational disruption and uncertainty.
There has been an increased focus on how lenders handle customer debt, particularly with the introduction of Financial Conduct Authority (FCA) rules on persistent debt, as well as its focus on vulnerable customers. Lenders can expect the FCA to closely monitor and scrutinise the handling of customers experiencing financial difficulty during this time.
There are a number of options available to firms seeking to offer forbearance or other relief to customers that are experiencing financial difficulty as a result of the coronavirus outbreak, both under the FCA's Rules as well as under the terms of consumer finance products themselves. The FCA is also encouraging firms to create new initiatives to support their customers. This could include agreeing to waive fees, payment holidays, extending other contractual or regulatory timeframes, waiving cash withdrawal limits, or agreeing to end deposits early.
In the case of mortgages and other home finance arrangements, the FCA has issued guidance on how it expects mortgage lenders and administrators to treat customers fairly during this time. The most significant development is the expectation that customers experiencing or potentially experiencing difficulties in meeting repayments should be offered a payment holiday of up to three months.
Repossession activity should also be halted during this time even where lenders have already obtained a possession order, unless the customer chooses otherwise.
How lenders treat customers that are vulnerable, or at risk of being vulnerable, is likely to come into sharper focus over the coming months, and how these issues are handled is likely to be one of the greatest tests of a firm's culture, value and purpose.
Firms should ensure they are monitoring their customers and identifying where payment difficulties are arising, or have the potential to arise. Lenders should also ensure their communications around this are fair, clear and not misleading – particularly around how interest will be treated during any payment holiday granted.
A key issue for lenders will be deciding how to structure forbearance arrangements for consumer credit customers. Lenders should consider whether it is appropriate to issue waivers across customer segments or product groups, or if individual customers can be offered forbearance within the scope of the FCA regime (see CONC 7 of the FCA Handbook).
Where this isn't possible, lenders may need to consider amending existing agreements. If amendments are required, you will need to consider whether this will result in a "modifying agreement" within the scope of the Consumer Credit Act 1974 (CCA). This could be the case where you agree a new payment timetable with your customer, or if you agree to make a further advance.
Lenders should be aware that the modifying agreement provisions can be difficult to comply with, and where you are agreeing to slightly different terms you may need to update your standard documentation with the customer to reflect different regulatory requirements. Agreeing to new payment terms may also take an existing loan agreement outside an existing exemption under the CCA. Advances of credit may have a similar effect, and may also trigger other obligations – such as the requirement to assess affordability and issue disclosure documents.
Lenders will also need to keep an eye on other elements of the CCA, ensuring that they continue to comply with the requirements of issue statements or notices, even where forbearance has been agreed with the borrower.
Of course, contractual amendments will only be possible where they are directly agreed with the customer or otherwise supported by a robust variation power within the contract. In this context, lenders will need to be mindful of the FCA's recent guidance on unfair terms rules under the Consumer Rights Act 2015 (Unfair Terms Rules). Although customers are unlikely to make a challenge where lenders are making amendments to offer forbearance or other changes in the customer's interest, it can open the door for a broader challenge, particularly in times where customers may be experiencing difficulties.
In its 2017 Financial Lives survey (201-page / 8.4MB PDF), the FCA found that 50% of UK adults display one or more indicators of being vulnerable such as physical and mental health; life events; financial capability and financial resilience. The coronavirus pandemic and the measures in place to address the outbreak such as 'lockdowns' and resulting unemployment, could be a trigger for all these indicators.
How lenders treat customers that are vulnerable, or at risk of being vulnerable, is likely to come into sharper focus over the coming months, and how these issues are handled is likely to be one of the greatest tests of a firm's culture, value and purpose. Lenders will need to be particularly alive to the range and changing nature of customer vulnerabilities, and vigilant to the fact that the coronavirus pandemic is likely to lead to an increase of customers that fall into this category.
Against this backdrop, lenders should be considering how they can support customers who become vulnerable as a result of the impact of the pandemic. At a minimum, lenders should be assessing whether their existing measures, such as processes to identify and assess vulnerability, are sufficient, or whether more is required.
Lenders will need to ensure that their forbearance options are backed up by robust complaints handling procedures and a clear communication plan. Customer complaints are always a possibility, and these will need to be dealt with in line with the FCA's rules in the Dispute Resolution: Complaints Handbook (DISP) and the Principles for Businesses. Lenders should also consider the impact of remote working and outsourcing arrangements on the fair and timely handling of complaints.
Lenders should ensure there is up-to-date information available for customers, including on websites and in call centres. If you intend to offer customers forbearance, you should consider making this clear so that customers know they can turn to you for help.
Although not on the FCA's agenda, lenders should also be considering how they are managing their small business relationships – even where these fall outside the scope of the CCA or the Unfair Terms Rules. Many of your small business customers, particularly at the SME and micro-enterprise levels, will be under extraordinary pressure at the moment. Lenders should be considering their commitments to these customers under the SME Finance Charter, as well as in the context of their business plans more broadly.
Lenders should also consider the potential longer-term impact on this space. Times of uncertainty and market volatility such as this often lead to calls for change, such as the extension of some consumer protections like the Unfair Terms Rules to SMEs, and in some cases lead to larger regulatory or government enquiries.
Any plans to manage customer debt during this time must be backed up by sound operational and governance procedures. You will need to ensure your systems are set up to support any forbearance arrangements whether that be updates to customer terms and conditions, modifying agreements, payment holidays or fee waivers. Lenders will also need to consider how accounts will be flagged, and how this will link into any credit reference agency reporting protocols.
Lenders should ensure that all actions plans are taken through the usual governance procedures, that decisions are being documented, and any implemented plans are being regularly reviewed to ensure the intended fair outcomes are being delivered.
Achieving legal and regulatory compliance while managing your customers is only one part of the overall regulatory picture; and indeed your overall business response to the coronavirus outbreak. Other things to consider in the regulatory context include the impact on your firm's Senior Managers and Certification Regime arrangements, any ongoing LIBOR transition plans in place, as well as your operational resilience, business continuity and outsourcing plans.
Lauren McCarthy is a financial services regulation expert at Pinsent Masons, the law firm behind Out-Law.