The FCA has published guidance on the requirement to serve a default notice before a creditor enforces a guarantee or indemnity following breach of an agreement. Greg Standing, partner and head of the retail and finance automotive sector group at Gowling WLG, analyses the key points.
In January 2017, the FCA published guidance on its interpretation of the requirement in Section 87 (S87) of the Consumer Credit Act 1974 (CCA) to serve a default notice before a creditor enforces a guarantee or indemnity following breach of a regulated credit or hire agreement.
The guarantee or indemnity will have been given by an individual (or partnership) other than the borrower or hirer.
The guidance is around what constitutes 'enforcement' of a guarantee and takes account of comments received on draft guidance issued in 2016.
The FCA's guidance is that a guarantee is enforced not just when a court order is obtained, but also when, following breach of the regulated agreement by the borrower, the lender demands payment by the guarantor, or takes payment from the guarantor by using a continuous payment authority (CPA) or direct debit mandate that was previously provided, without appropriate prior notification to the guarantor.
However, a guarantee is not enforced if payment is made voluntarily by the guarantor following notification of the breach by the borrower and without any element of compulsion being present, or the lender requests payment by the guarantor but makes it clear that it is not thereby demanding payment.
The FCA's view is that the exercise of the CPA/direct debit without appropriate prior notice is sufficiently coercive as to constitute enforcement under S87, as the guarantor does not know when payment may be taken, or the amount.
However, where the guarantor is appropriately pre-notified before payment is taken under the CPA, the guidance is such that this would not be sufficiently coercive to constitute enforcement, as the guarantor has the opportunity to object or to cancel the CPA/direct debit to avoid payment being taken.
The guidance provides that the FCA expects a lender to clearly inform the guarantor of:
- The nature and extent of the borrower's breach of the regulated agreement,
- The amount of the overdue payment(s) and the lender's intention to take payment from the guarantor using the CPA/direct debit,
- The likely timing of those payment(s),
- The guarantor's right to cancel the CPA/direct debit, but making it clear that that will not extinguish the guarantor's obligations under the guarantee.
The guarantor should have a reasonable period to respond to the notification, which the FCA expects to be at least five working days following notification.
If no response or CPA/direct debit cancellation takes place within that period, the FCA would not regard the subsequent use of the CPA/direct debit facility as 'enforcement' of security requiring a default notice in accordance with S87 of the CCA.
This article originally appeared in Motor Finance in February 2017.