The full impact of the Coronavirus Disease ("COVID-19") is yet to be determined but already, it has led to severe market volatility, business closures, furloughing of staff, interest rate cuts and diminished consumer confidence. The Financial Conduct Authority ("FCA") has been taking unprecedented measures to protect consumers during this pandemic, including issuing specific guidance to firms in specific sectors, including Motor Finance providers. Sushil Kuner from Gowling WLG's Financial Services Regulatory team explores the impact of COVID-19 on Motor Finance firms and practical steps which firms should be taking in response.
Treating Customers Fairly
On 24 April 2020 the FCA implemented a package of measures aimed at directly supporting consumers facing payment difficulties due to COVID-19. These measures included guidance for regulated firms that issue regulated motor finance agreements on how to treat customers experiencing temporary financial difficulties due to COVID-19, fairly ("the Guidance").
The Guidance applies to firms who enter into regulated hire purchase agreements, such as personal contract purchase ("PCP") agreements, conditional sale agreements or other agreements used to purchase a vehicle where the creditor is also the supplier (e.g. credit sale). It also applies where there is a restricted use debtor-creditor agreement (apart from credit cards) used for motor finance and in relation to personal contract hire ("PCH") agreements. Any firms that have acquired any of these types of agreements will also be subject to the Guidance.
The Guidance applies from 24 April 2020 and is only intended to cover scenarios where motor finance customers are facing temporary payment difficulties due to circumstances arising out of the COVID-19 pandemic and out of their control. It is intended to help those who might be having temporary difficulties in making their finance or leasing payments due to a loss or reduction in income, or income of other members of their household, or to those who expect to experience such difficulties. The FCA has made clear that it will review the Guidance within three months of its commencement and may revise the Guidance if appropriate, depending on how the impacts of COVID-19 develop.
Where a customer was in pre-existing financial difficulty, the FCA's existing forbearance rules and guidance in its Consumer Credit Sourcebook ("CONC") would continue to apply. These include, for example, the firm considering suspending, reducing, waiving or cancelling any further interest or charges, deferring payment of arrears or accepting token payments for a reasonable period of time.
The Guidance relates to four main areas:
- Payment deferrals - where customers are experiencing payment difficulties, or reasonably expect to experience temporary payment difficulties as a result of circumstances relating to COVID-19 and wish to receive a payment deferral, the FCA has made clear that it expects firms to grant such a payment deferral for three months unless the firm determines (acting reasonably) that it is obviously not in the customer's interests to do so. A payment deferral means an arrangement under which a firm permits the customer to make no payments (or a token payment not exceeding £1 where firms' systems will not allow a zero payment) under their agreement for a specified period without being considered to be in arears. Customers will be able to request a payment deferral at any point within three months of commencement of the Guidance.
Firms are expected to make clear in their communications, including on their websites, that payment deferrals are available in the circumstances. They should make it simple for customers to submit such request by both online and phone. Where, during the course of interactions with a customer, the customer provides information suggesting that s/he may be experiencing payment difficulties, or could reasonably expect to, the firm should ask whether the customer wishes it to consider granting a payment deferral. Where a payment deferral request is granted, the firm should be mindful of its obligations to ensure communications are fair, clear and not misleading and inform customers of the full impact of a payment deferral (e.g. continuity of interest during the period of deferral, any changes to the term or future payments etc.).
In determining whether a three month payment deferral is obviously not in customers' interests, the FCA has made clear that firms should consider both the customer's need for immediate temporary support and the longer-term effects of a payment deferral on the customer's situation, in particular, the customer's ability to repay any accrued interest once the payment deferral ends, and over what period (firms are not prevented from continuing to charge interest under regulated credit agreements during any deferral period). The interest rate and remaining term will be among the relevant considerations. For example, if a customer's greater overall debt burden is greater compared to other solutions (e.g. reduced interest or waivers of interest) that could equally meet a customer's needs and that debt burden would be clearly unsustainable.
Where a three month payment is deemed not to be appropriate, the FCA will expect firms to offer other ways to provide temporary relief to customers, for example, reduced payments, rescheduled terms, payment deferrals of less than three months where there is a shorter period of a reduction in income or where the loss of income is partial.
For such payment deferral requests, the FCA is dis-applying CONC 6.7.18R and 6.7.19R which require firms to make enquiries with each customer to determine the circumstances surrounding a request for a payment deferral. There is therefore an inference that a firm should not, in the current pandemic, be unnecessarily delaying a determination by requesting evidence of payment difficulties.
Where customers have received a payment deferral, or other appropriate temporary solution in light of COVID-19, and are entitled to forbearance under the FCA's existing rules at the end of the deferral period, the FCA has made clear that it expects any interest accrued during the relevant period to be waived.
In accordance with the relevant Coronavirus Data Reporting Guidance published by the Credit Reference Agencies, firms should not report a worsening arrears status on the customer's credit file during the payment deferral period. However, where additional forbearance is required, the FCA would expect this to be reflected in the usual manner.
- PCP Guaranteed Minimum Future Value ("GMFV") and PCH Residual Value ("RV") - the FCA has made clear that when granting a payment deferral or other option for assisting customers affected by COVID-19, firms should not seek to unilaterally alter any aspect of the original agreement in a way which takes advantage of the customer's necessity, lack of experience of weaker bargaining position or which otherwise would lead to unfair outcomes.
For example, firms should not recalculate the GMFV or RV in a way that is based on temporarily depressed market conditions due to the effect of coronavirus in an attempt to recover more of the original car value through the periodic payments. Firms should also have regard to the Consumer Credit Act 1974 ("CCA") unfair relationship provisions.
- PCP agreements reaching term end during the Guidance period - where a customer wishes to retain the vehicle but does not have funds to cover the balloon payment due to COVID-19 related financial difficulties, firms should work with the customer to find an appropriate solution.
Where a customer wishes to return the vehicle, but this is impractical due to COVID-19 social distancing measures, firms should inform the customer that they are unable to use the vehicle once the agreement has been terminated or come to an end.
- Repossessions - where the customer has the right to use the vehicle, firms should not take steps to terminate the agreement or seek to repossess the vehicle where the customer is experiencing temporary payment difficulties as a result of the impact of COVID-19 and needs to use the vehicle. Firms who have issued hire purchase, conditional sale or other regulated credit agreement should have again regard to the CCA unfair relationship provisions.
Consequences of not adhering to Guidance?
The FCA has made clear that the Guidance builds on Principle 6 of the FCA's Principles for Business, i.e. that a firm must pay due regard to the interests of its customers and treat them fairly. Given that the FCA is a Principles-based regulator and is increasingly focused on outcomes, motor finance firms should take care to act in accordance with the Guidance.
In the current environment, firms should expect the FCA to be more vigilant in the consumer credit sector, especially given this is likely to be one of the sectors most at risk of harm from the impacts of COVID-19. Where firms do not adhere to this Guidance, there is a serious risk that the FCA could take enforcement action against both firms and Senior Managers at those firms for failing to treat customers fairly.
This article was first published in Motor Finance.