The Guidance
The FCA's finalised temporary guidance in relation to motor finance agreements and coronavirus (the Guidance) was published on 24 April 2020 effective 27 April 2020.
Which category of customers is the Guidance intended to assist?
The Guidance is intended to afford exceptional and immediate relief, for a temporary period only, to customers who have been, or expect to be, facing financial difficulties arising out of coronavirus and where those customers expect their financial difficulties to be temporary.
Which category of customers is the Guidance not intended to assist?
The Guidance is not intended to apply to customers who were already experiencing payment difficulties unrelated to coronavirus and the FCA's existing forbearance rules and guidance in CONC will continue to apply to those customers. In other words, the Guidance is not intended to have any relevance in circumstances other than those related to coronavirus.
To what type of credit agreements does the Guidance apply?
The Guidance applies to regulated firms that issue regulated motor finance agreements, including hire purchase agreements, such as personal contract purchase (PCP) agreements, conditional sale agreements or other debtor-creditor – supplier agreements used to purchase a vehicle. It also applies in relation to personal contract hire (PCH) agreements and extends to firms, for example, debt purchase companies that have acquired such agreements.
To what type of credit agreements does the Guidance not apply?
The Guidance does not apply to credit agreements or consumer hire agreements where the agreements relate to other types of goods.
The Guidance does not apply to agreements for business purposes. The FCA has commented, however, that firms should recognise that the Principals, including Principal 6 "A firm must pay due regard to the interests of its customers and treat them fairly." extend to all business customers, and may firms find the Guidance helpful when considering how to comply with the Principles in relation to business customers.
What support does the Guidance offer customers?
The Guidance introduces a payment deferral arrangement under which a firm permits the customer to make no payments (or a token payment not exceeding £1.00 where the firm's system will not allow a zero payment) for a specified period without the customer being considered to be in arrears. As the customer is not deemed to be in arrears, guarantors should not be pursued.
Circumstances in which a payment deferral may be appropriate is where there is, or will be, a coronavirus related temporary reduction in household income that would have otherwise been used to make finance or leasing payments.
Payment deferral: some key features
The Guidance provides that where a customer is experiencing or expects to experience temporary coronavirus related financial difficulties and wishes to receive a payment deferral, a firm should grant the customer a payment deferral for 3 months unless the firm determines (acting reasonably) that it is obviously not in the customer's interests to do so.
In relation to whether a 3 month payment deferral is "obviously not in the customer's interests" the Guidance states that:-
"... firms should consider both customers' need for immediate temporary support and the longer-term effects of a payment deferral on the customers' situation, in particular the customer's ability to repay any accrued interest once the payment deferral ends, and over what period. The interest rate and remaining term will be among the relevant considerations. For example, a payment deferral would obviously not be in customers' interests if it would give the firms' customers a greater overall debt burden compared to other solutions (that might involve reduced or waived interest for example) that could equally meet customers' needs and that debt burden would be clearly unsustainable."
The FCA have dis-applied CONC 6.7.18R and 6.7.19R so that, under the guidance, there is no expectation that the firm makes enquiries with each customer to determine the circumstances surrounding a request for a payment deferral, or whether this is not in the customer's interests. It should be noted that this dispensation i.e. there being no expectation to enquire into the customer's circumstances applies only to a payment deferral under the Guidance. If, therefore, a firm extended a 3 month payment deferral to all its customers, including customers who were not impacted by coronavirus, then in relation to those customers (not affected by coronavirus) the firm would be in breach of CONC if it had not enquired into their circumstances.
Where a firm considered a 3 month payment deferral not appropriate, it should, without unreasonable delay, offer ways to provide temporary support to the customer in accordance with treating the customer fairly. This could include reduced payments, or a rescheduled term. This could also include a payment deferral of fewer than 3 months if, for example, the expected loss of income is for a shorter period, or accepting a sum below the normal payment due if, for example, the loss of income is partial.
The Guidance does not preclude firms from providing more favourable forms of assistance to any customer including a longer payment deferral if deemed appropriate. In considering longer payment deferrals, firms should consider the customer impact of depreciating asset values.
Firms are not prevented from continuing to charge interest during a deferral period. If the customer is unable to resume payments at the end of the payment deferral period, the firm should work with the customer to resolve these difficulties in advance pf payments being missed.
Where a customer, who received a payment deferral, or a different solution for a period where a payment deferral has been deemed not in the customer's interests, as a result of circumstances relating to coronavirus, is entitled at the end of the period to forbearance under the existing CONC rules, then the FCA expects any interest accrued during the relevant period to be waived and an income and expenditure assessment carried out.
Communicating with customers
The Guidance requires that firms should"... make clear in their communications, including on their websites, that payment deferrals are available". If the customer indicates that he is experiencing, or expects to experience a temporary payment difficulty due to a coronavirus related issue, the firm should ask whether the customer wishes it to consider granting a payment deferral. The Guidance stipulates that "A firm should give customers adequate information to enable them to understand the implications of a payment deferral." This is underpinned by Principle 7 which requires that firms must communicate information to customers"...in a way that which is clear, fair and not misleading." It is, therefore, important that firms clearly explain to customers the consequences of interest that is accrued during a payment deferral period and its effect on the balance due under the credit agreement and on future payments.
Where the duration of an agreement is being extended, firms should highlight to the customer the need to consider wider implications of the extension, such as potential knock-on effects on insurance, warranties, breakdown cover or MOT.
What is the effect of a payment deferral, under the Guidance, on the customer's credit score?
The Guidance provides that during a payment deferral period the customer"... would not be considered in arrears and in accordance with the Coronavirus Data Reporting Guidance published by the Credit Reference Agencies (CRAs), firms should not report a worsening arrears status on the customer's credit file during the payment deferment period. At the end of the deferment period usual CRA reporting would resume.
What about PCP Guaranteed Minimum Future Value (GMFV), and PCH Residual Value (RV)?
When granting a payment deferral or other option for assisting customers under PCP or PCH agreements affected by coronavirus, firms must treat customers fairly and not seek to modify, or seek to unilaterally alter, any aspect of the original agreement in a way that takes advantage of the customer. In particular, firms should not recalculate the GMFV or RV in a way that is based on temporarily depressed market conditions due to coronavirus issues.
What about PCP agreements reaching the term end during the period of the Guidance?
Where a customer wishes to retain the vehicle but cannot afford the balloon payment due to coronavirus issues,"... firms should work with the customer to find an appropriate solution."
Firms should not try to use a temporary depreciation of car prices caused by the coronavirus situation to recalculate Personal Contract Purchase (PCP) balloon payments at the end of the term in a way that leads to an unfair customer outcome. Firms must act fairly where contractual terms are adjusted.
What about vehicle repossessions?
The Guidance provides that where a customer is experiencing temporary financial difficulties relating to coronavirus, has the right to use the vehicle and needs the use of it, firms should not take steps to terminate the agreement or seek to repossess the vehicle, whether by court action or otherwise. A breach of this repossession moratorium would very likely contravene Principle 6.
If a customer genuinely consents and requests that a vehicle is repossessed then the repossession may continue.
The repossession moratorium created by the Guidance does not apply where a customer has a financial difficulty which is not coronavirus related, although in these cases, CONC 7 rules on forbearance would apply.
When does the Guidance come in to effect?
The Guidance will come into force for 3 months on 27 April 2020 and customers are entitled to request a payment deferral at any point after the Guidance comes into force. This means that a payment deferral could go beyond the point where the 3 month window for requesting a deferral expires, and a 3 month payment deferral, requested in early July could last until early October 2020.
The FCA will review the Guidance over the next 3 months in light of developments regarding coronavirus and may revise it if appropriate. There can be no certainty as to whether the FCA may extend the Guidance beyond this period.
Please note that the above is not an exhaustive analysis of the Guidance. This Legal Update is intended only to summarise some of the key changes made by the Guidance and is not intended to constitute legal advice.
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