The Financial Conduct Authority (FCA) has proposed a range of targeted temporary measures designed as a stop-gap to quickly support users of certain consumer credit products who are facing a financial impact because of the exceptional circumstances arising from coronavirus.
The package is intended to complement measures already announced by the government to support mortgage holders (and renters) and the assistance being provided for furloughed employees and the self-employed.
The FCA says that the measures would span a wide variety of firms and it is conducting a brief consultation on our measures. However, given the national emergency and the significant impact on consumers’ finances right now, it has asked that all stakeholders to respond within a much shorter timeframe than normal – with a deadline of 6th April 2020. If confirmed the measures would start to come into force by 9th April 2020.
- Set out the FCA’s expectations on firms to offer a temporary payment freeze on loans and credit cards where consumers face difficulties with their finances as a result of coronavirus, for up to three months.
- Ensure that for customers who have been hit financially by the coronavirus and already have an arranged overdraft on their main personal current account, up to £500 will be charged at zero interest for up to three months.
- Require firms to make sure that all overdraft customers are no worse off on price when compared to the prices they were charged before the recent overdraft changes came into force.
- Ensure consumers using any of these temporary measures should not have their credit rating affected because of this.
Christopher Woolard, Interim Chief Executive of the FCA, said “Coronavirus has caused an unprecedented financial shock with far-reaching consequences for consumers in every corner of the UK. If confirmed, this package of measures we are proposing today will help provide affected consumers with the temporary financial support they need to help them weather the storm during this challenging time.”
If confirmed, these measures will provide a short-term, temporary stop-gap, for a period of up to three months. These measures would provide an expected minimum level of financial support for consumers who until now have been financially stable. They are not a substitute for our normal forbearance where that would be more suitable for a consumer in serious and immediate financial difficulty. Where consumers can still afford to make payments, they should as normal and this is likely to be in their best long-term interest to continue to do so.
Lenders do not have to put these measures in place until they come into force. It may take a short period of time for lenders to put in place arrangements to provide these measures. Consumers should not contact their lender yet unless their lender is already offering voluntary assistance. The FCA expects to make a further announcement about these measures next week.
This guidance would not prevent firms from offering more generous assistance to their customers, and some already are.
The FCA measures include:
Overdrafts: Consumers who need additional financial support because of coronavirus with an existing arranged overdraft will be able to request from their provider that up to £500, on their main personal current account, is provided at 0% for up to three months. Alongside this customers without an overdraft on their main personal current account are able to request this facility.
Our previously announced overdraft rules come into force on 6 April. Firms can only charge a single annual interest rate for arranged and unarranged overdrafts. This will significantly reduce the cost of unarranged borrowing, also providing vital protection during this period. The end of fees and charges for borrowing means that all consumers will be clear about what they’re paying. Under the FCA’s rules over 7/10 consumers will be better off or no worse off. In some firms, even more consumers are due to benefit.
However, some firms have recently decided to increase their arranged overdraft prices. Over the next 90 days, firms would have to ensure all consumers are no worse off and not paying more than they would have paid under previous prices.
Credit cards, store cards and catalogue credit: Customers facing financial challenges due to coronavirus would be able to ask for a three-month payment freeze or to pay a nominal payment on credit cards, store cards and catalogue credit. Firms could consider other measures, such as reductions in monthly payments, if appropriate. In addition, customer cards would not be suspended during this period.
Personal loans: Customers with personal loans who face difficulties with their finances as a result of coronavirus would also be able to ask for a three-month freeze if needed.
Treatment of interest: With the exception of the £500 overdraft proposal, firms would be entitled to charge a reasonable rate of interest where a customer requests a temporary payment freeze. In the event that a customer requires full forbearance that interest should be waived.
Responding to the measures Stephen Jones, Chief Executive of UK Finance, said “All lenders are ready to support their customers during this unprecedented situation, with many individual firms already helping with relief on overdrafts and other unsecured debts.
“We have been talking with the regulators about the need to change the rules to enable lenders to provide further help for their customers, where it is needed most. The proposed changes to the FCA’s rules should enable lenders to deliver further support to their customers and we will continue to work with the regulator as part of the industry’s commitment to get the country through these difficult times. ”
“Lenders want to ensure that customers are both helped with their current financial circumstances and able to manage their borrowing when the crisis has passed. It is critical that the FCA’s proposals do not disrupt the provision of credit to borrowers and takes account of the business models of all credit providers including those outside the mainstream market.”
“Firms have been taking a record volume of calls due to Covid-19 while facing the same pressures on staffing as the rest of the country. Where possible we would therefore encourage customers to check their lender’s website first to see if it answers their question, and consider getting in touch via online chat, social media and online banking and mobile apps.”
Joanna Elson OBE, Chief Executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline, said “The financial shock to households that the Coronavirus outbreak has caused is like nothing we have seen before – and the FCA is right to step in to ensure payment freezes on loans and credit cards where customers are struggling.”
“We need to know more, however, about what the regulator intends to do on other types of borrowing like car finance, guarantor loans and other high cost short term credit products. For forbearance to work, it has to cover all forms of borrowing, to help people through this difficult period.”
“Some firms have been ahead of the regulator in offering targeted forbearance for consumer credit customers affected by Covid-19 – but it’s important that all firms offer the same support. The FCA should also be prepared to extend these measures beyond three months if needed.”
Peter Tutton, Head of Policy at StepChange Debt Charity, said“We have already seen a number of firms introducing temporary payment holidays and forbearance, but to know that as a bare minimum people would effectively have a three-month freeze period would provide enormous peace of mind to many. This approach would also help debt advice organisations by introducing a welcome and clear expectation level of minimum standards of help people can rely upon, reducing the need for constant checking on what individual creditors might be offering as a stopgap emergency measure.”
Dame Gillian Guy, Chief Executive of Citizens Advice, said “These proposals offer a welcome short-term reprieve for many of those suddenly facing the immediate financial shock of coronavirus. But the debt will still be there waiting for borrowers at the end of these three months, and could suddenly have a high interest rate piled on top of it.”
“Another major concern is that these protections don’t seem to cover the most vulnerable borrowers, such as those with payday loans. The financial fallout of coronavirus will not be fixed by July. The FCA may well need to extend these measures to ensure all customers are protected until they can get their finances back on track.”
Vim Maru, Retail Director, Lloyds Banking Group, said “We welcome today’s guidance from the FCA and we continue to work closely with them through this unprecedented time. Since the start of the pandemic we have helped thousands of customers using the temporary support measures already introduced.”
“Customers can apply for payment holidays on mortgages and loans using a new online application that provides a decision in days, this will also be available for credit cards this week.”
“There are no missed payment fees on mortgages, credit card and loans for three months and mortgage offers are now valid for an additional three months. From 6th April, Lloyds Bank, Halifax and Bank of Scotland customers will also be able to access a £300 interest-free overdraft and we will introduce a new overdraft charging structure which means all of our customers will pay less interest than they do today. ”
“Recently launched dedicated phone lines for our over 70s customers and NHS staff have already helped thousands of customers reach us swiftly for support.”
Aneesh Varma, Founder and CEO at Aire said “We welcome the FCA’s proposed measures to support users facing financial difficulties due to coronavirus, however, we feel that a period of three-months is unlikely to be a long enough timeframe. Lenders will need to show forbearance for many months to come.”
“Millions of consumers will experience a great deal of pain over the coming months, and this crisis will test the limits of lenders’ ability to understand what is happening in their loan portfolios, and their ability to support customers experiencing difficulties.”
“Employers have already let people go in large numbers in sectors such as hospitality, travel, leisure, retail, arts and entertainment. Many of those already affected are young people working for minimum wage. We can expect many of the UK’s 5.8 million self-employed, freelancers and full-time gig workers to be hit soon after.”
“Lenders can expect to see default rates increase dramatically throughout 2020 and possibly well into next year too. Aire estimates that the number of people in the UK missing one or more credit payments could increase from around 700,000 last year to over 2 million this year.”
“Lenders are, understandably, stretched and struggling to build accurate, up-to-date pictures of their customers. As the crisis develops, and customer facing teams continue to be disrupted by school closures and enforced isolation, lenders will be challenged to provide the scale of support required by those customers who desperately need it.”
Deborah Ware, Chief Operating Officer of Financial Wellness Group said “With millions of people experiencing an income drop because of coronavirus, these new measures will be very welcome.”
“To make the scheme quick and simple to implement and to ensure that all lenders treat customers consistently, interest and charges should be frozen during the three-month payment break period. Its vital that consumers don’t find that their debt has increased whilst they are unable to meet their repayments.”
“Advice providers can play a central role in this new scheme: for consumers looking for assistance, a regulated debt advice provider can contact all their lenders on their behalf. Advice providers make this type of request daily and can deal efficiently with lenders.”
“When these measures expire, after three months, there will be a further spike in demand for debt advice and the FCA, MaPS and HM Treasury should ensure the sector is adequately resourced to ensure all who need advice are able to access it.”
John Crossley, Head of Money at comparethemarket.com, said “The FCA is right that problems in the overdraft market need to be addressed at this challenging time. It is encouraging that the regulator has now ordered banks to cut interest rates on arranged overdrafts of up to £500 to zero, for up to three months for those people struggling financially as a result of coronavirus. The 39.9% interest rate, which many banks were moving towards could seriously harm people who may be facing financial difficulty at the moment.”
“Where possible, it is important for people to keep on top of regular payments and practice good household financial management, as this is likely to leave you better off when life does eventually return to normal. However, this will not be feasible for many households at the moment. Our research suggests that 40% of UK adults have gone overdrawn in the last 12 months, so the measures announced by the FCA should help to relieve some financial pressure. The next few months are going to be very tough, both mentally and financially so regulation like this, which helps those who may be struggling and needing to dip into their overdraft for emergencies, is the right thing to do.”