The Financial Conduct Authority (FCA) has announced a proposed package of measures to directly support consumers facing payment difficulties due to coronavirus (Covid-19). The range of targeted temporary measures covers the motor finance and high cost credit agreements, which include: high-cost short-term credit (including payday loans), buy-now pay-later (BNPL), rent-to-own (RTO) and pawnbroking.
The proposals are intended to complement the measures already announced by the government to support consumers during the coronavirus pandemic.
Christopher Woolard, interim Chief Executive at the FCA, said “We are very aware of the continued struggle people are facing as a result of the pandemic. These measures build on the interventions we announced last week, and will provide much needed relief to consumers during these difficult times.”
“We have tailored our measures to specific products. For most of these proposals, firms and consumers should consider the amount of interest which may build up, and balance this against the need for immediate temporary support. If a payment freeze isn’t in the customer’s interests, firms should offer an alternative solution, potentially including the waiving of interest and charges or rescheduling the term of the loan.”
Within motor finance the FCA expects firms to provide a 3-month payment freeze to customers who are having temporary difficulties meeting finance or leasing payments due to coronavirus. If customers are experiencing temporary financial difficulties due to coronavirus, firms should not take steps to end the agreement or repossess the vehicle.
The FCA has also proposed that firms should not change customer contracts in a way that is unfair. For example, firms should not try to use temporary depreciation of car prices caused by the coronavirus situation to recalculate Personal Contract Purchase (PCP) balloon payments at the end of the term. The FCA says that it will expect firms to act fairly where terms are adjusted.
Where a customer wishes to keep their vehicle at the end of their PCP agreement, but does not have the cash to cover the balloon payment due to coronavirus-related financial difficulties, firms should work with the customer to find an appropriate solution.
High-cost short-term credit (including payday loans)
The FCA has also proposed that high-cost short-term credit (payday lending) firms will be expected to provide a 1 month interest-free payment freeze to customers facing payment difficulties due to the coronavirus pandemic. This shorter period reflects both the much shorter length of most loans and, given interest rates tend to be higher than for other high cost credit products, prevents firms from accruing additional interest during the freeze period. After the end of the freeze, the firm should allow the consumer to pay the deferred payment in an affordable way – whether for example, by 1 single payment after the end of the term or by a number of smaller instalments.
High-cost-short-term-lenders are also reminded, like all lenders, to consider whether immediate formal forbearance may be more suitable if a customer was already in financial difficulty before the impact of coronavirus.
The FCA has also proposed that other consumer credit providers s that enter into Rent To Own (RTO), Buy Now Pay Later (BNPL), or pawnbroking agreements will be expected to provide a 3-month payment freeze to customers facing payment difficulties due to coronavirus.
The FCA is proposing that firms should also take the following steps in relation to specific products:
Pawnbrokers should extend the redemption period for the 3-month freeze period or, if the redemption period has already ended, agree not to serve notice to sell an item that has been pawned for that period. If the firm has already informed the consumer they intend to sell the item, they should suspend the sale during the payment freeze
If a BNPL customer is within the promotional period, firms should extend this by the length of the payment freeze
RTO firms should provide a 3-month payment freeze. In addition, if a customer needs the goods during the guidance period, repossession should not take place
if social distancing means that pawnbrokers and RTO firms are unable to redeem, collect or repossess goods, they should not pass on any additional charges or fees to the consumer
Firms offering loan freeze arrangements, will be able to continue to charge interest during the payment freeze (except in the case of high-cost short-term credit). However, in the event that a customer requires full forbearance that interest should be waived. If a customer was already in financial difficulty, the FCA has existing forbearance rules which apply. These will 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 measures outlined today do not prevent firms from providing more favourable forms of assistance to any customer, including a longer payment freeze if appropriate.
The FCA welcomes comments on these proposals until 5pm on Monday 20th April 2020 and expects to finalise proposals by Friday 24th April 2020, with them coming into force shortly afterwards.
Debt charity Stepchange has welcomed the new draft guidance on how coronavirus-related forbearance for affected customers should be offered by providers of motor finance and payday loans. However, the charity believes that further measures are likely to be needed further down the line.
Richard Lane, Director of External Affairs at StepChange, said “The proposed new measures on car finance and high cost short term credit fill some of the gaps that were left in the previous approach required by the FCA to firms’ offering of forbearance to people suffering loss of income due to the pandemic. This is helpful to give people time to work out what their future situation may hold, but the one-month freeze on payday loans is unlikely to be long enough to allow people to take a realistic view of the future.”
“What is becoming urgent is to gain some understanding of what lenders will do at the end of the initial forbearance period – we think it is unlikely that most people whose income has been affected will be fully back on their feet and able to resume normal payments plus repayment of the sums accumulated during the forbearance period by that time. It’s likely that forbearance periods will need to be extended.”
Adrian Dally, Head of Motor Finance at the Finance & Leasing Association, said “The proposals announced by the Financial Conduct Authority broadly mirror the forbearance measures that motor finance lenders have been providing to their customers over recent weeks.”
“During this unprecedented period, every lender has recognised that forbearance is a vital bridge for customers whose income has been disrupted, and the industry has committed significant resource, human and financial, to meeting requests for support.”
“To enable this level of support to be maintained for customers, the industry will need some help from Government, and those discussions need to begin in earnest, with decisions reached rapidly.”
Jane Tully, Director of External Affairs and partnerships at the Money Advice Trust, the charity that runs National Debtline and Business Debtline, said “The FCA’s proposed new measures on car finance, rent-to-own and ‘buy now pay later’ schemes are welcome and provide a more comprehensive package of support for consumer credit customers. Payment freezes are crucial to allow some short-term breathing room for people whose incomes have been hit hard by the Coronavirus outbreak, and we are pleased that they will now apply to a wider range of borrowing.”
“However, the proposed one-month freeze on high cost credit, including payday loans, is unlikely to be long enough for someone trying to deal with their immediate situation. More broadly, there remains the problem of interest being accrued on credit cards, personal loans and other borrowing during payment deferrals – potentially storing up problems further down the line when customers are required to resume payments but for higher balances.”
“It is also crucial for the regulator to consider business lending products for microbusiness customers – and to look ahead as to what happens beyond the end of these temporary measures. The steps announced this month will help now but the financial challenges people are facing will not disappear after three months and are likely to last far longer.”
Richard Jones, Managing Director of Motor Finance and Leasing at Lloyds Banking Group, said “We welcome today’s guidance from the FCA on the support that should be offered to motor finance customers who have been impacted by Covid-19. Since the start of the pandemic we have already helped more than 50,000 customers using the temporary support measures we have introduced. Customers can apply to defer their payments for up to three months on Personal Contract Purchase, Hire Purchase and Contract Hire agreements by using our new online service which enables most customers to action their request instantly. There are no missed payment fees and a customer’s credit rating will not be adversely impacted.”