The FCA published draft guidance for regulated firms that enter into rent-to-own (“RTO“), buy-now pay-later (“BNPL“) (as defined in the FCA Handbook), or pawnbroking agreements today.
The guidance applies in the exceptional circumstances arising out of the Covid-19 pandemic and its impact on the financial situation of customers. It is not intended to have any relevance in circumstances other than those related to Covid-19.
It sets out the FCA’s expectation that firms provide, for a temporary period only, exceptional and immediate support to customers facing payment difficulties due to circumstances arising out of Covid-19.
Which customers will the guidance apply to?
The guidance applies where customers are already experiencing or reasonably expect to experience temporary payment difficulties as a result of Covid-19.
Where a customer was in pre-existing financial difficulty, our existing forbearance rules and guidance in CONC would continue to apply.
Any new definitions?
Yes – the FCA has defined ‘payment deferral’ as meaning an arrangement under which a firm permits the customer to make no payments under their regulated credit agreement for a specified period, or extends the period until payments are due, without being considered to be in arrears.
What would firms have to do?
Look at the customer’s situation – where a customer is already experiencing or reasonably expects to experience temporary payment difficulties as a result of circumstances relating to Covid-19, and wishes to receive a payment deferral, a firm should grant the customer a payment deferral for 3 months unless the firm determines that it is obviously not in the customer’s interests to do so.
Where the agreement is:
- a pawnbroking agreement, the firm should extend the redemption period for 3 months or, if the redemption period has already ended, agree not to give notice of intention to sell an item of pawn for that period. If notice of intention to sell has been given, the firm should suspend the sale for 3 months.
- a BNPL agreement where the customer is within the promotional period, the firm should extend the promotional period for 3 months.
Where an RTO customer has a payment deferral or the agreement is extended, the FCA expects firms to consider the impact on warranties or insurance sold or arranged by the firm. The FCA expects firms to take steps at least as favourable to those it has taken, or would take, where customers are in a similar position due to the FCA’s standard forbearance rules. Where this is not possible, firms should make customers aware of the implications.
Where the term of an RTO agreement is being extended and the customer has insurance or warranties they have purchased separately, firms should bring to the customer’s attention the need to consider wider implications.
Consider whether a 3 month payment deferral is not in a customer’s interests – firms should consider both a 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. The FCA says 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 could equally meet customers’ needs and that burden would be clearly unsustainable.
The guidance does not include an expectation that firms make 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. To this effect, the FCA has disapplied CONC 6.7.18R and 6.7.19R.
Consider other temporary relief if a 3 month payment deferral is not appropriate – in these circumstances, firms should offer other ways to provide temporary relief to the customer in accordance with Principle 6: treating customers fairly. The FCA says this could include waiving or reducing interest, alone or together with reduced payments or a rescheduled term. It could also include a payment deferral of fewer than 3 months or accepting a sum below the normal payment due. Where payment deferral is reduced, appropriate changes to the time periods related to pawnbroking redemption periods and BNPL promotional periods should be made.
The FCA says in all cases, a payment deferral or other way to provide temporary relief should provide the necessary immediate temporary support to customers and avoid the build-up of unsustainable debt as a result of interest, fees or charges.
Be clear in their communications – the FCA expects firms to make clear, including on their websites, that payment deferrals are available as set out in the circumstances described above.
Consider the FCA’s guidance on charging interest – firms are also not prevented from continuing to charge interest during a deferral period. However, where a customer is entitled at the end of the period to forbearance under the FCA’s existing rules due to circumstances relating to Covid-19, the FCA expects any interest accrued during this period to be waived.
Be flexible with repayments – firms should allow customers to repay the deferred payments and any accrued interest over such period and in such amount as the customer can reasonably afford, including over a period that extends beyond the original period of the loan. Where necessary, repayments of the deferred amount could be repaid across an extended period that goes beyond the original term.
Give customers adequate information – firms should give customers adequate information to enable them to understand the implications of a payment deferral,
In relation to BNPL agreements, the FCA highlights the communication obligations in CONC 6.7.16A R regarding giving customers notice of any action they need to take towards the end of the promotional period, in good time. In these circumstances that should include the possibility of deferring the end of the promotional period and explain the consequences of this on backdated interest on any outstanding balances at the end of the promotional period.
What would firms have to stop?
No fees or charges – customers should have no liability to pay any charge or fee in connection with the permitting of a payment deferral, or a different solution where a payment deferral has been deemed not in the customer’s interests.
Do not report worsening arrears statuses – firms should not report a worsening arrears status on the customer’s credit file during the payment deferral period.
Redeeming, collecting or repossessing goods
What would firms have to do?
Consider the Government’s instructions on social distancing and self-isolation – where this prevents collection or repossession of goods through no fault of the customer, no interest, fees or charges should be charged.
Where a customer is experiencing temporary difficulties related to Covid-19 and needs the goods, the FCA considers that commencing or continuing repossession action is very likely to contravene Principle 6 – absent exceptional circumstances (such as a customer requesting that repossession continues).
Communicate with customers – where a firm has closed its stores, they should communicate this and any implications to customers, for example by SMS or email, signs in store windows, or recorded messages on their phone lines. Firms should also make it clear how customers can get in touch with them.
What would firms have to stop?
No interest, fees or charges – no interest, fees or charges should be charged where adhering to the Government’s instructions prevents a customer making a payment.
When are the measures likely to be implemented?
The FCA is looking for comments by 5pm on Monday 20 April with a view to publishing the final guidance by Friday 24 April 2020, with the final measures coming into force shortly after that.