Category: Consumer credit

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FCA consults on further pause for handing motor finance discretionary commission arrangements

🚨 Earlier today, on 30 July 2024, the FCA published a consultation paper entitled ‘CP24/15 – Extending the temporary changes to handling rules for motor finance complaints’ and a press release proposing to extend the current pause to the time that firms have to respond to motor finance complaints about discretionary commission arrangements.

📆 The FCA says it proposes to set out its next steps in May 2025 (and not September 2024).  By then, the FCA says it’ll have analysed: (a) the data it has collected from motor finance firms and (b) the outcome of Barclays’ judicial review of the Financial Ombudsman’s decision to uphold a DCA complaint.

✋ The proposed pause to 4 December 2025 will allow the FCA to (for example) consult on a redress scheme or ask firms to deal with motor finance complaints relating to discretionary commission models.  Firms will not be required to respond to such complaints before 4 December 2025.

📝 The FCA also proposes to give consumers until the later of 29 July 2026, or 16 months from the date of their final response letter, to refer any complaint to the Financial Ombudsman Service.

👨‍💻 The deadline for responding to the consultation is 28 August 2024.

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FCA decides to investigate the use of personal guarantees given for certain small business lending

On 5 March 2024, the UK Financial Conduct Authority published a press release announcing it is investigating the use of personal guarantees given to lenders to support loans made to certain small businesses. The follows the Federation of Small Businesses making a ‘super-complaint’ to the FCA.

The FCA’s perimeter is, in fact, fairly limited for business lending. It only applies to such lending where (in broad terms):

– the borrower is an individual or a relevant recipient of credit (being a partnership of two or three persons not all of whom are incorporated, or an unincorporated body of persons which does not consist entirely of bodies corporate and is not a partnership); and

– the amount of credit is no more than £25,000.00.

The FCA will:

– collect data between April 2024 and June 2024 to understand when lenders entering into a regulated credit agreement are asking for guarantees;

– review samples of firms’ policies and procedures;

– work with the Financial Ombudsman Service to monitor the level of complaints; and

– consider whether lenders need further guidance in CONC.

The FCA has also published its response to the super complaint.

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FCA tells firms to improve their treatment of struggling small business borrowers

On 12 July 2022, the UK Financial Conduct Authority published a press release telling firms to improve their treatment of struggling small business borrowers together with (a) its review into small and medium enterprise collections and recoveries and (b) a ‘Dear Chair’ letter to firms.

The FCA reviewed the practices of eleven banks. It found a number of issues including:

– lenders not treating small businesses fairly when trying to agree sustainable payment plans (for example, arranging clearly unaffordable payment plans);

– staff not having the right training to provide effective support to consumers and to make fair decisions;

– lenders not having clear policies to help staff identify and support vulnerable customers; and

– not having quality assurance and testing for their processes to ensure that they deliver fair results for consumers.

The FCA has given feedback to individual firms. It has also written to the chairs of all retail banks with small business customers. The FCA makes it clear that their ’Dear Chair’ letter is based on the existing principles, rules and guidance. It reminds firms that it will not wait for the introduction of the consumer duty in 2023 to take action where it finds evidence of customer detriment.

The ‘Dear Chair’ letter makes it clear that “all regulated firms offering lending to individuals and relevant recipients of credit (“RRCs”) should consider the findings and recommendations and where necessary, act on them“. The FCA expects “accountable Senior Manager(s) to proactively engage to achieve good practice when overseeing SME collections and recoveries“.

The FCA has set out some of its expectations in the ‘Dear Chair’ letter. These include:

– Where borrowers are treated as if they have a regulated credit agreement, either by requirement or voluntarily, firms should be able to demonstrate they are meeting these standards.

– Policies and procedures are clear with adequate information to support staff to make judgements when required.

– Systems and controls should be arranged to help with the delivery of fair customer outcomes.

– Firms should be able to accurately maintain records and be able to use such records to test whether they have delivered fair outcomes. Firms should also be able to produce customer records without gaps in a timely manner;

– Firms should be able to demonstrate forbearance and due consideration are being offered in accordance with CONC 7.3.4R (where it applies).

– Where CONC 7.2.1R applies, the firm must establish and implement clear, effective and appropriate policies and procedures for the fair and appropriate treatment of customers, who the firm understands, or reasonably suspects, to be vulnerable.

– The management of third parties should be subject to a suitable risk framework that helps ensure fair treatment of SMEs

– The FCA encourages all firms to carry out both quality assurance and customer outcomes testing for customer processes. This assurance should follow a holistic approach so that the customer’s overall outcomes are understood and these are assessed for fairness. There should be clear evidence that root cause analysis is effectively identifying opportunities to improve customer outcomes.

– Staff should receive suitable training that equips them to effectively support SME customers to receive fair outcomes during collections and recoveries.

– Senior management should receive effective MI that allows holistic oversight of SME customer treatment during collections and recoveries

– Senior managers responsible for collections and recoveries should have suitable levels of awareness and oversight of SME customer matters including treatment during collections and recoveries.

The FCA is expected to publish its review of its final findings into firms’ provision of appropriate support to borrowers in financial difficulty both during and after the COVID-19 pandemic, and next steps. This publication is currently expected on Q3 2022.

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European Parliament publishes press release on proposed new Consumer Credit Directive

On 12 July 2022, the European Parliament published a press release on a proposed new Consumer Credit Directive. These proposals are for a new Directive which will replace the EU’s Consumer Credit Directive from 2008.

The key points from the press release on the proposals are:

– it will aim to protect consumers online from credit card debt, overdrafts and loans that are unsuitable for them;

– it should cover credit agreements up to €150,000 (but Member states can implement a higher limit);

– a lighter touch regime for small value loans (up to €200), interest-free and without charge loans, or loans to be repaid within three months with minor charges;

– a creditworthiness assessment which requires information on a consumer’s current obligations or cost of living expenses. For those with thin credit files, other information can be considered (for example, non-bank lending, telecommunications and utilities bills);

– the European Banking Authority will be encouraged to published guidelines on how a creditworthiness assessment can be undertaken;

– consumers will be given clear information to allow them to make informed choices (including having all essential information in one place);

– consumers should be reminded of their right to withdraw within 14 days;

– credit advertisements should contain a clear and prominent warning that borrowing money costs money, and they should not encourage consumers who are over-indebted to apply for more credit; and

– overdrafts and credit overrunning products should be regulated.

Parliament negotiators will now talk with both the European Council and Commission on the final shape of the rules.

Whilst the United Kingdom is no longer a Member state, and already has in place many of these protections, it is likely that HM Treasury’s commitment to review the consumer credit regulatory regime will include looking at what is happening in the European Union (but, of course, the United Kingdom does not have to follow those proposals).

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FCA urges consumers struggling with price rises to seek help

On 6 July 2022, the UK Financial Conduct Authority published a press release urging consumers struggling with rising prices to seek help from their lenders. This press release follows the publication of a recent ‘Dear CEO’ letter, and press release, to consumer lenders.

The FCA and MoneyHelper are urging consumers to:

– contact their lenders if they are struggling to make their payments;

– contact MoneyHelper if they are worried about money

The FCA and MoneyHelper have also published five top tops:

– open up and talk to someone about your challenges

– work out your debts

– prioritise your debts

– shop around for affordable credit

– set a budget

This press release is in a long line of financial difficulty communications from the FCA. The FCA is expected to publish its review of its final findings into firms’ provision of appropriate support to borrowers in financial difficulty both during and after the COVID-19 pandemic, and next steps. This publication is currently expected on Q3 2022.

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Policy Statement published on changes to FCA Handbook to reflect breathing space

On 26 February 2021, the FCA published Policy Statement 20/1: ‘Breathing Space Regulations – changes to our handbook’ (‘PS 20/1’)to make changes to the Consumer Credit Sourcebook (or ‘CONC’) to implement the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium (England and Wales) Regulations 2020 (which come into force on 4 May 2021).

The changes (which come into force on 4 May 2021) are:

– two new definitions will be introduced: ‘Debt Respite moratorium’ and ‘moratorium debt’;

– CONC 5D.3.3G(5) will be amended to say that if a Debt Respite moratorium is in effect for a customer’s overdraft and a firm is complying with its obligations under that moratorium, the firm is treating the customer with appropriate forbearance for the portion of the overdraft subject to the moratorium (and the firm is not required to take the steps under CONC 5D.3 during the moratorium);

– there will be changes to CONC 6.7 so that complying with a Debt Respite moratorium is considered to be compliance with a firm’s obligations under CONC 6.7 (in effect, a moratorium is equivalent or more favourable steps); and

– firms can take into account the period under a Debt Respite moratorium when considering a ‘reasonable period’ under CONC 7.3.11R.

The FCA does not consider any changes are necessary to CONC 8.

PS21/1 makes it clear that “consumers ought to be able to benefit from the protections of both the Regulations and our rules” (see paragraph 1.14). The FCA’s view is that “advising a customer on eligibility for a moratorium clearly falls within the regulated activity of debt counselling”. 

The FCA also says that any “communications required by our rules should continue to be made. The Regulations do not prevent a credit from contacting a customer where this is required under the Consumer Credit Act 1974 (CCA) or FCA rules (Regulation 11). Section 3.9 of the Insolvency Service’s guidance also explains the effect of the Regulations on communications with customers” (see paragraph 3.5). 

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High Court finds no unfair relationship arising out of a commercial bridging loan agreement

On 2 March 2021, the High Court handed down judgment in Credit Capital Corporation Limited v Watson [2021] EWHC 466 (QB) where a borrower (who had entered into an exempt bridging loan agreement) alleged his relationship with the lender was unfair under Sections 140A to 140C of the Consumer Credit Act 1974 (the ‘unfair relationship provisions’).

The facts

In essence, the borrower, Mr Watson, had entered into two exempt bridging loan agreements: (a) one for a loan of £1,475,000 with Credit Capital Corporation Limited (‘CCL’) and (b) one for £47,500 with Market Financial Solutions Limited (‘MFS’). Both agreements contained a business use declaration and therefore fell outside of the definition of a regulated credit agreement or a regulated mortgage contract.

The allegations of unfairness

Mr Watson made a number of allegations to say that his relationship arising out of the agreements was unfair under the unfair relationship provisions. The allegations included the following claims:

– a commission was paid to the broker without Mr Watson’s consent;

– rolling up the first year’s interest and deducting it from the advance was unfair;

– pressure was put on Mr Watson and a property was sold because of a false representation over the buyer’s identity; and

– there was a sale at an undervalue for one of the properties.

The Court’s finding on unfairness

Whilst the Court was critical of the evidence put forward by all of the parties, and the lack of evidence from a director of the lenders (particularly where one of the directors was heavily involved), it decided there was no unfairness. The key findings were:

– Mr Watson knew a commission would be paid and there was sufficient disclosure of it;

– there was nothing unfair in rolling up interest for the first year and deducting it from the advance (a common practice in bridging loans);

– whilst pressure was put on Mr Watson, it was not enough to make the relationship unfair;

– whilst there had been a misrepresentation over the identity of the buyer of one of the properties, Mr Watson found out the true position before exchange of contracts so this did not, on its own, make the relationship unfair; and

– there was no clear evidence to show that the properties were sold at an undervalue.

Comment

This is another example of the Court being slow to find unfairness where the borrower is a commercial or business borrower. The Court correctly identified that earlier decisions have not found enforcement unfair unless it has been done in an arbitrary or exploitative way.

The Court also correctly found there was no unfairness where a misrepresentation was made but the true position was discovered before exchange of contracts. It is submitted that this should also be the position in unfair relationship provisions involving consumers. Whilst the unfair relationship provisions do not require an actionable legal wrong to have taken place, it must be the case that there can be no unfairness if the borrower finds out the correct position before entering into the agreement.

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HM Treasury publishes new amending regulations changing the form and content of default, enforcement and termination notices

On 11 November 2020, HM Treasury laid before Parliament the Consumer Credit (Enforcement, Default and Termination Notices) (Coronavirus) (Amendment) Regulations 2020 and published an explanatory memorandum.

These regulations amend the Consumer Credit (Enforcement, Default and Termination Notices) Regulations 1983, which prescribe the form and content of:

– an enforcement notice under Section 76(1) of the Consumer Credit Act 1974;

– a default notice under Section 87(1) of the Consumer Credit Act 1974; and

– a termination notice under Section 98(1) of the Consumer Credit Act 1974.

These changes make significant changes to the form and content of such notices. The changes come into force on 2 December 2020.

By Regulation 9 of the Consumer Credit (Enforcement, Default and Termination Notices) (Coronavirus) (Amendment) Regulations 2020, there is a transitional period of six months from 2 December 2020 during which time a notice under Sections 76(1), 87(1) or 98(1) of the Consumer Credit Act 1974 will be compliant if it complies with the Consumer Credit (Enforcement, Default and Termination Notices) Regulations 1983 immediately before its amendment on 2 December 2020.

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FCA announces further proposals to support motor finance customers impacted by COVID-19

Earlier today, on 4 November 2020, the UK Financial Conduct Authority published a press release setting out its further proposals to support motor finance customers impacted by COVID-19.

There is:

– a draft updated guidance for consumer credit firms;

– a draft further updated temporary guidance for personal loans;

– a draft further updated temporary guidance for motor finance; and

– a draft Consumer Credit Instrument updating provisions in CONC 6.7 and 7.3.

The FCA proposes:

– those who have not yet had a payment deferral will be eligible for two payment deferrals of up to six months in total;

– those who have had one payment deferral, will be eligible for another payment deferral of up to three months;

– to allow customers until 31 January 2021 to ask for a payment deferral;

– if a customer has restarted payments after a deferral, they are not entitled to another deferral but should receive tailored support if they are experiencing payment difficulties.

– if customers can afford to make repayments then they should continue to do so;

– borrowers should hold off contacting their lender until the enhanced measures are in place;

– lenders should hold off repossessions of goods, unless there are exceptional circumstances, until 31 January 2021; and

The FCA has invited comments by 10am on 6 November 2020.