Coronavirus - FCA issues draft temporary guidance for firms on motor finance agreements and coronavirus – UK

• United Kingdom

• Coronavirus
• Financial services and markets regulation
• Payment systems and digital commerce
• Financial services - Retail finance

17-04-2020

On Friday 17 April 2020, the FCA issued a draft guidance for consultation on temporary forbearance measures to assist motor finance customers facing financial difficulty because of COVID-19. The consultation will close at 5 pm on Monday 20 April 2020. The final guidance is expected to be published by Friday 24 April with the temporary rules expected to come into force shortly after.

Who does it apply to?

Once finalised, these measures will affect firms who offer or have acquired the following regulated products:

• hire purchase agreements such as personal contract purchase (PCP) agreements
• conditional sale agreements
• personal hire contracts (PCH) agreements
• other credit agreements used to purchase a vehicle where the creditor is also the supplier (e.g. credit sale).

Regulated agreements relating to other types of goods and agreements entered into for business purposes are not in scope for these measures. 

When does it apply?

The measures are only meant to alleviate customers’ temporary financial difficulties in making payments under their finance or leasing agreements due to an actual or expected loss or reduction in their own or their household income because of COVID 19.

Any customers with pre-existing difficulty will need to be treated in accordance with the existing forbearance rules and guidance in CONC.

Firms are also expected to take into account the particular needs of vulnerable customers when implementing the guidance.

What are the proposed measures?

Payment Deferral in general

The FCA expects firms to offer affected customers a payment deferral arrangement for 3 months under which the customers can make either no payment or a token payment of £1, without being considered to be in arrears.

Firms should make this option clear on their websites. A customer will be able to request a payment deferral at any time within 3 months from the date the final guidance comes into force. This means that a payment deferral could continue after mid July.

During the deferral period, firms can elect to keep interest accruing on the amount outstanding but cannot pursue guarantors, charge any fee to consent to the arrangements or arrears fees. Further, firms are expected to adhere to the Coronavirus Data Reporting Guidance and not report worsening arrears status on the customers’ credit file to Credit Reference Agencies (‘CRAs’) during the payment deferral period unless additional forbearance is required in which case the usual reporting rules apply. Where delays in concluding the deferral arrangements leads to a notification of arrears to CRAs, firms are expected to work with customers and CRAS to ensure that credit files are rectified. 

Prior to entering into any arrangement with customers, firms are not expected to assess whether payment deferrals are in the customer’s interest (CONC 6.7.18R and CONC 6.7.19R will be disapplied to give effect to this). They can offer more favourable assistance and if a longer payment deferral is considered they should take into account depreciating asset values in their assessments. Where a firm determines that a payment deferral arrangement is not appropriate, the firm is expected to offer, without unreasonable delay, alternative solutions such as reduced or rescheduled payments.

Note that where a customer is entitled to forbearance at the end of the deferral period, the firm will be expected to waive any interest accrued.

Further, firms are expected to provide customers with adequate information explaining the implications of payments deferral highlighting that interest will continue to accrue (where this is the case) and how their outstanding debt will be impacted. Additionally, where terms are extended, firms are expected to raise awareness that such extension may impact other products the customers may have in connection with their motor finance such as insurance warranties, break down cover or MOT. 

Guaranteed Minimum Future Value and other features

If a firm grants a payment deferral or alternative option by varying the customer’s original PCP or PCH  agreement, the FCA warns that in doing so, it must not otherwise change the agreement in a way which leads to unfair outcomes for the customer and must pay due regard to the Consumer Credit Act 1974 (CCA) unfair relationship provisions. The FCA illustrates this point by stating that “firms should not recalculate the GMFV or RV in a way that is based on temporarily depressed market conditions due to the effect of coronavirus in an attempt to recover more of the original car value through the periodic payments.”

Balloon Payment Deferral at the end of PCP agreements

Noting the increased potential for disparity between balloon payments and asset value in the current climate the draft guidance requires firms to consider the fairness of any balloon payment refinancing arrangements they propose to customers. Further, where a customer cannot return their vehicle due to COVID 19, firms are expected to inform the customer that they are unable to use the vehicle once the agreement has been terminated and that they need to make a Statutory Off Road Notification (SORN) declaration if they want to stop taxing and insuring it because it is ‘off the road’. 

Repossessions

The FCA stresses that firms must not take steps to terminate the agreement or seek to repossess the vehicle where the customer needs use of the vehicle and is facing temporary difficulties due to COVID 19. Any re-possessions going ahead must be informed by the government’s social distancing advice. Again, the FCA refers to the unfair relationship provisions in the CCA in the context of enforcement in stating that an unfair relationship can be established by the way in  which a firm enforces their rights under the agreement.

Next Steps

Once finalised, these measures will be reviewed three months thereafter by the FCA.