On Friday 1st May, the Financial Conduct Authority (the “FCA”) issued draft guidance for regulated firms operating in the insurance and premium finance markets in respect of customers facing temporary financial difficulties as a result of the coronavirus pandemic. These firms include:
- Insurance intermediaries (including appointed representatives);
- Premium finance lenders who provide credit to fund the payment of insurance premiums in instalments;
- Premium finance brokers that carry on regulated activities relating to credit granted for the purposes of financing insurance premiums in instalments;
- Debt collectors; and
- Other firms that may be involved in insurance arrangements and/or in relation to the provision of premium finance.
The guidance applies to all non-investment insurance products, however, for premium finance agreements, the guidance is not intended to cover lending for business purposes. The guidance does not cover those customers who are in financial difficulties for reasons other than the current pandemic, where existing forbearance rules and guidance and CONC still apply. The proposed guidance is based on FCA Principle 6 (‘A firm must pay due regard to the interests of its customers and treat them fairly’) and the aims of the guidance are two-fold:
- Minimise the impact of temporary financial distress.
- Ensure that customers continue to have insurance that meets their demands and needs.
The FCA seeks comments on the draft guidance by Tuesday 5th May, with a view to the measures starting to come into force by 13th May 2020. The guidance is to be reviewed in three months considering any changes to the Coronavirus situation.
When firms should act
The FCA expects firms to consider actions to support customers who are experiencing financial distress as a result of the current pandemic. Firms are expected to act where a customer contacts the firm because they are having difficulties making repayments and wish to reduce their cover, and where the firm has a reasonable basis for knowing or has identified that there are customers experiencing financial distress (even where the customer has not contacted the firm).
Actions firms can take
The FCA has suggested the following actions which may assist customers during this period:
- Re-assessing the risk profile of the consumer – firms may be able to offer the consumer a lower premium as a result of the changes to their risk profile during this crisis.
- Considering whether there are other products the firm can offer which would better meet the customer’s needs and revising the cover accordingly.
- Working with consumers to avoid the need for cancellation of necessary cover such considering payment deferrals (see below). Where consumers do wish to cancel their policy, the firm should waive any cancellation fees (or any fees associated with the amendment of a customer’s policy as outlined above). Firms should also consider fair treatment of consumers when assessing new premiums for consumers who cancel and then return to the insurer.
The FCA expects firms to make the different solutions available to customers clear, both on their website and through any communications issued. Firms should make it as easy as possible to contact them and consider the needs of vulnerable customers in so doing.
Expectations in relation to rate of interest
If amendments to the insurance cover do not help alleviate the payment difficulties for a customer paying their premium in instalments, the firm should consider reviewing the interest rates associated with the instalments, considering their fairness in light of the current crisis.
In such circumstances where neither an adjustment to the insurance cover, or the interest rate payable assists the customer with their financial difficulties, the firm should offer a payment deferral. A payment deferral, as understood by the FCA, is an arrangement under which a firm allows a customer who pays their premium in instalments to make no payments for a specified period, without being considered to be in arrears and without the firm exercising any right to cancel the insurance policy unilaterally.
Where a customer wishes to receive a payment deferral, firms should grant it unless it is obviously not in the customer’s interests to do so. Where a deferral is considered inappropriate, the firm should consider other ways to provide temporary relief to the customer.
The FCA advises that any payment deferral should be granted for a minimum of one month and a maximum of three months, and that customers should be able to request a payment deferral at any point within three months of the guidance coming into force. The FCA does not expect the firm to make specific enquiries with each customer regarding the circumstances of the payment deferral request. Where customers are unable to reach timely agreement for a payment deferral because of a firm’s operational difficulties and subsequently miss a payment, firms are expected to work with customers and credit reference agencies to ensure the necessary rectifications are made to credit files.
Firms are not prohibited from charging interest during the deferral period (although they should not seek payment of such charges until the deferral has ended), however, customers should not be liable for any charges or fees in connection with the granting of a payment deferral. If the customer is unable to resume repayments at the end of the deferral period, firms should work with the customer to resolve such difficulties.
Regulated credit agreements
All of the above proposals will impact insurance bought using a regulated credit agreement. Providers will have to think carefully about how to make any amendments to their credit agreements as variations under the Consumer Credit Act 1974 are not straightforward and risk the credit agreement becoming unenforceable. Additionally, there are potential unforeseen consequences in the knock-on effect on changes to “notices of sums in arrears”, “default notices” and if applicable “annual statements”. Regrettably the FCA has given limited guidance on these.
Article co-authored by Niresh Sri Rajkumar.