FCA confirms further guidance for firms offering support for mortgage customers struggling to pay their mortgage due to Covid-19

The FCA has confirmed the support available for mortgage customers who are experiencing payment difficulties due to the Covid-19 pandemic (the Guidance), which came into force on 4 June 2020. Alongside the Guidance, the FCA also published the feedback received from firms, trade bodies, consumer groups and individuals (the Feedback Statement). Our earlier article gave an in-depth analysis of the Guidance when originally proposed and can be found here.

The Guidance confirms:

• Customers who are experiencing financial difficulty but have not yet had a payment holiday have until 31 October 2020 to request one.
• An extension of the ban on repossessions of homes by lenders until 31 October 2020.
• Firms will need to make clear to customers what happens after their payment holiday ends, offering a range of repayment options if they can resume payments.
• Lenders will support customers who have already had a payment holiday if they remain in temporary financial difficulty, including offering a further three-month full or part payment holiday. Firms should communicate with their customers to discuss repayment amounts.
• Any payment holidays offered under this guidance will not negatively affect credit files, although the FCA reminds customers that lenders can use information obtained from other sources, such as bank account information, in their lending decisions.
• Customers in payment shortfall would also fall within the scope of the Guidance.

What should firms do if customers have not yet had a payment deferral?

If a customer has not yet had a payment deferral and is experiencing (or reasonably expects to experience), payment difficulties due to circumstances relating to Covid-19, and wishes to receive a full or a partial payment deferral, reduced to an amount the customer believes they currently can afford, a firm should agree to this for three monthly payments. This, however, does not prevent firms from agreeing an alternative option with a customer if in customers’ best interests.

Firms should also provide customers with ‘adequate information’ explaining the implications of support offered. This could include providing personalised information on the impact on a customer’s monthly payments or mortgage term, as well as the consequences (if any) for the total amount payable under the mortgage contact.

Respondents to the consultation argued that the FCA’s approach had created confusion; previous guidance stated that providing general information was adequate, whereas recent measures emphasised the need for personalised information. The FCA has clarified that, in order for customers to make informed choices, personalised information is required both before providing a payment deferral and to assist in customer decision-making when this period ends, although a reasonable estimate would be acceptable. Further, the FCA has clarified that personalised information is required for a full payment deferral, but the impact of a partial payment could be given in general terms, with reference to the impact of a full payment deferral, which appears to acknowledge the operational challenges firms face in giving personalised information on a partial payment deferral.

Fair treatment of customers

The Guidance reiterates that firms should treat customers fairly when seeking to recover any sums covered by a payment deferral (including any increase in the total amount payable under the mortgage contract).

The FCA stresses that firms should distinguish between those customers who:

• can resume full payments immediately;
• are currently unable to resume full payments due to circumstances arising out of coronavirus; and
• have a payment shortfall.

In ensuring customers are treated fairly, the Guidance also emphasises that firms should take account of the particular needs of vulnerable customers, adapting their communications and offering alternatives to digital channels.

What should happen if a customer is coming to the end of a payment deferral period?

Firms should in good time before the end of a payment deferral period, take reasonable steps to contact their customers to discuss resuming payments and engage with them about their options upon expiry. The communication should inform customers of what would happen if they do not respond, including:

• Information about any arrangements to capitalise the sums covered by a payment deferral (that is to add the arrears to the capital balance). Such arrangements may provide for capitalisation over the remaining term of the mortgage or a reasonable extension of the term alongside capitalisation (unless it would take the customer past retirement).
• Providing customers with information about the available options to repay any sums covered by a payment deferral, how to access these or receive further support.

Within the Feedback Statement, the FCA has clarified that where there is disagreement between the firm and customer on the amount that they can afford to repay, the lender should reduce payments to a level the customer believes they can afford.

Respondents also asked for clarification on the extent to which firms and customers could agree forms of support other than a full or partial payment deferral. The FCA reflected this by providing alternatives within the Guidance, namely:

• offering a payment deferral of fewer than 3 months;
• offering the customer a longer-term solution, such as an extension of the term or an alternative product; and
• offering more favourable forms of assistance to the customer, such as reducing or waiving interest.

Is a customer able to resume payments at the end of a payment deferral period?

The Guidance states firms should contact customers in ‘good time’ with information on resuming payments, including how to access additional support if required. If the customer has not responded, the firm may proceed on the basis that the customer can resume paying in full.

Options to repay the sums covered by a payment deferral should include making a lump sum payment and extending the term to maintain the customer’s previous repayment levels (unless this would take the customer past retirement or is not legally possible). This can be either through a digital or scripted process, and may rely wholly on the customer’s own assessment of their ability to resume repayments.

Prior to capitalising any sums covered by a payment deferral, the firm should give the customer personalised information on the impact on their monthly payments or the term of their mortgage, although this could be a reasonable estimate. If a customer is able to resume payments at the end of a deferral period but subsequently misses the next payment, the FCA expects firms to make reasonable efforts to contact them.

The FCA also reminds firms that MCOB 13 includes specific provisions about the capitalisation of payment shortfalls - a firm must not automatically capitalise a payment shortfall where the impact would be material, although this does not apply where a firm is capitalising sums covered by a payment referral. If a customer fails to respond to further communications after missing their first payment, a firm can treat the customer as being in payment shortfall in respect of the missed payment, and proceed in accordance with MCOB 13.

What if customers cannot resume full payments at the end of the deferral period?

A firm should offer a full or partial payment deferral for three monthly payments, unless it agrees with the customer that an alternative option is reasonably considered to be in customers’ best interests. If a partial payment is offered, the payment should be reduced to an amount the customer believes they are able to afford.

While there is no expectation that firms should investigate a customer’s request for a further payment deferral, firms are permitted to make the enquiries it considers necessary to offer an alternative to a payment deferral if it is in a customer’s best interests. The Feedback Statement echoes this, where respondents highlighted that continued payment deferrals may not be in the customer’s best interests and stressed the importance of highlighting alternative forms of support. Alternatives are detailed above, focusing on providing customers with adequate, personalised information explaining how any option would impact their monthly payments or mortgage term.

Treatment of customers in payment shortfall

The FCA took into account responses to the consultation which argued that customers in payment shortfall should be treated in the same way as other customers. The Guidance has been amended to allow customers in arrears to choose a second payment deferral in the same way as other customers.

The FCA reminds firms that MCOB rules dis-applying restrictions on execution-only and requirements to assess affordability continue to be in effect where a firm varies the terms of a regulated mortgage contract or home purchase plan solely for forbearance or to avoid a payment shortfall. The Guidance also confirms MCOB requirements will continue to apply for new regulated mortgage contracts.

Training, monitoring, record keeping and Credit Reference Agency reporting

The Guidance makes it clear that firms should train staff to enable them to implement the firm’s process for compliance, including keeping records of how processes are designed showing that any options presented are in a customer’s best interests.

Firms should also effectively record and monitor initial and further payment deferrals offered as well as any alternative measures provided, noting any issues which could impede customers’ ability to access the assistance required. Firms must use this information to keep their processes under review ensuring that it acts in a customer’s best interests, particularly as firm supervisors may request access to records and the outcomes of a firm’s customer monitoring.

The FCA stressed that the payment deferrals detailed in the Guidance are offered due to exceptional circumstances outside of the customer’s control and firms should not report a worsening status on a customer’s credit file during any initial or further payment period. However, the Feedback Statement stressed the protection afforded is temporary, and negative reporting could occur under usual reporting processes once payment deferral periods end. This would ensure future lending is based on a more complete and accurate assessment of a customer’s financial position, although this should be balanced with fairness principles and the FCA acknowledges that further work or guidance may be needed to achieve this outcome.

Repossessions

There was strong support for the FCA’s proposal to extend their expectations that firms should not commence or continue repossession action to 31 October 2020. Unless there are exceptional circumstances, repossession action is unlikely to be in the customer’s best interests given the unprecedented uncertainty and upheaval that they would face. This applies irrespective of the stage that repossession proceedings have reached and to any step taken in pursuit of repossession. If a possession order has already been granted, firms are instructed to refrain from enforcing it.

Debt help and money guidance

Finally, the FCA highlights that those firms who wish to help customers who suffer financial difficulty could do so by providing information on steps that customers can take or free debt advice services. This could include signposting customers to the Money Advice Service coronavirus support page or sources of free money guidance and debt advice at the point of granting a full or partial payment deferral. It recommends that the customer contacts their creditors to discuss their payments and explains that self-help options could be beneficial to the customer.

Co-authored by James Highfield