The key points arising out of the Proposals are:
- Customers able to resume full payments at the end of a payment holiday should do so, with firms contacting them to agree a plan on resuming payments and how missed payments will be repaid.
- Firms should support those who continue to need help, which could include extending a payment holiday by a further three months.
- An extension of the scheme, enabling customers who have not yet done so to request a payment holiday until 31 October 2020.
- Ensuring people have a roof over their head, with a current ban on repossessions of homes continued to 31 October 2020.
- Ensuring payment holidays and partial payment holidays offered under the Proposals do not have a negative impact on credit files.
The Proposals have been reflected in a draft update to guidance previously issued to firms.
The FCA has asked for all stakeholders to respond to the draft guidance by 5pm on Tuesday 26 May 2020, and expects to finalise the guidance shortly after this deadline. It has emphasised that the Proposals (if implemented) will not apply to consumer credit products, which is covered by separate guidance and will be updated in due course.
Customers who have not yet had a payment deferral
If a customer is experiencing or reasonably expects to experience payment difficulties as a result of circumstances relating to coronavirus and wishes to receive a full payment deferral, a firm should grant a customer a full payment deferral for 3 monthly payments, unless it can demonstrate that it is obviously not in a customer’s best interests.
When determining whether a 3 month payment deferral is obviously not in a customer’s best interests, firms should consider the customer’s need for immediate temporary support and the longer-term effects of a payment deferral on the customer’s situation. This would include a consideration of the customer’s ability to repay accrued interest once the payment deferral ends, and over what period. An example of a payment deferral not being in a customer’s best interests is if it would increase the overall debt burden when compared with other solutions and lead to an unsustainable debt burden. If a payment deferral is not considered appropriate, firms should offer other ways to provide temporary relief to the customer, ensuring it treats them fairly.
If a customer provides information that suggests they may be experiencing or are reasonably expected to experience payment difficulties as a result of circumstances relating to coronavirus, firms should ask if the customer would be interested in a full payment deferral.
Firms are not prevented from providing more favourable forms of assistance, such as reducing or waiving interest, or providing a longer-term solution, such as extension of the term or an alternative product.
If a payment deferral is given, a firm should give customers adequate information to understand the implications of a payment deferral, such as the expected consequences (if any) for the total amount payable under the mortgage contract, the term of the mortgage contract and the amount of contractual monthly instalments.
Customers who had a payment shortfall prior to 20 March 2020
Customers who had a payment shortfall prior to 20 March 2020 who have not yet had a payment deferral are able to request one, and should not receive less favourable treatment than other customers. Whilst the remaining guidance does not apply to a customer who had a payment shortfall prior to 20 March 2020, a firm may consider agreeing a further payment deferral with a customer who has had a payment shortfall and already benefitted from a payment deferral if it would be appropriate under MCOB 13.
If a further payment deferral is given, a firm’s obligations under MCOB 13 extend to the amounts deferred, although firms are reminded that MCOB 13 includes specific provisions on the capitalisation of payment shortfalls.
Fair treatment of customers at the end of a payment deferral period
Firms should ensure that the manner in which they seek to recover any sums covered by a payment deferral and any increase in the total amount payable under the mortgage contract is compatible with the principles of treating customers fairly, in accordance with Principle 6 of the FCA Handbook and MCOB 2.5A.1R.
What will be regarded as fair will differ depending on the circumstances of the individual customer, and firms should distinguish between those who:
- are able to resume full payments immediately;
- are unable to resume full payments due to circumstances arising out of coronavirus; and
- had a payment shortfall prior to 20 March 2020.
Firms should take account of the needs of vulnerable customers, for example, if using digital channels, firms should provide accessible alternatives to those less able.
What should firms do if a customer is approaching the end of a payment deferral period?
If a customer is approaching the end of a payment deferral period, firms should take reasonable steps to contact their customers in good time to discuss their options when it expires.
This contact should include informing customers of what will happen if they do not respond, including the impact on their next monthly repayment. As well as this, information provided should include any default arrangements to capitalise the sums covered by a payment deferral over the remaining term of the mortgage or a reasonable extension of the term alongside capitalisation (unless this would take the customer past – or further past – retirement).
Many customers are likely to be able to resume full payments at the end of a payment deferral period, but firms are required to make reasonable attempts to ensure that this is the case, and may rely solely on information the customer provides. However, a firm may use other information to understand the needs and circumstances of customers coming to the end of a payment deferral period, although this is not required, such as information already held by the firm (such as a customer’s payment history) or information provided by others (such as data from credit reference agencies). If a customer does not respond to contact from a firm, it is permitted to proceed on the basis that the customer is able to resume full payments.
Is a customer able to resume full payments at the end of a payment deferral period?
If they are, firms should give them information (via a digital or scripted process) on how to access different options to repay any sums covered by a payment deferral, in good time and before they are bound by default arrangements a firm puts in place. Options that a firm could offer customers should include making a lump sum payment and extending the term to maintain the customer’s previous payment levels where these are legally possible.
Before capitalising any sums covered by a payment deferral, and any associated increase in the total amount payable, firms should give customers personalised information on its impact on their monthly payments or term of their mortgage. As well as this, firms should be clear in telling customers that this could result in them paying more over the lifetime of the mortgage when compared against alternative means of repayment, such as in a lump sum.
However, if customers are regarded as able to resume full payments and subsequently miss a payment due, the FCA expects that firms make reasonable attempts to contact them. If a customer is then unable to resume payments or contacts the firm seeking further assistance before missing a payment, firms should offer them additional help.
If a customer does not respond to further communications after missing a payment, the firm is permitted to treat the customer as being in payment shortfall in respect of the missed payment and proceed in accordance with MCOB 13.
Customers unable to resume full payments
If a customer is unable to immediately resume full payments, firms should offer a further full or partial payment deferral for 3 monthly repayments, based on what the customer considers they can currently afford to repay. Firms should not depart from this unless it is obviously not in the customer’s best interests and a different option is more appropriate.
When making this assessment, the FCA states that firms will need to consider the customer’s need for immediate temporary support and the longer-term effects of a payment deferral on the customer’s situation, such as their ability to repay accrued interest once the payment deferral ends, and over what period. An example of when a payment deferral would obviously not be in a customer’s best interests is if it would give them a greater overall debt burden compared with other solutions that could equally meet the customer’s needs, and lead to an unsustainable debt burden. However, firms are not required to investigate or verify a customer’s individual circumstances beyond identifying the customer’s assessment of what they can currently afford to repay before granting a further 3 month payment deferral.
Similarly where customers are able to resume full payments, a firm should not have regard to its own commercial interests when considering what is in the customer’s best interests.
Firms are not prevented from providing more favourable forms of assistance, such as reducing or waiving interest, putting in place a longer-term solution to enable the customer to resume payments in a sustainable way, extending the term of offering an alternative product, if this is in the customer’s best interests.
Firms are required to ensure that customers receive adequate information to understand the implications of support provided, including the impact (if any) on the total amount payable under the mortgage contract, and this should include personalised information on the impact on the monthly payments or the term of their mortgage.
In providing information to customers, this can be provided through digital or scripted means, although care should be taken to ensure alternative measures are in place for vulnerable customers or those less able to use them.
If a customer who has agreed a partial repayment deferral requests further assistance before the end of the deferral period, a firm should offer additional support for the remaining period, which could involve extending the deferral period to 3 months, reducing the agreed payment, or a full payment deferral to 3 months.
At the end of the period, firms should take reasonable steps to contact the customer about resuming payments in good time before the end of a payment deferral. If a customer is able to resume full payments, the information above is applicable. If a customer is not able to resume full payments and is facing payment difficulties as a result of coronavirus, firms should work with the customer to resolve such difficulties prior to a payment being missed. This could involve firms agreeing a tailored plan, such as extending the mortgage term, changing the mortgage type or deferring payment of interest or capitalisation.
Interaction with the provisions of MCOB
Unless otherwise specified, sums subject to a payment deferral should not be regarded as a payment shortfall, and for the avoidance of doubt, this does not apply to any further payment deferrals given to customers who were in payment shortfall prior to 20 March 2020.
The FCA reminds firms that where the terms of a regulated mortgage contract or home purchase plan are varied solely for the purposes of forbearance or to avoid a payment shortfall, MCOB 4.8A.19R and MCOB 11.6.3R(3) will continue to have effect, which dis-apply restrictions on execution-only and requirements to assess affordability.
If a variation is made to an existing Mortgage Credit Directive regulated mortgage contract, MCOB 7.6.28R and MCOB 7.6.28AR detail the required disclosure in relation to any change in the payments due.
If a new regulated mortgage contract is entered into, standard MCOB requirements regarding new contracts continue to be applicable, and an illustration will need to be issued in respect of disclosure.
Training, monitoring, record keeping and credit reference reporting
The FCA states that firms should ensure staff are adequately trained to enable them to implement the firm’s process for complying with the guidance. This includes:
- Record keeping of how any process was designed to ensure options presented were consistent with customers’ best interests, as well as generic information provided to all customers, and personalised information where relevant.
- Recording and monitoring initial and subsequent payment deferrals offered, any alternative forbearance provided, as well as any issues that may impede customers’ ability to access assistance. This information should be used by firms to ensure continued compliance and that customers’ interests are being met, refining their approach as needed.
- Supervisors of firms requesting access to records and outcomes of a firm’s customer monitoring.
Payment deferrals given should be regarded as being offered in exceptional circumstances beyond a customer’s control, and as a result, firms should not report a worsening status on the customer’s credit file during any new or continuing payment deferral period. If a firm has operational difficulties and customers have been unable to reach timely agreement resulting in a missed payment, the FCA expects firms to work with customers and credit reference agencies to ensure credit files do not record any worsening status during the payment deferral period.
As mentioned above, firms may not commence or continue repossession proceedings against customers before 31 October 2020 in light of unprecedented uncertainty and upheaval, as well as Government guidance on social distancing and self-isolation. This ban applies regardless of the stage reached in repossession proceedings. If a possession order has been obtained, firms should refrain from enforcing it.
The FCA states that it ‘will not hesitate to take appropriate action where necessary’ should repossession proceedings be commenced or continued, as it is likely to contravene principles around treating customers fairly and MCOB 2.5A.1R – absent exceptional circumstances (such as a customer requesting proceedings continue).
During this time, firms should keep customers fully informed and discuss the impact of suspending any moves toward repossession, such as explaining the effect of remaining in the property on the customer’s remaining equity.
If a customer takes a full or partial payment deferral they may benefit from assistance to manage mortgage payments or money generally and firms may be able to help by providing information on steps customers can take or free debt advice services. This could include signposting customers to sources of free money guidance and debt advice at the point of granting a full or partial payment deferral, or explain self-help steps that could prove useful.