Following an announcement by the UK government on 17 March 2020, the Financial Conduct Authority (FCA) has published guidance for mortgage lenders, mortgage administrators and other participants in the residential mortgages sector, setting out the FCA’s expectations in respect of payment holidays that are to be offered to customers experiencing financial difficulties arising from the coronavirus outbreak.
The guidance is effective immediately, and remains in effect until further guidance is provided, which the FCA expects to review within the next 3 months.
Who is affected by the guidance?
The guidance applies directly to regulated firms offering or administering regulated mortgage contracts and / or unregulated Buy-to-let mortgages. In this regard, the FCA refers specifically to Principal for Business 6’ i.e. the general requirement to ‘treat customers fairly’, as well as MCOB (the Mortgage Conduct of Business Rules) 2.5A.1 which requires firms to behave ‘honestly, fairly and professionally in accordance with the best interests of its customer’.
The FCA also appeals to unregulated lenders that may own regulated mortgages loans through assignment structures, noting that the Consumer Protection from Unfair Trading Regulations 2008 may be invoked if the lenders does not meet the “standard of special skill and care which a trader may reasonably be expected to exercise towards consumers”.
What does the FCA expect?
If a customer is experiencing, or expects to experience, payment difficulties arising from coronavirus, firms are expect to offer a payment holiday of 3 months, save where it would be in the customer’s best interests to do otherwise. Longer payment holidays can also be offered.
‘Payment holiday’ in this contexts means no payment of any nature i.e. no principal payments, or payments of interest or fees. There should be no charges or fees for providing the payment holiday, although the FCA does clarify that interest may continue to accrue on the full amount of the unpaid principal balance of the loan.
Lenders may decide how the unpaid amounts should be capitalised i.e. whether to increase monthly instalments, or extend the term of the loan. However, the impact must be explained to the customer before capitalisation occurs. For the most part, lenders appear to be increasing monthly instalments, although we expect that alternative options could be agreed following customer request.
Lenders and administrators should be proactive around offering payment holidays to customers facing financial difficulties. This is likely to require changes to customer service procedures, for example, so that customers reporting payment issues are referred to the payment holiday option. Many firms are already publicising their payment holiday offers on their websites.
There should be no record of arrears arising from the payment shortfall, and accordingly no impact on the customer’s credit file.
What about customers that were having difficulties before the outbreak?
In short, customers who have already missed payments should not be treated any differently to customers that are current, and are equally entitled to take a payment holiday. Indeed, where customers are already in arrears, the FCA expects that lenders and administrators will consider whether further measures may be taken in order to assist the customer.
Finally, the FCA has stated that lenders and administrators should desist from starting or continuing any repossession activities at this time, irrespective of the stage of proceedings – this therefore includes taking or continuing court proceedings, and enforcing existing court orders. The move seemed inevitable, given the constraints on activities such as court hearings, evictions, and the buying and selling of property, that inevitably arise from current social distancing guidelines.
The FCA would regard the taking or continuation of such activities to be in contradiction of the requirement to treat customers fairly.
What else is happening?
It is unsurprising that residential and Buy-to-let mortgages would be the first types of consumer debt to be addressed by the UK Government. Plans for dealing with consumer hardship across other classes of consumer debt, for example personal loans and credit cards, are expected to follow.
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