Regulatory Outlook | Consumer Finance | January 2021

Current issues

FCA guidance on cancellations and refunds

As a result of the impact of Covid-19, customers have seen events and trips cancelled. On 2 October 2020, the Financial Conduct Authority (FCA published guidance on cancellations and refunds. The guidance, which applies to insurance, credit card and debit card providers, is effective until 2 April 2021. The FCA generally expects that the quickest and easiest route to a refund will be via the retailer or other guarantee scheme (such as ABTA or ATOL for travel). However, where customers decide to claim their money back via a ‘chargeback’ or by making an insurance claim, the FCA expects firms to:

• Treat their customers fairly.
• Handle claims and enquiries fairly and in a reasonable period of time.
• Provide clear explanations to customers (on declines and other options which might be available to them).

Changes to default notices

Lenders are required to serve a default notice on a borrower before the lender is entitled, in the event the borrower is in breach of the agreement, to (among other things) terminate the agreement or demand earlier payment of any sums under it. The Consumer Credit (Enforcement, Default and Termination Notices) (Coronavirus) (Amendment) Regulations 2020 came into force on 2 December 2020
and make changes to form and content requirements relating to default notices. The key changes require lenders to:

• No longer use block capital in order to achieve required prominence of certain words. Instead lenders must use lowercase and may use bold formatting or underlining (but not both).
• Alter the prescribed wording and ordering of the notices to become more consumer friendly.
• Provide clearer explanations of any legal jargon or words that are not easily understood, for example, by including prescribed wording explaining what is meant by ‘a surety’, if applicable.
• Update sources of support identified in the FCA’s information sheet and the government’s Money Advice Service.

Lenders must ensure that their default notices comply with the new Regulations by 2 June 2021. Failure to do so will require a lender to serve a compliant default notice on a borrower before they are entitled to take any of the actions set out in section 87.

Interim funding for APP scam victim compensation extended

On 9 December 2020, UK Finance issued a press release stating that a group of seven signatories to the voluntary Authorised Push Payment (APP) Contingent Reimbursement Code have agreed to extend until 30 June 2021 the interim funding to compensate eligible victims of APP scams where the customer, sending and recipient banks have met the standards expected of them under the Code.

The extension is intended to ensure that customer reimbursement takes place whilst regulators and the government deliver a long-term, sustainable funding arrangement, and steps can be taken to place the voluntary Code on a statutory footing.

FCA consults on guidance on Bounce Back Loan scheme and PAYG options

On 4 December 2020, the FCA issued a guidance consultation for firms collecting payments under a Bounce Back Loan (BBL) where the collection of that debt is a regulated activity.

The BBL scheme is a government initiative that enables smaller businesses to access finance more quickly during the coronavirus pandemic. On 24 September 2020, the Chancellor announced the introduction of pay as you grow (PAYG) – a system providing flexibility for repaying a BBL. The FCA is consulting on proposed guidance for firms that will be providing PAYG options.

The FCA explains that chapter 7 of the Consumer Credit sourcebook (CONC) applies to firms when they carry out regulated debt collection under the BBL scheme. Collecting debts under the BBL scheme may be a regulated activity where the borrower is a sole trader or small partnership, so CONC 7 and Principle 6 can apply to these types of borrowers. The proposed guidance aims to detail how firms can:

• Use and offer PAYG options in a manner compliant with
  CONC 7.
• Recognise vulnerability and respond to the needs of
  vulnerable customers.
• Assist borrowers who need debt advice.

Feedback from the FCA is expected in early 2021.

FCA portfolio letter to firms in the mainstream consumer credit lenders portfolio

On 2 December 2020, the FCA published a ‘Dear Board of Directors’ letter aimed at mainstream consumer credit lenders (MCCLs). The MCCL portfolio is made up of firms providing Consumer Credit Act regulated unsecured overdrafts, loans or credit cards and contains firms with a range of business models and funding sources.

In the letter the FCA:

• Sets out its view of the risks MCCLs may pose to their consumers or the markets in which they operate. Firms are asked to consider the degree to which they present such risks and their strategies for mitigating them.
• Outlines its expectation of MCCLs, including how firms should be mitigating these risks.
• Describes its supervisory strategy and programme of work to ensure that firms are meeting its expectations, and harms are being remedied.

The FCA focusses on five key areas: affordability, treatment of customers in arrears, embedding of regulatory changes, transparency of pricing and features, and Brexit.

MCCLs should reflect on the issues highlighted in this letter to ensure they are operating to minimise risk of consumer and market harm. Where the FCA identifies harm, it will intervene.

Support for consumer credit customers impacted by Covid-19

On 19 November 2020, the FCA confirmed updated guidance to firms setting out enhanced support that should be available to consumer credit customers experiencing payment difficulties as a result of the coronavirus pandemic. The guidance came into force on 25 November 2020.

The guidance covers users of personal loans, credit cards, store cards, catalogue credit, rent to own, buy now pay later, pawn broking, motor finance and high-cost short-term credit.

Consumers have until 31 March 2021 to apply for an initial or a further payment deferral. After that date, they will be able to extend existing deferrals to 31 July 2021, provided these extensions cover consecutive payments, and subject to the maximum six months allowed. If borrowers who have not yet taken a deferral think they need the full six months, they should apply in good time before their February 2021 payment (to cover a full six months of payments, from February to July inclusive).

Support for mortgage borrowers impacted by Covid-19

On 17 November 2020, the FCA updated its guidance to firms setting out enhanced support that should be available to mortgage borrowers experiencing payment difficulties as a result of the coronavirus pandemic.

The FCA has published:

• Finalised guidance: Mortgages and Coronavirus: Payment Deferral Guidance.
• Finalised guidance: Mortgages and Coronavirus: Tailored Support Guidance.

Consumers will have until 31 March 2021 to apply for an initial or a further payment deferral. After that date, they will be able to extend existing deferrals to 31 July 2021, provided these extensions cover consecutive payments, and subject to the maximum six months allowed. Borrowers who have not yet taken a deferral, and who think they need the full six months should apply in good time before their February 2021 payment is due.

In October 2020, the FCA issued separate guidance for borrowers with interest only or part-and-part mortgages whose capital repayment plans were affected by the crisis. This means that borrowers whose mortgages matured from 20 March 2020 can delay the repayment of the capital on their mortgage until 31 October 2021.

Review of the unregulated lending market

On 16 September 2020, the FCA announced that Christopher Woolard will chair its review of the future regulation of the unsecured credit market. The review will concentrate on how regulation can better support a healthy unsecured lending market, taking into account:

• The impact of the coronavirus on employment security and credit scores.
• Changes in business models and new developments in unsecured lending, including the growth of unregulated products in retail and the workplace.

Mr Woolard will be assisted by an advisory group and will make recommendations to the FCA Board in early 2021.

Firms should expect regulatory changes to follow if the FCA accepts Mr Woolard’s recommendations.

In Focus: Regulation after Brexit

What do UK businesses trading in the EU need to do now that the Brexit transition period has ended?

Section 55 of the Consumer Credit Act 1974 requires a lender to provide a borrower with pre-contract information in a prescribed manner. Currently, this is provided via the Standard European Consumer Credit Information (SECCI) document.

On 30 December 2020, the Financial Services and Economic and Monetary Policy (Consequential amendments) (EU Exit) Regulations 2020 came into force. These regulations require firms to remove references to SECCI (for loans) and European Consumer Credit Information (for overdrafts) by 30 May 2021. These headings do not have to be replaced with alternatives, it is just a case of deleting them.

Failing to update pre-contract credit information documents by the deadline could mean that credit agreements are unenforceable against borrowers with a court order.

Firms should therefore review the wording on the forms/templates they use to ensure this change is reflected by the deadline.

Changes to the Regulated Activities Order 2001 mean that where loan contracts entered into after the end of the transition period are secured on land in the EEA, they will not be regulated mortgage contracts (though existing regulated mortgage contracts secured on land in the EEA before the end of the transition period will remain as such). These post-transition period contracts may instead be regulated credit agreements, in which case firms will need to comply with consumer credit provisions.

Where firms have decided to stop servicing customers in the EEA after the transition period, they should communicate the decision to customers early, consider what would be a fair timeframe for winding down or transferring business and support customers while they find alternative providers.

From 1 January 2021, businesses and consumers are no longer able to use the Online Dispute Resolution (ODR) platform. The ODR platform is an EU website that links consumers with alternative dispute resolution providers in the EU. If they have not already done so, firms should remove links and references to the ODR platform from their website and any terms and conditions.

What do non-UK businesses trading in the UK need to do now that the transition period has ended?

EEA firms carrying on consumer credit lending who notified the FCA to enter the Temporary Permissions Regime (TPR) will be issued with a ‘landing slot’ by the FCA, during which period they will be required to apply for UK authorisation. It is expected the TPR will operate for three years with the last landing slot allocated in early 2021.

Which incoming EU laws should UK businesses be aware of, and is the UK likely to implement similar rules?

Generally speaking, the consumer credit regime is governed by legislation which emanates from the UK and is therefore unaffected by Brexit.

The EU has committed to improving consumer protection in a strategy referred to as the “New Deal for Consumers”. As part of that strategy, the Omnibus Directive came into force on 7 January 2020.

EU Member States have until 28 November 2021 to adopt the Directive, and until 28 May 2022 to bring it into force. Since this will be after the end of the transition period, it is likely that
there will be no obligation to adopt it in the UK. However, the UK government has indicated that it intends to implement similar domestic consumer protection legislation.

Are there any other areas where the UK regime might start to diverge from that of the EU? If so, what should businesses do to ensure they are prepared?

The regulatory regime for consumer credit lending in the UK has always been driven predominantly by domestic market and policy considerations. Accordingly, any areas of divergence that arise either in the short or long term are unlikely to be as a result of the UK’s departure from the EU
or European policy considerations.

Dates for the diary

Early 2021

Christopher Woolard due to make recommendations of the FCA Board following a review of the unsecured credit market.

28 February 2021

Complaints return data must be submitted – no extension has been granted.

31 March 2021

Deadline for consumers to apply for an initial or a further payment deferral under the FCA finalised guidance on consumer credit products. After that date, they will be able to extend existing deferrals to 31 July 2021, provided these extensions cover consecutive payments, and subject to the maximum six months allowed.

2 April 2021

FCA cancellation and refunds guidance expires.

For more on what the EU-UK TCA means, across 17 areas of regulation, and what else is on the regulatory agenda, see our full Regulatory Outlook.