Back to All Members' Briefings

FCA Consultation – Strengthening Protections for Borrowers In Financial Difficulty: Consumer Credit And Mortgages

Friday 5 January 2024

The Financial Conduct Authority (FCA) has published a consultation paper setting out how the FCA plan to incorporate aspects of the Tailored Support Guidance (TSG) into the Consumer Credit (CONC) and Mortgages and Home Finance: Conduct of Business (MCOB) sourcebooks to reflect the planned withdrawal of the TSG.

During the coronavirus pandemic the FCA introduced the TSG to clarify how firms could support customers in financial difficulty. Most credit unions are exempt from these changes due to the sector’s exemption from consumer credit regulation. However, this consultation will impact credit unions who provide mortgages or other consumer credit permitted products e.g., Borrower-lender-supplier agreements, or those wishing to apply for permissions to offer any of the new regulated activities proposed in the pending legislative reform.

The FCA want to provide a stronger framework for firms to better support customers facing payment difficulties by incorporating aspect of the TSG into the Handbook. The proposed changes reinforce the expectations of the FCA for firms to put customers’ needs first and to support firms in delivering good outcomes for customers, as will be required under Consumer Duty.

The Proposals

Currently CONC 7 and MCOB 13 primarily apply to customers who have already missed a payment. The FCA proposes to expand the scope of these chapters to clarify that this should also apply to customers who indicate to a firm that they are at risk of missing a payment, as well as any instances where this is identified by firms.

Credit

To extend relevant CONC rules and guidance to require firms to provide appropriate support to customers approaching arrears where the customer indicates to the firm that they are at risk of not meeting one or more repayments when they fall due. This proposal builds on the existing requirements in CONC 6.7.2R and CONC 6.7.3AR for firms to monitor a customers repayment record and take appropriate action where there are signs of actual or possible repayment difficulties and to provide customers with appropriate support at an earlier stage.

Mortgages

The FCA plan to expand the scope of MCOB 13.3.1R to make clear that firms must deal fairly with any customer who has or may have payment difficulties. For the purpose of MCOBS this would include the following three situations:

  • The customer has a payment shortfall
  • The customer indicates to the firm that they are at risk of falling into payment shortfall
  • The firm otherwise becomes aware that they customer may be at risk of falling into payment shortfall

The FCA propose that a firm should offer support to a customer where they become aware that the customer is, or may be, at risk of missing mortgage payments, even where the customer has not told them this. This information could have been received through a third party, such as a debt advisor, or if a customer has multiple products with the same financial provider and misses payments on these. However, while the FCA propose firms must react to information indicating a customer is, or may be, at risk of payment shortfall, they do not propose to require firms to take steps to proactively identify such customers as not all firms will have access to information which may indicate this.

Another proposed change is to build on the requirement for firms to give customers adequate information to understand the implications of any proposed arrangement, which will help customers consider whether such options are right for them.

Question 1 – Do you agree with the proposed changes to the scope of:

    1. CONC 5 & 7
    2. MCOB 13

Reviewing Policies and Procedures

The TSG highlighted the importance of having policies and procedures that are fit for purpose and that can respond to change in the external environment. The FCA is consulting on adding a new rule to both CONC 7 and MCOB 13 to require firms to ensure the effectiveness of any policies and procedures put in place for customers in or at risk of payment difficulty, and the firm’s ongoing compliance with them, is reviewed at appropriate intervals. Providing firms with the flexibility to review when it is appropriate to do so, including to respond to external or internal factors such as external shocks and changes in the economic environment.

The FCA propose to consult of supporting guidance for firms to ensure these reviews consider the customer’s overall experience, rather than only considering individual interactions in isolation. This will allow firms to better assess whether they are providing customers in payment difficulty with the appropriate support, and treating them fairly, while their difficulties remain.

Question 2 – Do you agree with the proposals to include a new Handbook rule and associated Handbook guidance, covering the reviews of the effectiveness of policies and procedures:

    1. in CONC 7?
    2. in MCOB 13?

Customers in Vulnerable Circumstances

The FCA propose to replace the expectations in CONC 7 and MCOB 13 with new guidance that reminds firms that they should have regard to regard to the expectations set out in the FCA’s guidance for firms on the fair treatment of vulnerable customers (FG21/1), ABCUL previously published a briefing on the guidance that can be found here. Firms will be reminded to develop policies and procedures for customers who have, or may have, payment difficulties. Each firm will also need to use their judgement to consider what each section of the Vulnerable Customer Guidance means for them and what they should do to ensure they treat customers fairly.

Question 3 – Do you have any comments on the updated references to the fair treatment of vulnerable customers for CONC 7 or MCOB 13? 

Forbearance options

The FCA expect firms to consider a range of forbearance options and take account of customers individual circumstances when determining and providing the appropriate support.

Credit

The FCA propose adding examples of forbearance and due consideration that may be appropriate to the existing examples setout in CONC 7.3.5G so it includes:

  • suspending, reducing, waiving or cancelling any further interest and charges
  • allowing deferment of payment of arrears
  • accepting no payments, reduced payments or token payments for a reasonable period of time
  • agreeing a sustainable repayment arrangement with the customer that allows the customer a reasonable period of time to repay the debt
  • transferring the debt to an alternative credit agreement (refinancing) to help the customer reduce the debt over a reasonable period of time in such a way that does not adversely affect the customer’s financial situation

Overdrafts

The FCA has proposed the following forbearance options to support the individual circumstances of the customer to be included in CONC:

  • reducing and waiving interest
  • transferring the overdraft debt to an alternative credit product on more favorable terms (refinancing)
  • agreeing staged reductions in the overdraft limit and balance (agreeing a repayment plan)

Mortgages

In the TSG, the FCA said that firms should consider and use a range of forbearance options and not take a ‘one size fits all’ approach because different solutions are likely to be appropriate for different customer circumstances.

The proposal is to add to the list of options that a firm must consider, given the circumstances of the customer, under MCOB 13.3.4AR. Firms will need to consider whether it is appropriate to waive or defer payment of capital and/or interest, and/or whether it is appropriate to reduce the interest rate or apply simple interest. The FCA do not propose to make this expanded list exhaustive and continue to expect firms to consider other options which may be appropriate in specific circumstances, and to also add new guidance confirming their expectation that a firm employs a sufficient range of options to help customers facing financial difficulties.

Question 4 – Do you agree with the proposals to add to the existing list of forbearance options at CONC 7.3.5G, CONC 5D 3.3(4)G and MCOB 13.3.4AR?

Transparency and accessibility of forbearance options

The FCA proposes to add guidance to MCOB 13 and CONC 5 & 6 that firms should:

  • offer to engage with customers through a range of channels, changing the channel if necessary to enable the customer to engage with the firm effectively; and
  • be transparent with customers about the range of options the firm will consider and the communication channels available:
    • For mortgages, the FCA propose the range of options to help customers that a firm will consider should be setout clearly, including in a prominent location on the firm’s website
    • For overdrafts, the FCA propose that firms should set out on their website in a prominent location the range of options that can be considered when an overdraft borrower is facing financial difficulties to enable customer and those advising them to understand and evaluate the options. When a firm offers refinance loans, firms should provide indications of the eligibility criteria, interest rate and term.

Question 5 – Do you agree with the proposals on the transparency and accessibility of forbearance options to CONC 7.3.13A, 5D 3.9G, 5D 3.3G(7) and MCOB 13.3.4C? 

Money Guidance and Debt Advice

Credit (including overdrafts)

The FCA propose to supplement the existing guidance in CONC 7.3.4R with further provisions including that firms should, where appropriate:

  • Inform the customer that money guidance and debt advice is available and can be acceded through a range of delivery channels, including digital tools
  • Effectively communicate to customers the potential benefits of money guidance or free and impartial debt advice from not-for-profit debt advice bodies
  • Consider whether the customer would benefit from specialist sources of debt advice, such as making a self-employed customer aware of business debt advice providers
  • Have regard to the Money and Pensions Service Strategic Toolkit when considering how to provide appropriate help and support to customers

The FCA are also proposing that this guidance should apply to overdrafts. Where a customer has a pattern of repeat use, and there are signs of actual or financial difficulties, the FCA are proposing that firms should also take steps to inform and direct customers to appropriate help and support.

Mortgages

To strengthen the expectations on mortgage providers the FCA proposes to expand MCOB 13.3.2AR by requiring firms to also:

  • Inform a customer that free and impartial money guidance and debt advice is available, including not-for-profit bodies
  • Effectively communicate the potential benefits of accessing free and impartial money guidance and debt advice, and the range of channels through which these are available
  • Signpost or refer the customer to suitable sources of free and impartial money guidance or debt advice

All firms will need to consider the potential benefits of these services for individual customers as referrals will not be necessary or appropriate in all cases.

Question 6 – Do you agree with the proposals relating to effective customer engagement and communication around money guidance and debt advice in CONC 7.3.7A and in MCOB 13.3.2AR?

Providing information to customers

Credit

The FCA proposes to include guidance to remind firms of their obligations to communicate with customers in accordance with Principle 7 (A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading) or Principle 12 (To act to deliver good outcomes for retail customers). The proposal also includes guidance that firms should:

  • make available to customers timely, clear and understandable information which takes into account the individual characteristics of the customer and is sufficient to enable the customer to understand their financial position in relation to their debt, including the potential impact of any forbearance or due consideration on their overall balance and any implications for the customer’s credit file
  • consider the most appropriate way to engage and communicate with customers, and offer to engage through a range of channels, changing the channel if necessary to enable the customer to engage with the firm effectively

There is also the proposal to reiterate in CONC 5D that firms should not suspend or remove overdraft facilities or reduce credit limits if this will cause financial hardship to the customer. While also clarifying the term “financial hardship” which firms should refer to when reading the FCA’s guidance on when a firm should consider removing, suspending, or reducing an overdraft facility.

Mortgages

The FCA is proposing to amend MCOB 13.3.4AR to align with the expectations set out in the TSG to ensure that customers not only receive adequate information to understand the implications of any proposed arrangement but also the impact this arrangement will have on the customers overall balance and credit file. Firms will also be required to explain the implications of not agreeing an arrangement, for example when the customer is concerned about the effect on their credit file but will likely miss payments. The FCA was welcoming views on whether customers should be given a reasonable period to consider the implications of the arrangement before it is agreed and if so, what period is reasonable.

Another proposed change is to remove the provision that firms may be able to provide information on any new terms in line with the annual statement provisions.

Question 7 – Do you agree with the proposals to include further Handbook provisions on expectations relating to customer engagement and communications in CONC 7.3.13A, 5D and MCOB 13.3.4AR?

Consequential amendments

The FCA is also proposing various minor consequential amendments to other chapters in MCOB and CONC which reference provisions that the FCA are proposing to amend as part of this consultation.

Credit

  • CONC 5 – to reflect the references to Vulnerable Customer Guidance – This would be relevant when firms are developing policies and procedures for fair and appropriate treatment of vulnerable customers including creditworthiness assessments.
  • CONC 6.7 – to expand the scope of certain post contract requirements to customers approaching arrears.

Mortgages

  • Amending references of customers in payment shortfall or arrears to reflect the proposal for MCOB 13 to refer to the treatment of customers in payment difficulties more broadly.

Credit specific proposals

Escalating balances

  • To make permanent where a firm has put in place a sustainable repayment arrangement as a forbearance measure, for as long as the customer id meeting the terms of that arrangement, the firm must suspend, reduce, waive, or cancel any further interest or charges to the extend necessary to ensure the level of debt under the arrangement does not rise for the period of that arrangement.
  • If a customer’s circumstances change so they can pay a larger amount under the repayment arrangement, the firm will not be required to waive as much interest, fees, or charges to prevent the balance from escalating.

Charges

  • To supplement CONC 7.7.5R with guidance to help firms determine their necessary and reasonable costs in setting fees and charges applied to customers in payment difficulties. These proposals support the price and value outcome under Principle 12 (Consumer Duty).

Sustainable repayment arrangements

The TSG for credit sets out the FCA’s expectation that firms agree sustainable repayment arrangements with customers which consider their priority debts and essential living costs.

  • The FCA propose introducing a requirements that firms must take all reasonable steps to ensure that any repayment arrangements agreed with customers are sustainable and providing additional supporting guidance to clarify what is a sustainable payment.

Reviewing Forbearance measures

The TSG set out the FCA’s expectations for firms to review forbearance measures that have been put in place for a customer to ensure their circumstances have not changed and the measures remain appropriate. The FCA proposes that firms must take reasonable steps to ensure that forbearance measures remain appropriate.

Income and expenditure assessments

Currently CONC sets out that income and expenditure assessments, where appropriate, should have regard to the provisions in the Common Financial Statement or equivalent guidance. The FCA are proposing a new rule for firms who assess income and expenditure must do so in a subjective manner by referring to the spending guidelines in the Standard Financial Statement or equivalent guidance. The FCA are also proposing further guidance which sets out their expectations that firms must have policies detailing how and in what circumstance they conduct income and expenditure assessments. In addition to this the FCA are also proposing guidance that firms make available to the customer a record of any income and expenditure assessment that has been conducted to enable the customer to share the record with other lenders and debt advice providers.

Question 13 – Do you agree with the proposals for firms to objectively undertake income and expenditure assessments?

Question 14 – Do you agree with the proposed guidance for income and expenditure assessments on clear policies, assessing whether arrangements are appropriate and sustainable and making available to the customer a record of any assessment to allow them to share with other lenders and debt advice providers?

Repossessions and voluntary terminations

The FCA is proposing to incorporate key elements of the TSG guidance on repossessions and voluntary terminations which set out what firms should consider applying when treating a customer with forbearance and due consideration.

Repossessions

The FCA is proposing that repossession of a customer’s goods or vehicles should only be repossessed as a last resort. Reflecting on the existing rule in regard to repossession of a customer’s home in CONC 7.3.17R. Another proposed change is to introduce a new rule stating that commencement or continued repossession action must not be actioned for as long as the customer is meeting their agreed forbearance arrangement.

The FCA are also proposing supporting guidance which clarifies the following:

  • Where a customer informs a firm they intend to access debt help or money guidance, the firm should allow customers reasonable time to access it before considering whether to commence repossession action
  • A firm may take action to repossess goods or vehicles as a last resort, for example when the firm has made reasonable attempts to engage with the customer and the customer has not engaged
  • When considering whether repossession is appropriate, firms should have regard to all aspects of the financial impact on the customer including asset depreciation if repossession is delayed
  • Firms should inform customers of the impact of the firm suspending any repossession actions, including on the value of goods or vehicles
  • Firms taking or considering taking enforcement action should have regard to the FCA Guidance for firms on the fair treatment of vulnerable customers (FG21/1)

Voluntary termination

The FCA is proposing that firms must inform customers of their rights to terminate a hire purchase or conditional sale agreement under section 99 and section 100 of the Consumer Credit Act in good time of that right, and provide information that is clear, fair, and not misleading.

Question 16 – Do you agree with our proposals on voluntary termination?

Revision to CONC App1.2

The proposal will amend CONC App 1.2, this will require lenders to include in their calculation of the Annual Percentage Rate (APR) situations where they may exercise their rights under a continuous payment authority (CPA) to take all of the outstanding balance under the agreement which results in regular redrawing by the customer.

Mortgage specific proposals

Increasing balances

The FCA has highlighted that some firms do not consider the impact a forbearance arrangement has on the customer’s overall balance. With the potential for ongoing payments being less than the accruing interest, resulting in their balance will increase. The FCA are proposing firms with second charge mortgages consider using a range of forbearance options to mitigate the balance from escalating to a point where the customer is unlikely to be able to repay the total amount owed, and give the customer more scope to address any shortfall.

Although this is specifically tailored to second charge mortgages, the FCA is mindful that this issue may not be limited to this product and are proposing that firms should consider if it is appropriate to reduce interest rates or apply simple interest in all cases.

The FCA is also proposing that where a payment error has occurred due to a technical issue or direct debit bounce-back, and the customer is not in financial difficulty that the information requirements in MCOB 13.4.1R are not triggered if the shortfall is a result of payment error and is cleared within five working days.

Question 19 – Do you agree with the FCA’s proposal to change and extend the scope of the rules in MCOB 13.4.1R and MCOB 13.5.1R to ensure more timely disclosure of information on any payment shortfall?

Capitalisation

The guidance currently provided in MCOB 13.3.4DG states that firms should not agree to capitalize a payment shortfall save where no other option is realistically available to assist the customer. The FCA proposes to amend this guidance to clarify that firms can take a more balanced approach when it is in the customer’s best interests.

The FCA are consulting on Handbook guidance setting out that capitalization may be appropriate if:

  • the firm reasonably considers, taking into account the root cause of the shortfall, that the customer can afford the monthly payments when the shortfall is capitalised;
  • other options to repay the shortfall more quickly have been considered; and
  • taking account of the customer’s individual circumstances, the firm reasonably considers that capitalisation is in accordance with the customer’s best interests

This would mean that a firm cannot capitalise a shortfall simply because the customer asks for this. The proposed guidance will clarify what the firm will need to consider ensuring this is in the customer’s best interest and if there are other options available that would repay the shortfall quicker. It is also vital that customers can afford future capitalized payments. The FCA are seeking views on determining the affordability of the customer to maintain the future capitalised amounts and if it would be appropriate to review the customer’s income and expenditure in some instances.

Question 20 – Do you agree with the FCA’s proposals to amend the guidance in MCOB 13.3.4DG?

Question 21 – Do you agree with the factors the FCA have proposed a firm considers before determining whether capitalisation is appropriate?

Question 22 – Do you have any comments relating to determining the affordability of future capitalised payments?

Ensuring arrangements remain appropriate

The FCA is proposing the addition of a new rule that will mean firms must take reasonable steps to ensure that any arrangement with a customer in payment shortfall remains appropriate. They are also seeking views on guidance as to what is considered reasonable, bearing in mind that this will depend on the individual circumstances of each customer and the arrangement in place. Should it be agreed at the outset to regularly review arrangements at specific intervals, also reactive responses from firms due to a customer’s changing circumstances or other relevant information the firm receives.

Question 23 – Do you agree with the FCA’s proposal for firms to ensure that forbearance arrangement remain appropriate?

Question 24 – Do you agree with the FCA’s proposed guidance on what the FCA considers to be reasonable steps?

Taking account of wider indebtedness

In the TSG, the FCA set out expectations that if a customer indicated that they hare having difficulties paying other priority debts, the FCA expects firms to take those debts, and the consequences of falling behind on them, into account when considering or offering forbearance. The FCA is proposing to incorporate this guidance into MCOB 13.3.4CG, to clarify that a firm should take account of a customer’s wider indebtedness when considering what options are appropriate.

Question 25 – Do you agree with the FCA’s proposals to provide additional guidance at MCOB 13.3.4CG to include taking account of wider indebtedness?

Sharing income and expenditure assessments

The FCA is proposing to add guidance to MCOB 13.3.4CG that where a firm conducts an income and expenditure assessment they should offer to share this with the customer. This will enable the customer to share this with other lenders or debt advice providers, potentially the time spend repeating information regarding their income and expenditure with multiple creditors.

Question 26 – Do you agree with the FCA’s proposal for firms to share income and expenditure assessments with customers where possible?

Record keeping

MCOB 13.3.9R already requires firms to maintain adequate records of the support offered to customers whose account has a payment or sale shortfall. The FCA proposes to extend this rule in line with the expanded scope of MCOB 13, to include records of dealings with customers who may have payment difficulties. They are also proposing to clarify the requirement to record telephone calls with customers that discuss any amount in arrears or subject to payment shortfall charges, including video calls, to ensure consistent practice across firms. Currently the FCA does not require firms to record discussions of all payment shortfalls (regardless of whether they are incurring charges) or all conversations with customers who have or may have payment difficulties. Many firms will already be recording these conversations and the FCA are welcoming views on whether this rule should be extended to record calls with those customers in payment shortfall and those who may have payment difficulties.

Q27 – Do you agree with the FCA’s proposal to extend the rule in MCOB 13.3.9R to include customers who have or may have payment difficulties?

Q28 – Do you agree with our proposed clarification on recording video calls in MCOB 13.3.9R? Do you agree with the FCA’s proposal not to extend this to those facing payment difficulties?

ABCUL’s View

ABCUL supports the FCA’s proposals to expand the scope of relevant consumer credit and mortgage chapters to provide clarity to firms of what appropriate support should be provided to customers in or at risk of payment difficulty. Although many credit unions do not provide consumer credit products, they have been readily providing forbearance to members in need of support and responding to members in financial difficulty. With many credit unions adhering closely to the requirements which strengthens the sector’s position of exemption. With the impending legislative reform some credit unions may be considering applying for consumer credit permissions to offer the new products and services that will be available. We would welcome views from all credit unions regardless of their current consumer credit status.