Are there are any consultation papers or proposals for amending the Consumer Credit Act 1974 in relation to notices of sums in arrears in light of the Financial Conduct Authority’s final guidance for payment holidays regarding hire purchase agreements?

Are there are any consultation papers or proposals for amending the Consumer Credit Act 1974 in relation to notices of sums in arrears in light of the Financial Conduct Authority’s final guidance for payment holidays regarding hire purchase agreements?

Produced in partnership with Russell Kelsall LLB (Hull); LPC (Shef) of TLT

 

What temporary guidance has been issued by the FCA?

The Financial conduct Authority (FCA) has issued temporary guidance, applying for an initial period of three months, to a significant number of firms in the consumer credit sector.

• On 9 April 2020, the FCA published its finalised temporary guidance to consumer credit firms dealing with customers needing coronavirus (COVID-19) related payment holidays for personal loans, credit cards and retail revolving credit (for example, catalogue credit or store cards) and overdrafts. This guidance came into force on 14 April 2020. For more, see: Q&A: On 9 April 2020, the Financial Conduct Authority confirmed a package of targeted temporary measures to help people with some of the most commonly used consumer credit products. What are the implications of the measures?

• On 24 April 2020, the FCA published its finalised temporary guidance to consumer credit and hire firms dealing with customers needing coronavirus related payment holidays for ‘motor finance’ and ‘high-cost credit’. This guidance came into force on 27 April 2020. For more, see: Q&A: On 24 April 2020, the Financial Conduct Authority confirmed a further package of targeted temporary measures to help people with some of additional consumer credit and consumer hire products relating to motor finance, high-cost short-term credit, rent-to-own, fixed-sum credit buy-now pay-later and pawnbroking agreements. What are the implications of the measures?

• On 1 May 2020, the FCA published its draft temporary guidance to insurance and premium credit firms dealing with needing coronavirus related payment holidays. The finalised temporary guidance is likely to come into force shortly after 5 May 2020

For consumer credit products impacted by the temporary guidance which may require a notice of sum in arrears (NOSIA) to be issued, the finalised temporary guidance says the customer should not be considered to be ‘in arrears’.

 

When is a NOSIA triggered under the CCA 1974?

The Consumer Credit Act 1974 (CCA 1974) requires a NOSIA to be sent to customers where one is triggered. The triggers rely on the word 'payments'. This word is defined as payments made at 'pre-determined intervals provided for under the terms of the agreement' (see CCA 1974, s 86B(13)(a) for fixed-sum credit agreements and CCA 1974, s 86C(8) for running-account credit agreements).

 

When does the guidance cause an issue with NOSIAs?

Firms implementing the guidance normally have one of three options:

• unilaterally varying the agreement’s terms under CCA 1974, s 82(1)

• consensually modifying the agreement under CCA 1974, s 82(2)

• granting a concession to the agreement’s terms (which does not contractually change the agreement’s terms). It is this latter approach (which is commonly used for very good reasons) which often causes a NOSIA to be issued because the agreement’s terms remain the same and, as a consequence, the customer is technically (for the purposes of NOSIA triggers) ‘in arrears’ (despite what the guidance says).

 

What does the FCA say?

After the first round of consultation, the FCA published FS20/3: FS20/3: Temporary financial relief for consumers impacted by coronavirus: feedback on draft guidance and rules. This says the FCA is ‘familiar’ with the industry’s concern (see paragraph 2.63) that giving a customer a concession is unlikely to stop a NOSIA being triggered (which hardly creates a good customer journey). But it says these issues are ‘not new’ and have been in place for ‘many years’ (see paragraph 2.64). The FCA also says (see paragraph 2.67):

Where a NOSIA is required to be sent, although the legislation requires the inclusion of certain prescribed wording, it is open to firms to provide suitable explanations or context with these notices if they consider that they might otherwise lead to confusion. One trade body suggested that if firms had operational difficulties in including the additional wording within the NOSIA itself that they could include it in a separate communication. We do not have any issues in firms doing this provided it is sent in a timely manner and is likely to be clearly understood.

But there is no suggestion by the FCA that it intends to lobby HM Treasury to introduce legislation to change the rules on when a NOSIA is triggered.

 

Is anything being done by the industry?

Yes—both the Finance and Leasing Association and UK Finance are lobbying HM Treasury for urgent legislation to make entering into a modifying agreement more straight-forward. If such legislation is made (and there are very good reasons for these changes), it will allow firms to enter into modifying agreements instead of giving concessions to customers. The key advantage of such an approach is that a NOSIA will be triggered based on the new contractual terms. This means the customer will not be ‘in arrears’ under the guidance or under CCA 1974 so long as they keep to the terms of the modified agreement.

 

This Q&A states the position as at 5 May 2020.

 

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