FCA Consultation: Strengthening protections for borrowers in financial difficulty

On 25 May 2023, the Financial Conduct Authority (the FCA) published its long awaited consultation on ‘Strengthening protections for borrowers in financial difficulty: consumer credit and mortgages’ (CP23/13) (the Consultation). The Consultation is also supported by a press release on the FCA’s webpage.

The Consultation

The Consultation sets out how the FCA plans to incorporate the Tailored Support Guidance (the TSG) into the Consumer Credit Sourcebook (CONC) and Mortgages and Home Finance: Conduct of Business (MCOB) sourcebooks (together the Handbook) with a view to withdrawing the TSG. The TSG was introduced during the coronavirus pandemic to clarify how firms should support customers in financial difficulty.

The FCA is also proposing “targeted additional changes” to support consumers in financial difficulty and these changes will reinforce the expectation for firms to deliver good outcomes for customers in accordance with the Consumer Duty.

The key aspects of the TSG that the FCA proposes to incorporate into the Handbook include:

• broadening the scope of relevant consumer credit and mortgage chapters to make clear to firms that appropriate support should be provided to customers in, or at risk of, payment difficulty;
• enhancing the FCA’s expectations around customer engagement and providing information including on money guidance and debt advice; and
• expecting firms to consider a range of forbearance options and take reasonable steps to ensure arrangements remain appropriate;

Consumer credit

• expecting firms to consider the customer’s individual circumstances when providing forbearance; and
• introducing guidance to help firms determine their necessary and reasonable costs in setting fees and charges;

Mortgages (mainly focusing on regulated mortgage contracts)

• changing the FCA’s guidance to allow firms more scope to capitalise payment shortfalls where appropriate;
• improving disclosure for all customers in payment shortfall; and
• providing clearer guidance on the existing requirement to record telephone calls with customers in payment shortfall, including video conferencing.

The Proposals

The current rules in CONC 7 and MCOB 13 largely apply to consumers who have already missed a payment. The guidance provided under the TSG encourages firms to support customers before they miss a payment (i.e., consumers who are in or at risk of payment difficulty). The FCA say it is important that customers facing payment difficulties engage early with their lender and get the support they require.

Reviewing the effectiveness of policies and procedures

The TSG highlighted the importance of having policies and procedures that are fit for purpose and can respond to change.

The FCA is therefore consulting on adding new rules to CONC 7 and MCOB 13 to require firms to ensure the effectiveness of 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.

Customers in vulnerable circumstances

The TSG emphasised the need for firms to ensure they respond to the needs of customers with vulnerable characteristics who may be at the greatest risk of harm.

The FCA proposes to replace “the narrowly drawn expectations on vulnerability” with new guidance with regard to the Guidance for firms on the fair treatment of vulnerable customers (FG21/1).

Forbearance options

Firms will be required to consider a range of forbearance options (that will not be exhaustive) and take account of customer’s individual circumstances when providing support.

Examples of forbearance will be added to CONC 7.3.5G.

A list of options for firms to consider given the individual circumstances of a customer will be added under MCOB 13.3.4AR.

Guidance will also be added to CONC 5 & 7 and MCOB 13 to support with the transparency and accessibility of forbearance options.

Money guidance and debt advice

CONC 7.3.4R will be updated with further guidance to support customers.

The FCA proposes to strengthen its expectations in MCOB 13.3.2AR by requiring firms to take steps to offer guidance and debt advice.

Providing information to customers

Guidance will be included to remind firms of their obligations to communicate with customers in accordance with Principles 7 and the new Consumer Duty Principle 12.

MCOB 13.3.4AR will be amended to align with the expectations set out in the TSG.

Specific proposals for credit and mortgage agreements

Credit: the FCA says a lot of the guidance around these proposals are included in the TSG, but proposals include measures surrounding escalating balances, charges, sustainable repayment arrangements, reviewing forbearance measures, income and expenditure assessments and repossessions and voluntary terminations.

Mortgages: proposals will include measures surrounding increasing balances, shortfall statements, capitalisation, ensuring arrangements remain appropriate, taking account of wider indebtedness, sharing income and expenditure assessments and record keeping.

The draft Handbook text is covered at Appendix 1 of the Consultation.

Comment

The Consultation demonstrates the FCA’s ongoing focus and work on reducing harm for consumers who are or may be in financial difficulty, and the treatment of customers with vulnerabilities. The FCA’s proposed changes to the Handbook will provide further rules and guidance on how firms should interact and support customers to:

• lower overall costs from interest, fees and charges;
• lower time costs for customers and firms;
• reduce impact on credit files; and
• help customers resolve their debt problems quickly.

The questions in the Consultation are framed in a very simplistic way. Careful thought will need to given to the impact of each proposal and the measures that will need to be put in place to ensure they are practical and effective.

The Consultation will remain open until 13 July 2023. The FCA says it intends to publish a Policy Statement including its response to feedback in H2 2023 and expects the rules to come into force in H1 2024.

Authors: Heff Heathcote, Alanna Tregear and Kaileigh Hunter

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.