FCA seeks to expand firms’ obligations to borrowers in financial difficulty

The proposals (91-page / 1.21MB PDF), which relate to consumer credit providers and mortgage providers, are a clear indication of the FCA’s ongoing focus on consumer protection and on ensuring that the most vulnerable are protected and supported.

What has happened?

The FCA has published a consultation paper proposing changes to its CONC and MCOB sourcebooks that will permanently incorporate parts of its Covid tailored support guidance (TSG) into those sourcebooks. It is also proposing some additional changes to further support borrowers in financial difficulty. The consultation closes for response on 13 July 2023.

Background to and summary of the proposals

The TSG was introduced in 2020 at the height of the pandemic and subsequently updated in 2021. The aim of the guidance was to ensure that customers with borrowing were supported at a time of economic uncertainty. The cost-of-living crisis that has followed the pandemic has meant that financial pressures have not eased as they were originally anticipated to do.

The FCA has been alive to this. It initially launched a ‘borrowers in financial difficulty’ project focussed on the TSG and it is also reflected in the outcome of the regulator’s 2022 financial lives survey. In June 2022, a 'Dear CEO’ letter to the consumer lending sector made it clear that the FCA regarded its TSG as equally applicable to cost-of-living issues as to coronavirus issues. The current proposals to incorporate the guidance into CONC and MCOB will make the approach a more permanent fixture of the regulatory regime for consumer lending and raise its prominence.

In its consultation, the FCA proposes changes to the existing scope of its chapters in CONC and MCOB dealing with arrears. The proposed changes, if brought into effect, would expand the scope of these chapters and the obligations on firms to offer support not just to customers who have already missed payments but also to those who tell their lender they may miss a payment and those for whom the firm has information to suggest they may be at risk of missing payments. Firms would not, however, be expected to proactively identify customers at risk of missing payments.

The FCA’s proposals, especially around circumstances where the firm has information to indicate risks of missing payments, are likely to present challenges to firms in determining how to monitor this and additionally at what point might be the appropriate point to offer support. Equally, early intervention is likely to be beneficial both to firms and customers in the long term if fewer customers fall into arrears as a result.

The consultation includes a mix of proposals being applied across both consumer credit and home finance activities, and some proposals that are specific to either credit or mortgages. In the general category some welcome assistance is provided to firms in the form of examples of forbearance and due consideration that firms may consider using. Along with the requirement that options should be transparent to customers, this could help both firms and customers know where they stand when forbearance is needed.

Additionally, the FCA is proposing to update its sourcebooks to reflect changes to its views on the treatment of vulnerable customers which there has been since CONC and MCOB were first drafted. The changes make it clear that firms should be looking to the FCA’s vulnerable customers guidance published in 2021 to inform their approach.

Credit specific measures

In the credit specific measures, the FCA proposes new rules and guidance requiring firms to take all reasonable steps to ensure that repayment arrangements agreed with customers are in fact sustainable. The FCA notes that if a customer is unable to meet their essential living costs, the arrangement will not be sustainable. In addition, the FCA proposes to require firms to take reasonable steps to ensure that forbearance arrangements remain appropriate and not to take repossession action whilst forbearance arrangements are being followed. Additional guidance is also proposed on when repossession may be appropriate.

Questions of forbearance and how to support customers in payment difficulties have been concerning firms for some years now. The transposition of the TSG into the FCA Handbook makes the FCA’s expectations clearer in what is frequently a highly fact sensitive situation.

The complexity of fees, charges and escalating balances in consumer credit are also addressed in the consultation, with provisions outlining expectations to prevent debt balances from escalating under repayment arrangements and guidance on what amounts to necessary and reasonable costs for setting fees. This has long been an opaque area and with the consumer duty setting expectations that fees and charges do not impact fair value, guidance in this area is a welcome clarification.

Mortgage specific measures

Typically, mortgage customers receive an annual statement of their account. Current rules in MCOB 13 provide for additional statements once two or more payments are missed and where a shortfall attracts charges. In its consultation, the FCA proposes changing the rules to ensure that customers are notified of a shortfall whenever it occurs and are provided with at least quarterly statements if they are in ongoing shortfall.

As with the consumer credit specific measures, the FCA proposes that firms should ensure that any forbearance arrangements remain appropriate. The FCA also proposes that in considering what arrangements may be appropriate, a mortgage firm should have regard to a customer’s wider indebtedness. 

In a rare relaxation of approach, the FCA also proposes changes to the rules on capitalisation of shortfalls as it considers that the current rules have led to firms refusing capitalisation even where it is appropriate due to FCA guidance that it is an option of last resort. The FCA proposes changing the guidance to make it clear that capitalisation may be appropriate if, after considering the circumstances, other options, and the customer’s ability to afford the capitalised payments, it remains in the customer’s best interests. Whilst the expectation remains that this should not be the first option and nor should it be automatically given on a customer’s request, the shift in the guidance will offer firms more flexibility to achieve good outcomes for customers in difficulties.

In relation to both consumer credit and mortgages, the FCA proposes additional guidance that firms should offer to make income and expenditure assessments available to customers so that they can share them with other lenders and debt advice providers. In a regulatory environment which depends on firms gathering information from consumers to assess affordability, the ability for a customer to share an income and expenditure assessment with another lender or debt adviser should facilitate both the customer achieving good outcomes and the lender or adviser in carrying out their responsibilities efficiently. If customers take advantage of the offer, it is a way in which firms will be able to support them in meeting their financial objectives in line with the consumer duty.