FCA confirms rule changes to clarify firms' compliance with debt relief regulations

The regulations come into force on 4 May 2021 and establish protective periods, or ‘breathing spaces’ under a debt respite scheme, during which creditors are prevented from carrying on certain activities in respect of breathing space debts. There is a standard, 60 day breathing space for people with problem debt and a mental health crisis breathing space for debtors receiving treatment for a mental health crisis.

Breathing spaces can only be started by an FCA-authorised debt advice provider, or a local authority providing debt advice to residents. Debtors who are unable or unlikely to be able to repay their debts apply for a standard breathing space by seeking debt advice from a debt adviser who then assesses if a breathing space is appropriate for their needs. Alternatively, for individuals receiving mental health crisis treatment, in addition to the debtor certain people caring for them, such as their social worker or an approved mental health professional, can apply to a debt adviser for a mental health crisis breathing space on the debtor's behalf.

Following a consultation the FCA has confirmed the changes (24 pages / 501KB PDF) it is making to the consumer credit sourcebook (CONC), issuing a policy statement which clarifies how its rules apply where the regulations on debt respite also apply. The FCA said it wanted to avoid duplicating the effects of the regulations in a disproportionate way.

The revised guidance makes it clear that if a customer is benefitting from a debt respite moratorium, firms complying with their obligations under the moratorium are taking steps equivalent to or more favourable than those in the CONC rules on persistent debt, so are not to take the steps to intervene to help the consumer reduce debt levels that would otherwise be required by CONC. Similarly in relation to an overdraft or the part of it that is subject to the moratorium, firms complying with their obligations under the moratorium will be treating the customer with the appropriate forbearance required by the rules in CONC on repeat overdraft use, so are not required to take the steps in CONC to stop the repeated use of the overdraft that would otherwise apply. The FCA said the interventions required in CONC were inconsistent with the concept of a breathing space, which is to give customers time to seek further debt advice.

However, at the end of a breathing space firms will have to consider the relevance of the rules and guidance in CONC. The guidance clarifies they will be able to consider the time the debt has already been in a moratorium in determining what constitutes a reasonable period, if applying the rule requiring firms suspend active recovery of a debt for a reasonable period where the customer is developing a repayment plan.

Financial services regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said: “The policy statement does not provide guidance on interpreting or applying the government’s regulations, so to fully understand their obligations relevant creditor firms will find it helpful to read both the policy statement and the government’s breathing space guidance.

“An area for creditor firms to focus on is their standard communications with debtors. This needs to be reviewed by firms as communications with the debtor during the breathing space are restricted, so creditor firms and their agents must ensure their communications with the debtor during the breathing space are in line with the breathing space requirements. Firms should also be ready to contact third parties such as assignees of any breathing space debts, or agents recovering them to ensure such activities cease during the breathing space. Staff will also need to be trained on how to apply the new requirements,” Barber said.

Barber said when making process and business changes firms must ensure these cater for the two types of breathing space and staff understand the differences between them.

“It will also be important for management to keep in mind Principle 6, which concerns the fair treatment of consumers, and the needs of their firm’s vulnerable customers. Although the FCA does not supervise or enforce the regulations, the approach firms take to compliance could have regulatory implications if its rules are breached, or there is what the FCA calls ‘systematic non-compliance’ with the regulations. This would cause the FCA to focus on whether the firm is satisfying its principles or threshold conditions,” Barber said.