UPDATE NOVEMBER 19
The Financial Conduct Authority (FCA) has confirmed the additional support it wants consumer finance companies to provide to customers who are struggling to make payments due to the coronavirus.
Consumer credit refers to personal loans, credit cards, auto financing, leasing with option to buy, buy it now, and pawn shops.
The guidelines go into effect on November 25, but the FCA is encouraging companies to start providing this enhanced support sooner if they can.
The news follows confirmation earlier this week of measures designed to help mortgage borrowers in similar financial difficulties.
What will the new support look like?
FCA guidelines for consumer finance companies mean that:
- those who have not yet had a payment deferral will be able to request payment deferrals of up to 6 months in total
- those who currently have a payment deferral will be eligible to request another deferral, as long as the total duration of the deferrals does not exceed a maximum of 6 months in total
- those who have already had a payment deferral of less than 6 months will also be able to request another payment deferral, provided that the deferrals do not exceed 6 months in total
- a business may find that a deferral of payment is clearly not in the best interests of a customer. In such cases, the company should instead provide tailor-made support tailored to the client’s situation.
- consumers who have already had six months of deferral of payment or who are in arrears or who receive tailor-made assistance, will not be able to benefit from a further deferral of payment. Instead, companies will provide tailor-made support tailored to their situation. This may include the ability to defer other payments
- Consumers of high cost short term credit, such as those with payday loans, will be entitled to a 1 month deferral of payment.
Consumers will have until March 31, 2021 to request a first or new payment deferral.
After this date, they will be able to extend the existing postponements until July 31, 2021, provided that these extensions cover consecutive payments, and subject to the maximum of 6 months allowed.
If borrowers who haven’t yet taken a deferral feel they need the full six months, the FCA says they should apply in a timely manner before their February 2021 payment (to cover six full months of payments, from February to July included).
How could this affect credit scores?
The FCA confirmed that the deferral of payment would not be recorded on a borrower’s credit file. However, he warned that this could still affect their ability to access credit in the future, as providers consider a range of factors when making their decision whether or not to lend.
More personalized help, if needed, can be recorded on a borrower’s credit report, although lenders should notify borrowers when this is the case.
What about overdrafts?
The FCA asks banks to offer tailor-made support to overdraft borrowers. This could include:
- reduce or waive interest
- agree on a program of gradual reductions in the overdraft limit
- transfer overdraft debt to an alternative credit product on more favorable terms
Premium finance consumers (who use credit to fund the payment of insurance premiums in installments) are expected to continue to benefit from tailor-made support announced by the FCA on October 30.
Sheldon Mills, interim executive director of strategy and competition at FCA, warned, “It is in the long-term best interests of borrowers to only accept deferral of payment when absolutely necessary. Those who are able to continue paying should do so.