Consumer credit debt and Covid-19

Posted: 17/04/2020

The Covid-19 pandemic has affected every business and household in some way: some businesses (the minority) are enjoying increased demand for their services and products, but the majority are not - many operations are suspended altogether and others are experiencing reduced demand. Additionally, with up to nine million workers furloughed or expected to be furloughed, the ability of many individuals to meet all of their monthly outgoings will be impacted.

While some people may be able to borrow additional money, others may not (or may not want to – the idea of borrowing to repay existing borrowing in the current circumstances will be anathema to some) and so default and the risk of potential enforcement action for default will be inevitable for many.

In response to this, the FCA has:

relaxed the rule in the Consumer Credit Sourcebook (CONC) that prescribes the minimum payment be made on credit card statements; and
issued guidance that will effectively oblige lenders of consumer credit to grant a three month moratorium on debts and to reduce interest costs, applicable from 14 April 2020.[1]

The FCA has previously issued guidance in relation to mortgage payment holidays, which can be found below.[2]

How does the guidance work?

Credit card debt and personal loans

The debtor experiencing financial difficulties as a result of Covid-19 must contact the lender and request a payment moratorium. While the lender can investigate the circumstances behind the request, if the problems appear genuine, the lender must grant a payment moratorium of up to three months (the period can be shorter if there is the possibility of the debtor meeting payments before then).
Interest can still be charged during the moratorium.
If the debtor is still experiencing financial difficulties at the end of the moratorium, then the forbearance rules contained in CONC 6.7.27R - 6.7.40R of the FCA Handbook will be activated.
There is to be no adverse report on the debtor’s credit record as a result of the moratorium.

Overdrafts

The guidance applies to lenders, excluding private banks and credit unions, and refers to overdrafts on a customer’s ‘primary personal current account’ (in order for business or professional accounts to be excluded).
Lenders are to provide ‘for a temporary period only, exceptional and immediate support to consumers facing temporary difficulties with their finances, or who can reasonably expect to face temporary difficulties with their finances, due to circumstances arising out of coronavirus.’
Where the customer has an arranged overdraft and is in financial difficulties, the guidance proposes that for a period of three months;
- no interest should be payable on up to £500 of the balance of the overdraft (so if a consumer has an overdraft of over £500, the amount over £500 will remain interest bearing);
- new overdrafts should be interest free for the first £500; and
- if a lender is contemplating changing its pricing, it must consider the impact on existing customers and the prices must be set in accordance with Principle 6 of the FCA Handbook (which provides that a firm must pay due regard to the interests of its customers and treat them fairly). The FCA expects that charges will not be less beneficial to the customer than they were before the publication by the FCA of PS 19/16 (the FCA’s high cost credit review) in June 2019.[3]

Does a lender have to comply with the FCA guidance?

Given that the FCA states that the guidance ‘sets out [our] expectation that firms should provide, for a temporary period only, exceptional and immediate support to consumers facing payment difficulties due to circumstances arising out of coronavirus’, the fact that the guidance is based on Principle 6 (see above), and the fact that it is potentially relevant to enforcement cases, it would be a brave lender that would disregard this; the expectation is that all lenders will implement the measures set out in the guidance.

Impact on enforcement proceedings

Given the FCA guidance, it would seem now is not be the time, in the majority of cases, for a lender to commence enforcement (or bankruptcy) proceedings.

Where proceedings have been issued (prior to Covid-19, or at least prior to 14 April 2019), there is nothing to suggest that such proceedings should not run their normal course. Creditors should expect delays in the court system due to the effect of the pandemic.

Pitfalls in the FCA guidance

There are a number of potential issues with the guidance:

it is for the debtor to approach their lender where they require relief from credit card debt or personal loans. This will not be helpful to any debtor that buries their head in the sand in times of crisis;
the debtor must be experiencing financial difficulties and while it is open to lenders to ask for evidence, it is not clear how far a lender could or should go to establish that the financial difficulties seem genuine;
the steps only freeze the debt payments and do not stop interest accruing, meaning that the debtor will pay more interest on the amounts due in the longer term; and
there is an inevitable impact on all lenders offering consumer products who will find their income (temporarily) affected.

Where does this leave you?

Debtors

Debtors will need to be proactive and contact their lenders in the event that they are or will be in difficulty in meeting their contractual payments (and mortgage payments).
They should be mindful that interest continues to accrue on the debt and the moratorium does not constitute a waiver, meaning their debt will be bigger at the end of the moratorium period.
They should also be mindful that recovery and bankruptcy proceedings are not the subject of a blanket prohibition and that these routes remain open to lenders in appropriate circumstances.

Lenders

Lenders will need to carefully consider instituting any proceedings against debtors generally during the three month period (especially bankruptcy proceedings) whether or not a debtor has been granted a moratorium: Principle 6 will be at the centre of any decision.
They will also need to review their practices in relation to Principle 6, which will apply when any moratorium comes to an end.
They will need to consider their own cash flow and monitor their ability to service any debt of their own.

Insolvency Practitioners

Any insolvency practitioner will need to carefully consider the viability of any proposal for an individual voluntary arrangement (IVA) during the current pandemic.
They may be asked by the debtor to consider proposing an amendment to the terms of an IVA to deal with any reduction of income resulting from Covid-19.
They should also carefully consider the initiation of bankruptcy proceedings, as their use may be considered as overly aggressive at this time.

The above is a summary and brief comment on the current FCA guidance which may be added to or changed as the pandemic continues. If you would like to discuss any aspect of the guidance then please contact a member of the team.

[1] https://www.fca.org.uk/publications/guidance-consultations/credit-cards-coronavirus-firms

[2] https://www.fca.org.uk/firms/mortgages-coronavirus-guidance-firms

[3] https://www.fca.org.uk/publications/policy-statements/ps19-16-high-credit-review-overdrafts 16

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