Fairness and forbearance

What is the issue?

COVID-19 has impacted the lives of every individual across the country. It is critical that firms are able to continue to treat customers fairly during this challenging time and it is also more likely that customers will become vulnerable as the crisis unfolds meaning certain customers require greater support than others.

There have been various support packages announced by the Government along with associated guidance from the regulator to set expectations as to how this should be achieved in practice. It is possible that these expectations will evolve as the crisis unfolds, therefore firms will need to be agile over the coming period having regard to regulatory expectation and actual customer outcomes.

What has the regulator said?

The Financial Conduct Authority has published various guidance for lenders, the key points of which are:

Mortgage lenders

• Payment holidays: of up to three months where customers are experiencing financial difficulty.
• Halting repossessions: temporarily to ensure no one loses their home at this time regardless of whether a possession order has been obtained. However, interest can still be charged.

Consumer credit lenders

• Three month payment freeze: for most loans (see overleaf for details).
• One month payment and interest freeze: for high-cost credit.
• Further forbearance: for customers who continue to struggle post payment holiday (e.g. waiving of interest).

Arranged overdrafts

• Interest free overdrafts: of up to £500 for three months where requested by customers in financial difficulty.
• Overdraft pricing structures: to be reviewed for consistency and fairness in the context of COVID-19.

The guidance for mortgage lenders came into effect on 20 March 2020 and the regulator has committed to reviewing the impact it has had in three months and may issue amended guidance following this review.

The guidance for consumer credit lenders and in respect of overdrafts came into effect during April 2020.

What are the practical issues in play?

Key overall considerations

• Governance meetings: ensure that retail customer outcomes are updated for the impacts of COVID-19 and fed through in management information and reporting.
• Regularly review response plans: to incorporate customer feedback and evolving customer circumstances.
• Evidence key decisions: that have an impact on customer outcomes including supporting rationale (an important consideration in respect of demonstrating “reasonable steps”).
• Communicate clearly: and be consistent and joined-up with public and customer communications.
• Communicate regularly: so customers are kept up to date as the situation evolves (helps to manage expectations).
• Be clear on the implications of forbearance: for example, if a payment holiday is agreed, interest will likely still be charged and when payments resume they may be higher than they were previously.
• Cashflow/capital position: in the context of forbearance; model and assess impacts.

Mortgage-specific considerations

• Consider the longer term implications of halting repossessions: whilst this may be considered fair and appropriate in the short term, there may be longer term fairness impacts if customers cannot viably repay their debts. Consider whether this could result in any perceived or actual detriment.
• Customers can voluntarily continue with repossession: where they feel it is in their best interests and appropriate alternative accommodation has been sourced.

Consumer credit and overdraft-specific considerations

• Consider Consumer Credit Act implications: as forbearance may require lenders to enter into a modifying agreement and trigger affordability assessments required under the Consumer Credit Sourcebook (“CONC”).
• Reconsider overdraft charging structures in the round: to ensure that they are consistent with the obligation to treat customers fairly in light of the exceptional circumstances arriving from COVID-19.

Forbearance measures at a glance: a summary of the regulator’s announcements to date

We have summarised below the key forbearance guidance issued by the regulator across key lending products to date. The regulator has committed to reviewing the impact these have had over the next three months and further announcements may be made as the COVID-19 pandemic evolves.