What’s the rationale behind the proposed changes?
The FCA’s TSG covering Mortgages, Consumer Credit and Overdrafts was put in place during the COVID-19 pandemic to help firms continue delivering support to customers affected by the crisis. The FCA’s BiFD project to assess whether firms were meeting the TSG expectations found that a number of firms were falling short of those expectations, resulting in harm to customers. For more on the FCA’s November 2022 BiFD findings, take a look at our article ‘FCA Report on the review of borrowers in financial difficulty following COVID-19’.
The FCA now wants to provide a stronger framework for firms to better support customers facing payment difficulties by incorporating relevant aspects of the TSG into its Handbook and thereby regularising good practices across the industry. The proposed changes are designed to reinforce its expectation that firms put customers’ needs first, aligning with its Strategy, and support firms acting to deliver good outcomes for customers, as will be required under the Consumer Duty.
A related press release highlights that the FCA has worked with almost 100 lenders on how they treat borrowers in financial difficulty and has sought significant improvements from many of them. Issues identified included:
- not adequately tailoring support to individual circumstances;
- failing to respond appropriately to customers with characteristics of vulnerability; and
- not effectively engaging with customers about money guidance and debt advice.
The press release also points out that the FCA has so far secured up to £47m of redress from 17 of the firms. In addition, it has given detailed feedback on areas for improvement to all the firms it worked with.
Overarching proposed changes to the Handbook
As well as changes specific to credit or mortgages (see further below), the FCA is also proposing a number of changes affecting both product areas to incorporate key aspects of the TSG into the Handbook. These include:
- Supporting customers at risk of payment difficulty: Broadening the scope of CONC 5 and 7 (including in relation to overdrafts) and MCOB 13 to make clear to firms that appropriate support should be provided to customers in or at risk of payment difficulty - both where a customer indicates to a firm that they are at risk of missing a payment and where this is identified by firms. For mortgages, the FCA clarifies that while it proposes firms must react to information indicating a customer is, or may be, at risk of payment shortfall (eg via a debt adviser), it does not propose to require firms to take steps to proactively identify such customers, as not all firms will have access to information which may indicate this.
- Reviewing the effectiveness of policies and procedures: Adding a new rule to both CONC 7 and MCOB 13 to require firms to ensure the effectiveness of any policies and procedures put in place for customers in or at risk of payment difficulty, and the firm’s ongoing compliance with them, is reviewed at appropriate intervals. This is designed to provide flexibility for firms to respond in a timely way to external or internal factors such as external shocks and changes in the economic environment, as well as findings from internal reviews including quality assurance and customer outcomes testing. Supporting guidance is also proposed, aimed at firms ensuring these reviews consider the customer’s overall experience, rather than only considering individual interactions in isolation.
- Customers in vulnerable circumstances: Replacing the narrowly drawn expectations on vulnerability in CONC 7 and MCOB 13 with new guidance reminding firms that they should have regard to the expectations set out in the FCA’s Finalised Guidance on the fair treatment of vulnerable customers (FG21/1), including when developing policies and procedures for customers who have, or may have, payment difficulties. The FCA states that firms will need to use their judgement to consider what each section of the Guidance means for them and what they should do to make sure they treat customers fairly.
Transparency and accessibility of forbearance options: Adding guidance to MCOB 13 and CONC 5 and 7 that firms should:
offer to engage with customers through a range of channels, changing the channel if necessary to enable the customer to engage with the firm effectively; and
be transparent with customers about the range of options the firm will consider and the communication channels available:
For mortgages, the range of options to help customers that a firm will consider should be set out clearly, including in a prominent location on the firm’s website;
For overdrafts, firms should set out on their websites in a prominent location the range of options that can be considered when an overdraft borrower is facing financial difficulties to enable customers and those advising them to understand and evaluate the options. Where the firm offers refinance loans, firms should provide indications of the eligibility criteria, interest rate and term. The FCA points out that this proposal is in line with its September 2020 Overdrafts Finalised Guidance.
- Money guidance and debt advice: Along with some additional provisions, incorporating the TSG’s clarification of the FCA’s expectations that firms should help customers understand what types of debt advice and money guidance are available, and to refer or signpost them to it if it meets their needs and circumstances, into the Handbook. This is in keeping with relevant findings from both its latest Financial Lives Survey and the BiFD project on the importance of clear communication from firms about money guidance and debt advice. For mortgages, the FCA explains that the effect of its proposals will be the need for firms to consider the potential benefits of these services for individual customers. Where appropriate, it wants firms to help customers access tools and services as well as effectively communicate the potential benefits of money guidance and debt advice, and it expects this to increase the number of referrals to debt advice bodies.
Providing information to customers: Building on the TSG expectations that firms give customers appropriate information before providing forbearance to help them to understand their financial position, their options, and the implications of any arrangements by incorporating them into the Handbook and clarifying its expectations around the information that should be provided to customers. Some points of particular interest in the proposals include:
For credit, including guidance that will remind firms of their obligations to communicate with customers in accordance with Principle 7 (A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading) or Principle 12 (To act to deliver good outcomes for retail customers) which is the new Principle for Businesses being introduced under the Consumer Duty.
- For mortgages, removing the provision in MCOB 13.3.4AR(2) that says a firm may be able to provide information on any new terms in line with the annual statement provisions. This is because the FCA thinks that a firm is unlikely to be able to satisfy the proposed information requirements as amended, solely by providing information under the annual statement provisions.
- Consequential amendments: Making various minor consequential amendments to other chapters in MCOB and CONC to ensure that references to provisions that the FCA is proposing to amend remain up to date.
Credit specific proposals
In relation to credit, the FCA’s proposed changes include:
Mortgage specific proposals
For mortgages, the FCA’s proposed changes include:
- Increasing balances: Introducing consideration by firms as to whether it is appropriate to reduce the interest rate or apply simple interest in all cases (expanded from the TSG which only referred to this as particularly important in the context of second charge mortgages). The FCA also proposes to make it explicit that firms, when considering what may be appropriate in a customer’s individual circumstances, must take into account the effect of any potential arrangements on the customer’s overall balance.
- Shortfall statements: In line with expectations under the Consumer Duty to ensure customers are provided with timely information on their financial position - including the impact of any charges when in payment shortfall - amending the scope of MCOB 13.4.1R so that initial information about missed payments is provided earlier, once a customer is in payment shortfall (by any amount), rather than waiting until they have missed the equivalent of at least two monthly payments. The scope of MCOB 13.5.1R would also be extended to require firms to send further, regular statements, at least quarterly, to all customers who have an ongoing payment shortfall, regardless of whether it is attracting charges. The guidance at MCOB 13.4.3G(2) relating to situations where information is provided before an account falls into arrears would also be deleted to reflect the changes. The information requirements in MCOB 13.4.1R would not be triggered if the shortfall is a result of an inadvertent payment error and is cleared within five working days.
- Capitalisation: Amending the current guidance to make it clearer that firms can take a more balanced approach to considering the benefits and costs of capitalisation and can agree to capitalisation where it is appropriate in accordance with the customer’s best interests. However, the rule in MCOB 13.3.4AR(1)(d) preventing firms from automatically capitalising a payment shortfall where the impact would be material will remain.
- Ensuring arrangements remain appropriate: Introducing a new rule that a firm must take reasonable steps to ensure that any arrangement with a customer in payment shortfall remains appropriate. This will be accompanied by new guidance that what is considered reasonable will depend on the customer’s circumstances and the nature of the arrangements.
- Taking account of wider indebtedness: Incorporating the TSG guidance on this point into MCOB 13.3.4CG to clarify that a firm should take account of a customer’s wider indebtedness when considering what options are appropriate.
- Sharing income and expenditure assessments: Adding guidance to MCOB 13.3.4CG that where a firm conducts an income and expenditure assessment, they should, where possible, offer to share this with the customer. The aim is that this will enable the customer to share this with other lenders or debt advice providers, potentially reducing the time they need to spend repeating information regarding their income and expenditure with multiple creditors.
- Record keeping: Extending the rule in MCOB 13.3.9R on firms having to maintain adequate records of dealings with a customer whose account has a payment or sale shortfall in line with the expanded scope of MCOB 13, to include records of dealings with customers who may have payment difficulties. There would also be clarification that the requirement to record telephone calls with customers that discuss any amount in arrears or subject to payment shortfall charges, includes video calls. This is to ensure consistent practice across firms. The FCA welcomes views as to whether it should extend the rule to record calls to include those with customers in payment shortfall and those who may have payment difficulties.
- Application to home purchase plans: The FCA explains that many of the proposed changes to MCOB affect rules that apply in respect of regulated home purchase plans as well as regulated mortgage contracts. The consultation paper chiefly focuses on the changes in the context of regulated mortgage contracts, but it invites comments from home purchase plan firms where the proposals would also apply to these products. It refers to a consequential change affecting home purchase plans specifically at paragraph 3.94 of the consultation paper.
- Application to some article 3(1)(b) creditors and P2P platform operators: The FCA points out that the changes being proposed to MCOB 13 would also affect some article 3(1)(b) creditors and some peer-to-peer (P2P) platform operators under MCOB 14 and 15.
Pandemic-specific TSG provisions will not be transferred to Handbook
The FCA does not propose to transfer parts of the TSG which are not relevant outside the context of the pandemic. It explains that these provisions were specific to the situation at the time or related to the transition from payment deferrals which firms were expected to offer, so will not remain after the TSG is withdrawn.
The consultation closes on 13 July 2023. The FCA will aim to publish a final policy statement, including its response to feedback, in H2 2023. It expects the rules to come into force in H1 2024 and propose to withdraw the TSG at the same time.
If you would like to discuss any aspect of the FCA’s consultation, please get in touch with one of the people listed above or your usual Hogan Lovells contact.
Our Consumer Duty Hub contains a range of materials to help you with implementation of the Duty’s requirements as the 31 July deadline for new and existing products or services open to sale or renewal rapidly approaches.
Authored by Virginia Montgomery.