15 April 2020

Three month moratorium on consumer credit debts due to Covid-19

Consumer credit lenders should now grant a three month moratorium on debts, under new rules brought in by the Financial Conduct Authority (FCA) to help those struggling financially because of Covid-19.

Is this just guidance or must lenders comply?

Although this is FCA guidance rather than rules, lenders are advised to follow it. The guidance is based on the principle (within its own Principles for Business) that: “a firm must pay due regard to the interests of its customers and treat them fairly” and the FCA will take any failure to follow its guidance into account when assessing whether there has been a breach of this principle.

Does this deferral apply to credit cards and loans?

The guidance applies to the most popular forms of consumer credit – credit cards, arranged overdrafts and personal loans.

How does a consumer get their repayment deferred?

If a consumer tells the lender that they are unable to repay the debt, and the lender considers this to be genuine, the lender should offer a three month payment deferral. A shorter moratorium may be appropriate if the consumer’s income could return within a shorter period.

Will they pay interest?

Interest may continue to accrue throughout the moratorium, and if the consumer is still unable to pay when the deferral ends, the usual enforcement action may be taken. However, the FCA expects that interest accrued over the course of the deferral should be waived in accordance with forbearance rules. The deferral should not adversely affect the consumer’s credit rating.

The lender should not impose any additional charges on the consumer, and the FCA has suggested that firms take this opportunity to consider whether their interest rates comply with Principle 6 in its Principles for Business.

In addition, the FCA has suggested that no interest should be payable on the first £500 of personal overdrafts; some banks have already put this into practice.

When does it start and how long will it continue?

The guidance is effective from 14 April and the consumer may request a three month deferral at any point in the three months following that. If a consumer’s financial difficulties extend beyond this period, firms should engage with the consumer to come to an agreement as to how to resolve the situation. The FCA has made it clear that this guidance is intended as a temporary measure only, to be in place initially for three months but that this will be kept under review and subject to extension if necessary.

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About the Author
Fiona Hayles, Partner, Head of Banking Litigation

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