Premium: Amid new FCA proposals, and payment holidays surging into the millions, lenders face a defining challenge in credit risk and collections

The statistics were published by UK Finance, which showed that as of June 12 2020, lenders have offered 27 million interest-free overdrafts, provided 961,700 payment deferrals on credit cards and 688,900 payment freezes on personal loans.

This followed the FCA’s proposals announced this morning, that credit card and personal loan providers will soon be expected to extend existing payment freezes to customers already on them, who’re still struggling financially due to Covid-19, and offer them to customers not already granted one, under a raft of new and extended measures. The proposals also apply to store card and catalogue credit providers.

The challenge for lenders will be to embed the new temporary guidance into procedures and policy, which in many cases they already will be through the first round of payment freezes. But lenders will need to contact and offer options to customers coming to a potential cliff edge in October, when not only the extended and new payment holidays may close, but also when the furlough scheme comes to an end.

In roughly the same month, the UK financial services industry could be facing around three million payment holidays expiring, (in total across all products including credit cards, mortgages and loans), at the same time that the government will be closing down a job retention scheme which has so far paid out more than £20bn, to over one million people whose jobs have been furloughed.

There’s also the practical challenge of contacting a high volume of customers, and calculating how many of those will require affordability assessments to examine whether circumstances have changed since being given an initial payment freeze. Many customers were effectively enabled to self-certify their financial predicament for a holiday, and lenders will have to write to them at a reasonable point before the agreement expires, to establish the situation and provide options.

The ‘off-ramping’ challenge with payment holidays, as it’s been called, will be one of the defining issues in 2020 for lenders’ collections operations.

The industry is also facing challenges with the interaction of the Consumer Credit Act and granting further payment freezes, with the legislation forcing them to send statutory notices even after freezes are granted, (an issue now subject to a campaign for change), but also whether actually granting a payment holiday constitutes a “modified agreement”, and if that leaves a credit agreements open to challenges on enforceability.

More generally this morning, industry bodies have tended to emphasise that it remains in customers’ interests to resume payments when they can.

Eric Leenders, UK Finance managing director, personal finance, said: “For those who can afford to restart repayments, it is in their best long-term interest to do so; however, there are a range of options available to support customers who cannot repay just now and lenders stand ready to help.”

He added “The banking and finance industry has a clear plan to help the country through these tough times and is committed to providing ongoing support to those customers who need it.”

 

‘FCA, Treasury and Bank of England must develop approach together’

The Finance & Leasing Association (FLA) this morning urged the government and regulators to ensure a co-ordinated approach. The trade body recently published statistics showing that forbearance requests related to Covid-19 sent into its members, had soared to 1.6 million in the 12 weeks to the end of May.

Stephen Haddrill, director general of the FLA, said: “The cost of forbearance is already at unprecedented levels. The FLA has sought urgent assistance from government to enable lenders to continue to provide affordable lending to consumers and businesses through the crisis and during the recovery. The FCA, the Treasury and the Bank of England must ensure their approach to forbearance and support for lenders are developed together.”

 

’The financial shock to households is like nothing we have seen before’

In the debt advice world, advice charities warned that substantial help will probably be needed even beyond the end of payment deferrals.

Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline, said: “The financial shock to households that the outbreak has caused is like nothing we have seen before, and we expect debt problems to increase significantly in the months ahead. We are pleased that these measures apply not only to customers who have already taken up support, but those who will unfortunately become affected in the coming months.

“While these measures clearly cannot last forever, many people are going to need support beyond even this extended period – and we need to make sure that these customers get the support and advice they need.”

Others warned that the FCA must avoid a cliff edge for customers when the temporary support expires.

Richard Lane, director of policy and external affairs at StepChange, said: “Unless further long-term support measures are put in place, this relief will be short-lived.

“Our own research has found that 4.2 million people have borrowed to make ends meet since lockdown began, storing up a tsunami of £6bn of debt that is set to worsen if left unchecked.

“With many households wondering how they will catch up with deferred payments, the FCA must not let payment holidays end with a cliff edge to debt. Withdrawing help from those who need more time to recover risks exposing them to avoidable long-term financial difficulty.”