With yesterday’s release of the Financial Conduct Authority’s finalised, updated guidance for the motor finance sector, the message is clear, explains Andy Thomas, motor finance operations director at collections and recoveries specialist Chartsbridge.
We believe that this guidance, confirmed yesterday (July 15) by the regulator, gives absolute clarity in two specific areas of collections processes.
Evidence of ensuring customers’ best interests
Motor finance lenders already have a regulatory responsibility to ensure that any steps taken are in their customers’ best interests, but now this obligation is placed under the spotlight if a customer’s affordability to maintain their usual payments is directly affected by Covid-19, especially if evidence has been provided confirming that to be the case.
To ensure that the best customer outcomes are achieved for customers affected by Covid-19, in cases where lenders are granting either new or extended payment deferrals or reductions, they will need to demonstrate that customers have evidenced their ability to resume future payments in an affordable and sustainable fashion. If the customer’s full range of exit options have been calculated and this is not the case, it may prove to be in the customer’s best interests for the lender to continue with their standard collections, termination and recovery processes.
With this obligation in mind, over-generous granting of payment deferrals or reductions could backfire leaving lenders exposed to future customer claims.
Keeping customers informed
Section 1.27 requires that “a firm should give customers adequate information to enable them to understand the implications of a payment deferral, including the consequences of interest that is accrued as a result of the payment deferral and its effect on the balance due under the agreement and on future payments”.
Lenders are required to explain to customers that although a worsening account status (regarding payment deferrals granted under this guidance) will not be recorded on their credit file as missed payments, other lenders may take payment deferrals into account when assessing the customer’s affordability for future lending decisions including, for example, loans or mortgages.
Section 1.64 states that “firms should also ensure that their customers are kept fully informed, and should make customers aware of the potential consequences of the firm suspending any action towards taking repossession of the vehicle(s), including on the value of the vehicle(s)”.
This requirement contains another implicit message to lenders to carefully consider suspending termination of an account when such a deferral may ultimately increase a customer’s indebtedness. If such a deferral leaves a customer in a position where their best interests can be shown not to have been correctly considered, the lender is inadvertently rendered unable to hold customers liable for inflated sums due.
Earlier this year the regulator’s final notice issued to Moneybarn was published, and it paid specific regard to “communicating forbearance options effectively and impartially”.
The notice provided further specific requirements on informing customers of all options available to them in exiting their agreement, coupled with a particular requirement to calculate and communicate the financial consequences of all exit options.
Since this final notice was issued, the Finance and Leasing Association (FLA) has been working with members to draft their FLA Best Practice on Forbearance Guidance’ which aims to assist motor finance lenders in best practice when communicating options to customers.
With the FCA making it crystal clear that keeping customers fully informed during this period is high on their agenda, motor finance lenders need to act quickly and ensure that they focus on final notice implications, if they have not already done so.