Key takeaways

• On 10 April 2024, the FCA published PS24/2: Strengthening protections for borrowers in financial difficulty: Consumer credit and mortgages and the related Consumer Credit and Mortgages (Tailored Support) Instrument 2024 (FCA 2024/7). It also published FG24/2: Guidance for firms supporting existing mortgage borrowers impacted by rising living costs.
• Most of the final rules and guidance are being introduced largely as consulted on. For a reminder of the consultation proposals, take a look at our previous Engage article ‘UK FCA consults on changes to create stronger framework to support borrowers in financial difficulty’.
• However, there are some amendments as well as further clarification on certain points including:
  • In relation to supporting customers at risk of payment difficulty, the new guidance in CONC 5D on the indicators of financial hardship has been clarified to refer to ‘essential living expenses’ (emphasis added).
  • On providing information to customers for both credit (including overdrafts) and mortgages, the relevant provisions have been amended to clarify that information given to customers to help them understand the implications of any proposed arrangement must include how it will be reported to their credit file in factual terms, and not anything on the broader implications for credit files. There had been concerns from respondent firms here, who pointed out that they can’t provide any assessment of the subsequent interpretation of the factual reporting by CRAs or other lenders.
  • In relation to credit, the provision to prevent escalating balances while a sustainable repayment arrangement is in place by requiring the firm to suspend, reduce, waive or cancel any further interest or charges has been amended to remove ‘suspend’ as this implies that interest and charges may be held off for a finite period and reimposed later, which could disincentivise customers to sort out their financial situation, cause confusion for both firms and customers, and compound financial difficulty.
  • The FCA is introducing the proposed new rule in CONC that where a firm assesses income and expenditure it must do so in an objective manner, along with the accompanying guidance. There are two amendments to the guidance in light of feedback:
    • For credit including overdrafts, CONC 7.3.5E G(2) and CONC 5D.3.9 G(2) is revised to ‘a firm may have regard to the spending guidelines in the Standard Financial Statement or an equivalent tool’.
    • For credit, the guidance at CONC 7.3.7AG(4) is amended to clarify that ‘where possible, firms should make available to the customer a record of any income and expenditure assessment that the firm has made to enable the customer to share the record with other lenders and debt advice providers.’
  • The FCA has abandoned proposed MCOB amendments which would have meant that initial information about missed payments is provided earlier, once a mortgage customer is in payment shortfall (by any amount). However, it is going ahead with the changes to the requirement to send a quarterly mortgage shortfall statement to include all customers in arrears, not just to those where the arrears are attracting charges.
• The updated version of the FCA’s finalised guidance (FG24/2) for firms supporting their existing mortgage borrowers impacted by the rising cost of living updates its March 2023 non-Handbook guidance (FG23/2) to reflect the relevant changes as set out in PS24/2 and the FCA instrument.

What do firms need to be thinking about?

• The FCA considers that giving firms just over 6 months to implement the changes is sufficient, given that many of them reflect existing expectations under the TSG which have already become industry good practice. However, it’s clear that firms will still need to carry out a legal review and gap analysis of the new requirements against current practices to identify required changes.
• Internal processes and governance will be an area of focus to ensure necessary adjustments as against the current framework for firms’ treatment of customers in financial difficulty eg in relation to customer communication policies. Firms will also need to consider how they will determine whether a customer may be at risk of falling into payment shortfall and include this in their written policy and procedures.
• Likewise in relation to existing staff training programmes, where new training may be required on how to meet the requirements of enhanced engagement with customers on money guidance and debt advice ie helping customers understand what types of debt advice and money guidance are available, and signposting them to it as appropriate.
• The changes to the requirement to send a quarterly mortgage shortfall statement to include all customers in arrears, not just those where the arrears are attracting charges, will require systems changes.

What’s next and how can Hogan Lovells help?

• The final rules and updated mortgages guidance take effect from 4 November 2024, when the TSG will also be withdrawn.
• The FCA is planning a wider review of its debt advice rules under CONC 8 ‘in due course’ to make sure the right framework is in place for good quality debt advice.
• To discuss the requirements and impacts for your business, our integrated legal and consulting services can provide support to firms assessing current processes and frameworks against the requirements. Guidance can be provided on potential uplifts required, adjustments needed to governance, reporting and monitoring practices.

Read on for more details of the FCA’s final rules and guidance.

Rationale for the new rules and guidance

In May 2023 and against the backdrop of a continuing cost-of-living crisis, the FCA launched a consultation setting out how it planned to incorporate aspects of the Tailored Support Guidance (TSG) introduced during the COVID-19 pandemic into its Consumer Credit (CONC) and Mortgages and Home Finance: Conduct of Business (MCOB) sourcebooks and withdraw the TSG. The FCA also proposed targeted additional changes to support consumers in financial difficulty. The aim is to provide a stronger framework for firms to better support customers facing payment difficulties by regularising good practices across the industry. The changes are designed to reinforce the FCA’s expectation that firms put customers’ needs first, aligning with its Strategy, and support firms acting to deliver good outcomes for customers, as now required under the Consumer Duty.

The results of the FCA’s newly published Financial Lives cost of living recontact survey show some customers benefiting from help from lenders, debt advisers or other financial support charities. However, it’s clear that many are still facing significant challenges. For example, the figure of 7.4m people who were struggling to pay bills and credit repayments in January 2024 is down from 10.9m in January 2023, but this is still higher than the pre-cost-of-living figure of 5.8m from February 2020.

Recap of consultation proposals

Key proposed changes related to incorporating aspects of the TSG into the FCA Handbook included:

• broadening the scope of relevant CONC and MCOB chapters to make clear to firms that appropriate support should be provided to customers in or at risk of payment difficulty;
• enhancing the FCA’s expectations around customer engagement and providing information, including on money guidance and debt advice;
• expecting firms to consider a range of forbearance options and take reasonable steps to ensure arrangements remain appropriate;
• for consumer credit, expecting firms to take into account the customer’s individual circumstances when providing forbearance (something that is already expected for mortgage firms).

Targeted additional changes supporting consumers in financial difficulty were also proposed beyond the TSG:

• For consumer credit firms, there was a proposal to introduce guidance to help firms work out their necessary and reasonable costs in setting fees and charges.
• For mortgages, proposals were to: change existing guidance to allow firms more scope to capitalise payment shortfalls where appropriate; improve disclosure for all customers in payment shortfall; and clarify the existing requirement to record telephone calls with customers in payment shortfall, including video conferencing.

For more on the consultation proposals, take a look at our previous Engage article ‘UK FCA consults on changes to create stronger framework to support borrowers in financial difficulty’.

What’s changed from the consultation proposals?

While most of the final rules and guidance are being introduced largely as consulted on, there are some amendments as well as further clarification in the policy statement on certain points, including:

Overarching changes to the Handbook

• Supporting customers at risk of payment difficulty
  • The FCA reiterates that the final rules and guidance do not introduce new requirements on firms to take extra steps, or create new processes and systems, to identify customers who may be in financial difficulty. Instead, the focus is on clarifying potential trigger points where firms should consider how to treat customers approaching arrears with ‘forbearance and due consideration’. However, as a result of the changes the FCA makes it clear that firms will need to consider how they will determine whether a customer may be at risk of falling into payment shortfall and include this in their written policy and procedures.
  • On reporting to CRAs as a potential barrier to customers’ early engagement with lenders, the FCA refers to its recent Credit Information Market Study final report and states that, pending any changes made following that report, it expects lenders to provide clear information on how they report information to customers’ credit files (see also ‘Providing information to customers’ below). For more on the report, see our Engage article ‘Credit information: UK FCA publishes final report with remedies package for improving the market’.
  • In relation to overdrafts, there is a reminder that firms are responsible for developing their own repeat use strategies and the rules are not prescriptive about which indicators to use. Firms are encouraged to use a range of indicators to help them identify which customers might be facing financial difficulties. Firms offering personal current accounts (PCAs) and overdrafts are also encouraged to develop models to make appropriate and proportionate use of the range of data held on customers’ overdraft usage and PCA activity to identify those most likely to need support. Firms should monitor and periodically review the effectiveness of their policies, procedures and systems and update or adjust them as necessary to ensure improved outcomes. Following feedback, the new guidance in CONC 5D on the indicators of financial hardship has been clarified to refer to ‘essential living expenses’ (emphasis added).
  • On mortgages, where a customer applying for a contract variation has a payment shortfall, or indicates that they are at risk of failing into payment shortfall, the firm should consider whether further support is needed. The FCA clarifies, however, that the mere act of applying for the variation would not in itself be a trigger for considering further support.
• Reviewing the effectiveness of policies and procedures
  • The rules are being finalised as proposed and the FCA considers that they and the related guidance complement existing expectations under SYSC, PRIN and the Consumer Duty.
  • No appropriate intervals between reviews are being defined, and there will be no list of instances when a review may be needed. This is so that firms can conduct reviews flexibly in response to internal and external factors.
• Customers in vulnerable circumstances
  • The FCA has finalised its updated references to its vulnerability guidance as proposed, because this remains the best source for firms to use for further guidance.
• Forbearance options
  • There was feedback raising concerns that the change in relation to mortgages involving adding to the list of options that a firm must consider, given the individual circumstances of the customer, under MCOB 13.3.4AR, could impact the way firms comply with prudential capital requirements or IFRS provisioning requirements. The FCA is of the view that as the updated rule does not introduce mandatory waiving of capital or interest, it does not think it automatically impacts the way firms comply with such requirements. It has also sought input from the PRA, who do not anticipate a material impact on underlying capital requirements (provided the firm already considers whether it is appropriate).
• Transparency and accessibility of forbearance options
  • On transparency and accessibility of credit forbearance options, in recognition of feedback around placing more emphasis on supporting customers to engage through ‘appropriate’ accessible channels the FCA has amended its provision to reflect this. There is also confirmation that – unlike for mortgages and overdrafts - it does not intend to require firms to publicise the list of available forbearance options on their websites under CONC 7. Given the diverse range of products and customers in this market, the FCA is of the view that firms are best placed to consider what is the best way to communicate with their customers, rather than providing generic information on websites.
  • For overdrafts, the FCA is not progressing with the proposed guidance at CONC 5D.3.3G(7) regarding the publication of details of eligibility criteria and interest rates for refinance loans on firms’ websites. Following feedback, it has decided that inclusion of this information could lead to unnecessary complexity of content on websites, and customer confusion.
  • For mortgages, the new guidance in MCOB 13.3.4CG(2) is being introduced broadly as consulted on. However, the drafting has been amended so that a firm should be transparent about the range of forbearance options it ‘may’ consider, rather than it ‘will’ consider. There is also a reminder about the requirements of the Consumer Duty’s consumer understanding outcome.
• Money guidance and debt advice
  • In relation to credit (including overdrafts), the FCA confirms that in referring to communicating the potential benefits of debt advice or money guidance, it doesn’t expect firms to provide debt counselling. It points to PERG for examples of what is and is not debt counselling. Firms are expected to provide a high-level summary of the potential benefits of debt advice where it is appropriate for the customer given their circumstances. The FCA gives the MaPS strategic toolkit for creditors as an example of guidance which firms may want to consider. The FCA is planning a wider review of its debt advice rules under CONC 8 ‘in due course’ to make sure the right framework is in place for good quality debt advice.
  • For mortgages, there is clarification in the policy statement that under the new rules firms will be able to refer customers to regulated commercial debt advice bodies provided the service is impartial and free of charge to the customer. The rules allow firms to signpost or refer customers to both not-for-profit and for-profit debt advisers.
• Providing information to customers
  • On credit (including overdrafts), the FCA has clarified that information given to customers to help them understand the implications of any proposed arrangement must include how it will be reported to their credit file in factual terms. It has amended the relevant text in CONC 7.3.13AG (2) and CONC 5D.3.11G(2) from ‘implications for the customer’s credit file’ to ‘how it is/will be reported to the customer’s credit file’. There had been concerns from respondents who pointed out that they could only advise customers on the factual information they would report to credit files, and not on the broader implications for credit files because firms can’t provide any assessment of the subsequent interpretation of that factual reporting by CRAs or other lenders. The FCA has also taken on board feedback that the transposed proposal differed from the TSG in that it did not include a reference to communicating a customer’s options. This wording has been added to the final version of CONC 7.3.13AG (2) and CONC 5D.3.11G(2).
  • On overdrafts, the wording of CONC 5D.3.11G 2(a) has been amended to ‘take into account their individual circumstances’ rather than ‘take into account their individual characteristics’. On the rule on the suspension, removal or reduction of an overdraft limit (CONC 5D.3.2R (5)-(7)), the FCA confirms that the intent of its related guidance remains to ensure that the receipt of income, possibly from wages, salary or benefits to a current account is not used by the lender as an opportunity to repay debt. It also confirms that its guidance should not be interpreted as requiring firms to increase overdraft debts to allow customers to meet priority debts and essential living expenses. Regarding the suspension, removal or reduction of overdrafts more generally, there is a reminder of the Consumer Duty – specifically, the cross-cutting rule at PRIN 2A.2.8 which requires firms to avoid causing foreseeable harm to retail customers.
  • On mortgages, regarding the proposed extension of MCOB 13.3.4.AR (2) so that when firms explain the implications of any proposed arrangement it must include the impact on the customer’s overall balance and the implications on their credit file, as for credit (see above) the final rules have been amended from ‘implications for the customer’s credit file’ to ‘how it will be reported to the customer’s credit file’. Reference to the annual statement has also been removed, although the FCA states in the policy statement that firms can still choose to reiterate the implications of any arrangements in the annual statement. However, it emphasises that only communicating the implications of any arrangement in the annual statement won’t meet its expectations in MCOB 13.3.4AR(2) because the rules require firms to communicate the implications of an arrangement before it is agreed.

Credit specific changes

• Application to SME lending
  • The FCA highlights that firms may need to consider different factors when providing forbearance to SME customers. It gives the example of how CONC 7 applies to firms when they carry out regulated debt collection under the Bounce Back Loan Scheme (BBLS), and flags that its January 2021 guidance Bounce Back Loan Scheme: guidance for firms using Pay as You Grow (PAYG) options, remains in force to help firms understand how they can use and offer PAYG options, complying with Chapter 7 of CONC where applicable.
  • There is also recognition (reflected in the Handbook) that there may be differences in the way that the new rules and guidance may be applied for SME lending, including where lenders carry out income and expenditure assessments, as they may consider different or extra factors such as the SME customer’s business cash flow.
• Escalating balances
  • The FCA is introducing its proposal to make permanent the TSG expectations that where a firm has put in place a sustainable repayment arrangement as a forbearance measure, and for as long as the customer is meeting the terms of that arrangement, the firm must suspend, reduce, waive or cancel any further interest or charges to the extent necessary to ensure that the level of debt under the arrangement does not rise for the period of that arrangement. However, this is subject to one amendment to remove ‘suspend’ from the provision as this implies that interest and charges may be held off for a finite period and reimposed later, which could disincentivise customers to sort out their financial situation, cause confusion for both firms and customers, and compound financial difficulty. Instead, where customers’ circumstances improve and they can pay larger amounts under the repayment arrangement, the firm won’t be required to waive as much interest, fees or charges to prevent the balance from escalating.
• Charges
  • Regarding the proposed supporting guidance (CONC 7.7.6G (1)-(3)) to help firms determine their necessary and reasonable costs in setting fees and charges applied to customers in payment difficulties - which support the FCA’s price and value outcome under Principle 12 (Consumer Duty) - there was feedback that the proposed CONC 7.7.6G (2) and (3) may inadvertently cause confusion, particularly because ‘administration costs’ may be interpreted differently by firms. The FCA is therefore only introducing the guidance under CONC 7.7.6G(1) with amendments clarifying that when considering what costs may be reasonable, firms may have regard to the frequency and nature of events to which those costs relate and whether they arise directly from the customer being in default or arrears difficulties.
  • The policy statement also highlights expectations under the Consumer Duty; firms should assess whether their fees or charges appear unjustifiably or unreasonably high (eg where increasing use of electronic communications has reduced costs).
• Sustainable repayment arrangements
  • The proposed requirement that firms must take all reasonable steps to ensure that any repayment arrangements agreed with customers are sustainable and the supporting guidance in CONC 7 and CONC 5D clarifying that a repayment arrangement is unlikely to be sustainable in the context of a forbearance scenario if it results in the customer being unable to meet their priority debts and essential living expenses are being introduced.
  • In recognition that customers may have a range of priority debts and living expenses, there is one amendment to the guidance to update to ‘priority debts and living expenses include, but are not limited to, payments for mortgage, rent, council tax, food and utility bills.’ The Handbook glossary contains further information on ‘priority debt’ and CONC 7 and CONC 5D have been updated so that all references to ‘priority debts’ now refer to this definition.
• Reviewing forbearance measures
  • The requirement that firms should take reasonable steps to ensure that forbearance measures put in place remain appropriate, and the supporting guidance in CONC 7 and CONC 5D that what is considered reasonable steps will depend on the customer’s circumstances and the nature of the forbearance provided, are being introduced. However, the guidance has been amended to provide that firms may include reviews at appropriate intervals, replacing ‘likely to include’. This is to address concerns from respondents that too frequent reviews could place an emotional strain on customers and potentially impact not-for-profit advice capacity.

• Income and expenditure assessments
  • The FCA is introducing the proposed new rule in CONC that where a firm assesses income and expenditure it must do so in an objective manner, along with the accompanying guidance. There are two amendments to the guidance in light of feedback:
    • For credit including overdrafts, CONC 7.3.5E G(2) and CONC 5D.3.9 G(2) is revised to ‘a firm may have regard to the spending guidelines in the Standard Financial Statement or an equivalent tool’.
    • For credit, the guidance at CONC 7.3.7AG(4) is amended to clarify that ‘where possible, firms should make available to the customer a record of any income and expenditure assessment that the firm has made to enable the customer to share the record with other lenders and debt advice providers.’
  • The policy statement also states that, although firms are not required to rely on information collected by third parties, they should support and encourage customers to re-use up-to-date income and expenditure information previously gathered where possible (eg a firm may choose to use an income and expenditure assessment completed by another lender where appropriate).

Mortgage specific changes

• Increasing balances
  • The FCA is introducing the proposed rule that firms must take into account the effect of any potential arrangements on the customer’s overall balance when considering what support is appropriate.
  • In the policy statement, it clarifies that while the rule does not require firms to prevent a balance from increasing, they must take into account the effect of the proposed support on the customer’s overall balance, to deal fairly with a customer. There is also a reminder that the Consumer Duty requires firms to act in a way that avoids the foreseeable harm caused by an escalating balance, and firms should also show that the total cost of the product, including any fees and charges that are added to the balance, represent fair value.
  • There is acknowledgement of a potential risk that, instead of firms letting balances escalate unfairly, firms move to repossession of properties at an earlier stage. The FCA states that its mortgages rules ‘remain clear that firms must not seek repossession unless all other reasonable attempts to resolve the position have failed (MCOB 13.3.2AR(6)).’
• Shortfall statements
  • The FCA has decided not to make the proposed amendments to the scope of MCOB 13.4.1R which would have meant 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. Instead, it makes clear that in line with the Consumer Duty firms should adopt an outcome-based approach when communicating with customers in early payment difficulties, to deliver good outcomes. For example, the policy statement mentions that a customer may find it helpful to receive the MoneyHelper information sheet ‘Problems paying your mortgage’ before they enter arrears, depending on their individual circumstances.
  • As the changes to the initial provision of information requirement are not being made, firms will also not be required to send quarterly statements to customers when they have entered shortfall, as customers should receive the initial provision of information before receiving any subsequent statements. However, changes to MCOB 13.5.1R are being made to ensure that all customers in arrears are receiving regular information about their account. This will require firms to send a statement to all customers in arrears at least quarterly, not just to those where the arrears are attracting charges.
• Taking account of wider indebtedness
  • The proposed additional guidance in MCOB 13.3.4CG to the effect that firms take into account wider indebtedness when considering appropriate support for a customer is being introduced. The term ‘priority debt’ in MCOB 13.3.4CG is being linked with the existing Handbook definition to help in explaining what it means.

Updated guidance for firms supporting existing mortgage borrowers impacted by rising living costs

The FCA’s March 2023 finalised guidance (FG23/2) for firms supporting their existing mortgage borrowers impacted by the rising cost of living (see our Engage article here) has been updated to take account of relevant Handbook changes being introduced.

The updated FG24/2: Guidance for firms supporting existing mortgage borrowers impacted by rising living costs will replace FG23/2 with effect from 4 November 2024, when the other rules and guidance changes also enter into force.

Next steps

The final rules and updated mortgages guidance take effect from 4 November 2024. The FCA will withdraw the TSG at the same time. The FCA considers that giving firms just over 6 months to implement the changes is sufficient, given that many of the Handbook changes reflect existing expectations under the TSG which have already become industry good practice.

The FCA will continue its supervisory work in this area, including monitoring complaints and information it receives from the Financial Ombudsman Service relating to the treatment of customers in financial difficulty and assessing the need for any further action in line with its Rule Review Framework.

If you would like to discuss any aspect of the FCA’s final rules and guidance, 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 and embedding of the Duty’s requirements as the 31 July 2024 closed books deadline rapidly approaches. For a summary of some recent related FCA work, take a look at our Engage article ‘UK Consumer Duty: FCA gives more implementation feedback and some focus areas for closed books work’.