Debt Breathing Space Regulations: FCA consults on Handbook changes

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The FCA has published a consultation on changes to its Handbook resulting from the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the Regulations) which are expected to come into force in England and Wales on 4 May 2021. The aim is to clarify how the FCA’s rules interact with the Regulations. Firms should take note that, while the FCA doesn’t have powers under the Regulations to supervise compliance or enforce against them, it points out that ‘systematic non-compliance’ is likely to be of interest to it as this may place a question mark over whether a firm is meeting the specific CONC rules, the suitability requirements in its Threshold Conditions or breaching one of the Principles (eg Principle 6 – TCF).

The FCA explains in the consultation that there are some areas in its Handbook - specifically, some of the consumer credit conduct rules in CONC 5, 6 and 7 - where it thinks it’s necessary to clarify how its rules apply where the Regulations also apply, and avoid duplicating the effects of the Regulations in a disproportionate way. It has not identified any rules or guidance in MCOB or CONC 8 (Debt Advice) which need clarifying or amending.

For more on the Regulations, take a look at our previous Engage article.

Changes to CONC conduct rules

Persistent debt rules

  • Under these rules, firms are not required to take certain steps under CONC 6.7.27R, 6.7.29R and 6.7.30R where the firm is taking equivalent or more favourable steps in relation to the customer’s account.
  • During a moratorium under the Regulations, the FCA considers that a firm will already be taking steps ‘equivalent or more favourable’ to the persistent debt rules (ie stopping interest from accruing and pausing enforcement action on the moratorium debt to give the customer time to get debt advice). Therefore the firm will not be required to comply with the specified persistent debt rules for the duration of the moratorium. It proposes to add guidance to the Handbook to clarify this.
  • At the end of the moratorium, the persistent debt rules would apply as normal unless the firm continued to take equivalent or more favourable steps.

Repeat overdraft use rules

  • CONC 5D.3.3G (5) provides that a firm is not required to do anything under the repeat overdraft intervention rules which is inconsistent with the treatment it has already adopted for a particular customer.
  • The guidance at CONC 5D.3.3(5) G states that, where a customer has been identified as being in financial difficulties and is being treated with appropriate forbearance by the firm, the firm is not required to make the interventions required by CONC 5D.3 where that would be inconsistent with that treatment.
  • Similarly to its approach to the persistent debt rules, the FCA considers that treating with ‘appropriate forbearance’ here would include firms complying with the Regulations so that the customer benefits from a moratorium in relation to their overdraft.
  • Likewise, the FCA considers that taking any of the steps envisaged under CONC 5D.3.2 is inconsistent with the treatment already adopted in compliance with the moratorium. The FCA explains that interventions under the repeat overdraft use rules would be inconsistent with the requirements of a moratorium, which aim to give customers time and space to obtain further debt advice.
  • The FCA is proposing to clarify the above in its guidance.
  • At the end of the moratorium, the FCA states that firms will need to consider the relevance of the guidance at CONC 5D.3.3(5) G in the light of their treatment of the customer.

Monitoring a customer’s repayments for signs of actual or possible repayment difficulty

  • Customers in a moratorium will have actual or possible repayment difficulty, which means that CONC 6.7.2R will apply and require firms to take ‘appropriate action’. This should generally include sending the customer information about the risks of escalating debts and providing contact details for not-for-profit debt advice bodies (CONC 6.7.3 G).
  • The FCA thinks this guidance is irrelevant where a customer is in a moratorium because they are already taking steps to deal with their debts and are in contact with a debt advice firm. It is therefore proposing additional guidance to make clear that compliance with a moratorium is an ‘appropriate action’ under this rule, as well as the similar provisions in CONC 6.7.3R A and B relating to retail revolving credit (store cards and catalogue credit) and credit card agreements.

Suspending recovery of a debt for a reasonable period

  • CONC 7.3.11R requires firms to suspend active recovery of a debt for a reasonable period where the customer (or someone acting on their behalf) is developing a repayment plan. A ‘reasonable period’ should generally be for 30 days and then a further 30 days where there is evidence of progress towards developing a plan (CONC 7.3.12 G).
  • When assessing what is a ‘reasonable period’ under CONC 7.3.11R, the FCA considers it reasonable for firms to take into account time the debt has already been in a moratorium. It proposes clarifying this point in its guidance.
  • The FCA makes it clear that firms will still need to make an assessment of what is a ‘reasonable period’ and may determine that additional time is reasonable depending on the borrower’s circumstances.

New Glossary definitions

As part of its amendments to the CONC conduct rules, the FCA is proposing the addition of two new Glossary definitions for ‘Debt Respite moratorium’ and ‘moratorium debt’.

No changes to MCOB or the debt advice rules in CONC 8

MCOB

Having discussed the Regulations with stakeholders, the FCA has not identified any MCOB rules or guidance which need clarifying or amending. It notes that, while the definition of ‘arrears’ used in the Regulations and its Handbook differs, it considers that ‘firms will understand the intended meaning clearly in any given context’.

Debt advice rules in CONC 8

Having considered:

  • the Handbook Glossary definition of ‘debt solution’;
  • the requirement for debt advice to be provided in a durable medium and to include certain information (CONC 8.3.4R); and
  • the requirement to inform customers of potential consequences of changes to contractual payments before a debt solution is agreed or entered into (CONC 8.6),

the FCA decided that no changes are necessary.

However, it asks whether there are any other consumer credit rules or guidance that it should consider amending.

Reminder on territorial scope

The Regulations will apply to debtors ordinarily resident or domiciled in England or Wales only, so firms will need to factor in the jurisdictional differences when looking at required systems, policies and processes changes.

Scotland already has a separate Debt Arrangement Scheme. As mentioned in HM Treasury’s June 2019 policy proposal response on the breathing space scheme, the government will continue to work with the Department for Communities and Department for the Economy in Northern Ireland to consider the introduction of an equivalent scheme in Northern Ireland.

Next steps

The closing date for the consultation is 6 January 2021. The FCA makes it clear that the consultation invites feedback on its proposed changes to the Handbook, and does not constitute guidance on the interpretation or application of the Regulations. Separate government guidance on the Regulations for creditors and debt advice organisations is planned.

The Regulations have been approved by Parliament and are currently laid before Senedd Cymru. They are expected to come into force on 4 May 2021.

The government also intends to introduce a statutory debt repayment plan (SDRP) that would enable an individual in problem debt to enter into a formal agreement with their creditors to repay all of their debts over a manageable time period, whilst receiving protections from creditor action.

The Financial Services Bill 2019-21, which has just been introduced to Parliament, will amend the Financial Guidance and Claims Act 2018 (that made provision for the creation of the debt respite scheme, ie breathing space and the SDRP) to give the government the full range of powers it needs to implement the SDRP effectively. In particular, the explanatory notes to the Bill highlight that the amendments will mean that the SDRP can include debts owed to government, can be funded by a charging mechanism, and that creditors can be compelled to accept amended repayment terms. The explanatory notes also reiterate that the government intends to make the regulations to implement the SDRP over a longer timeframe and has not set a specific implementation date.

The projected impact of COVID-19 on individuals' finances reinforces the importance of being well prepared for the launch of breathing space. Banks and other creditors should consider the necessary changes to systems, policies and processes as soon as possible. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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