COVID-19 and customers in financial difficulty
FCA Guidance: October 2020
05 November 2020
In May 2020, we reported on the FCA’s guidance for firms supporting customers experiencing temporary financial difficulty as a result of the ongoing coronavirus (Covid-19) pandemic. (That article is accessible here). The FCA published further guidance in August and again, most recently, in October (the “October Guidance”), reflecting the fact that a number of customers continue to face financial difficulty as a result of the ongoing pandemic. The October Guidance, which came into force on 1 November, can be viewed here.
The principles behind the October Guidance are not new. The October Guidance builds on existing FCA principles, including the need for firms to pay due regard to the interests of their customers and treat them fairly (Principle 6) and to pay due regard to the information needs of their clients, communicating information to them in a way which is clear, fair and not misleading (Principle 7). The October Guidance “applies in the exceptional circumstances arising out of the coronavirus pandemic”.
As with previous guidance relating to this subject matter, the October Guidance applies to general insurance and protection contracts (but not to re-insurance products) and applies to regulated firms operating in the insurance and regulated credit premium finance markets (but does not apply to lending for business purposes). The October Guidance seeks to reduce the impact of financial distress and ensure that customers continue to have insurance that meets their demands and needs.
In the October Guidance, the FCA states that firms should consider actions to support customers both where customers contact firms because they are having difficulty making repayments and also where they do not (e.g. where a customer has missed payments during the pandemic). The FCA expects that firms will not cancel insurance policies solely because of non-payment without first considering actions to support customers who may be in financial distress due to the pandemic.
Such actions might include:
- re-assessing a customer’s risk profile (e.g. a customer may no longer be using their vehicle or no longer using it for business purposes as a result of the pandemic, which could lead to lower premiums);
- considering if the firm can offer other products which would better meet a customer’s needs, and revising cover accordingly;
- working with customers to avoid the need to cancel necessary cover by acting in accordance with relevant forbearance measures.
The October Guidance also reminds firms that different options available to customers should be clear in a firm’s communications (including on a firm’s website and app), and that firms should encourage customers to make contact with them if they are in financial difficulty due to the coronavirus pandemic.
Generally, the FCA does not expect firms to take any action that will lead to an increase in premiums (unless such action is reasonable and any increase is justified by an objective assessment of the insurance risk). In assessing customers’ needs, firms should seek to ensure that customers continue to have insurance that meets their demands and needs, and which mitigates the risk of underinsurance.
Regulated credit (premium finance agreements)
A firm which has the right to cancel an insurance policy should not exercise that right unilaterally because of a customer’s financial difficulty in meeting premium finance payments when the firm is treating a customer with forbearance in accordance with the October Guidance. When treating customers with forbearance, the FCA expects firms to be flexible and “employ a full range of forbearance options” to minimise avoidable financial distress and the associated stress and anxiety. This may include allowing a customer to make no or reduced payments for a specified period.
The October Guidance sets out the outcomes which the FCA expects firms to deliver. These include: firms having due regard to customers and treating them fairly; protecting customers from escalating debt once they have entered into a forbearance arrangement with a firm; firms having clear, effective and appropriate policies and procedures for dealing with customers in financial difficulty; and referring customers to debt advice, if appropriate.
The October Guidance includes a section explaining how firms should treat customers at the end of a payment deferral (granted under earlier FCA guidance) if customers continue to experience financial difficulty. Key is the FCA’s expectation that firms would act in line with such customers’ interests.
The FCA has also included a section in the October Guidance to assist firms “in delivering effective forbearance in the current environment”. This includes engaging with customers seeking support before payments are missed, and taking steps to prevent escalating balances (e.g. by reducing or cancelling further interest/charges where a firm puts a repayment arrangement in place as a forbearance measure). The October Guidance also asks firms to consider a range of forbearance options for customers and reminds of the need to be clear with customers about the different implications of these e.g. in relation to total cost of credit.
The FCA recognises the challenges faced by firms in these times in terms of numbers of calls from customers and resourcing. However, firms should consider how they can mitigate issues like long or unpredictable call waiting times (which may put customers off from engaging with firms and receiving timely outcomes) and ensuring that their staff are adequately trained with appropriate oversight arrangements in place. Firms should consider how they are supporting vulnerable customers at this time and should also monitor and review arrangements regularly “to ensure that [a customer’s] circumstances have not changed and the arrangement remains sustainable”.
The October Guidance requires firms to adopt a quality assurance approach that reviews the end-to-end process in order to best evaluate the fairness of customer outcomes overall.
In relation to debt help and money guidance, the FCA expects that firms will help customers to understand what types of help are available. Signposting to appropriate money guidance should be done in a timely manner and should include informing customers that free and impartial advice is available from not-for-profit debt advice bodies.
Unfortunately, the coronavirus pandemic doesn’t seem to be going away any time soon. As firms therefore continue to provide temporary (or in some cases, longer term) support to customers in financial difficulty as a result of the pandemic, they should ensure that this support “reflect[s] the uncertainties and challenges that many customers will face in the coming months, possibly for quite some time to come.”