COVID-19: Customers in Temporary Financial Difficulty
An overview of the draft FCA guidance for regulated firms
14 May 2020
The Financial Conduct Authority (“FCA”) recently issued draft guidance for insurance and premium finance firms outlining the FCA’s expectations around how such firms should deal with existing customers who are facing, or who may reasonably expect to face, temporary financial difficulty as a result of the ongoing coronavirus pandemic (Covid-19).
The draft guidance, published on 1 May 2020, was open for comment until 5 May and, if confirmed, the FCA intends that the measures will start to come into force by 15 May. The guidance, which is accessible here, will be reviewed and – if appropriate, revised – in the next 3 months. In summary, the message of the guidance is one of collaboration.
The guidance applies to general insurance and protection policies but does not apply to customers who are in financial difficulties for reasons other than Covid-19 (to which the FCA’s existing forbearance rules and guidance continue to apply). This flash briefing aims to provide a high level summary of some of the key points in the draft guidance which is expected to be formally issued shortly.
Aims of the guidance
Principle 6 of the FCA’s 11 Principles requires a firm to pay due regard to the interests of its customers and treat them fairly. With this in mind, the FCA hopes that the guidance will (1) minimise the impact of temporary financial distress and (2) ensure that customers continue to have insurance that meets their demands and needs.
To whom does the guidance apply?
The FCA has indicated that the guidance applies to “regulated firms operating in the insurance and premium markets” including:
- insurance intermediaries (including appointed representatives);
- premium finance lenders providing credit to fund the payment of insurance premiums in instalments;
- premium finance brokers carrying on regulated activities relating to credit granted for the purposes of financing insurance premiums in instalments;
- debt collectors; and
- other firms that may be involved in insurance arrangements and/or in relation to the provision of premium finance.
As regards premium finance agreements, the guidance is not intended to capture lending for business purposes.
When and how should firms act?
It is clear that the FCA is promoting both reactive and proactive approaches. The FCA recognises that customers who are having difficulty making repayments or who have queries about their insurance cover in light of the pandemic may contact firms directly. The guidance, however, also suggests that firms should act to support customers where the firm
has a “reasonable basis for knowing, or has identified (or should reasonably have identified) that there are customers who are suffering financial distress…even where those customers have not contacted the firm.”
In supporting customers who are in temporary financial distress as a result of Covid-19, firms should consider what options can be offered to deliver a fair outcome for customers in light of their changed circumstances, such as:
- re-assessing customers’ risk profiles. Have these changed because of the pandemic?
- offering other products to meet a customer’s needs and revising cover accordingly. If a firm adjusts a customer’s policy, the firm should waive any fee associated with the adjustment.
- working with customers to avoid the need for cancellation of necessary cover e.g. by way of payment deferrals (as to which see more below). If a customer decides it’s in their interest to cancel a policy, firms should waive cancellation fees where necessary to ensure they are treating customers fairly. The FCA also notes the importance of treating consumers fairly when assessing new premiums for consumers who cancel and then return to the insurer.
If short-term adjustments to a customer’s policies are made i.e. affecting only a period within the cover period rather than the remainder of the cover period, firms should ensure that the customer’s situation is reassessed when that temporary period comes to an end to avoid the risk of underinsurance.
Clear communication, via firms’ websites and apps, is vital and firms should encourage customers to make contact if they are experiencing temporary financial difficulty as a result of coronavirus. In that regard, the FCA has noted that firms should make it as easy to contact them as possible and has highlighted the importance of considering the needs of vulnerable customers.
An alternative step which firms providing premium finance can take, where amendments to insurance cover do not help to alleviate temporary payment difficulties for a customer paying his or her premium in instalments, is to review any interest rates associated with the instalments.
The guidance defines a payment deferral as “an arrangement under which a firm permits a customer that pays their insurance premium in instalments… to make no payments under their particular arrangements for a specified period, without being considered to be in arrears, and without the authorised party exercising the right to cancel the insurance policy unilaterally because of the payment deferral.” The FCA regards payment deferrals under the guidance as being offered “in exceptional circumstances outside of the customer’s control”.
Broadly speaking, the FCA’s expectations as regards payment deferrals are these:
- Firms should grant payment deferrals to customers who wish to receive them unless a firm (acting reasonably) determines that it is obviously not in a particular customer’s interest to do so. Firms should give customers adequate information to help them understand the implications of a payment deferral.
- Payment deferrals should be granted for at least 1 month and up to 3 months, and customers should be able to request payment deferrals at any point after the guidance comes into force for a period of 3 months.
- (Despite the context in which the guidance is provided), firms are not expected to make enquiries with each customer to determine if the circumstances surrounding requests for payment deferrals are connected with coronavirus.
- Customers should not be liable to pay charges/fees in connection with granting a payment deferral.
- If a customer has been unable to reach agreement with a firm for payment deferral because of the firm’s operational difficulties, and the customer subsequently misses a payment, firms should work with the customer and Credit Reference Agencies to ensure that any necessary rectifications are made to credit files.
- During payment deferral periods, firms should engage with customers to understand the likelihood of their being able to resume payments at the end of the period. If a customer is unable to resume payments at the end of a payment deferral period, the firm should work with that customer to resolve payment difficulties in advance of payments being missed.
- Firms may continue to accrue interest charges during a payment deferral period but should not seek payment of these until the deferral has ended. In a similar vein, the FCA does not expect that any party (e.g. a broker or debt collector acting under recourse arrangements) would seek payment from a customer until a payment deferral period has ended.
If a payment deferral period is not regarded as appropriate, firms should offer alternatives for temporary relief to customers “without unreasonable delay” and in accordance with the principle of treating customers fairly. Such other options include, but are not limited to, accepting reduced payments or rescheduling a payment term, waiving missed or late payment fees, or permitting a customer to amend their repayment date without any cost.
And the FCA has also said: “this guidance does not prevent firms from providing more favourable forms of assistance to customers, if the firm deems this appropriate, including writing off unpaid repayments as well as any associated interest, fees or charges.” Whilst the coronavirus pandemic primarily impacts upon health and well-being, the knock-on implications on all other aspects of life are all-encompassing. The foregoing magnanimous statement in the FCA’s draft guidance is perhaps yet another reminder of this.
* This note reflects the position as at 14 May 2020.
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.
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