COVID-19: Customers in Temporary Financial Difficulty
An overview of the FCA guidance for regulated firms
21 May 2020
Please note that this article is an update of an article which we previously published on 14 May 2020 which gave an overview of the FCA guidance at draft stage. The draft guidance has been implemented with the clarifications outlined in this article.
The Financial Conduct Authority (“FCA”) has issued its final guidance (and accompanying feedback statement) for insurance and premium finance firms outlining 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 “Guidance”).
The FCA expects all firms carrying on regulated activities relating to insurance and premium finance arrangements to have regard to the Guidance. The Guidance applies to non-investment insurance contracts (including general insurance and pure protection contracts) but it does not apply to investment-based insurance contracts or re-insurance.
In our earlier article we provided an overview of the draft guidance. The Guidance, which came into force on 18 May 2020, makes a number of amendments and/or clarifications to the draft. The need to treat customers fairly and offer fair outcomes for customers, however, in light of the exceptional circumstances, remains a clear thread in the Guidance.
- The FCA has not been prescriptive in defining what “temporary financial difficulty” means, allowing firms to use their own criteria. As per the draft guidance, the Guidance reiterates that “firms should make it as easy as possible to contact them” so that customers are encouraged to contact firms if they are experiencing temporary financial difficulty as a result of coronavirus.
- In terms of premium finance arrangements, the Guidance is not intended to capture lending for business purposes. This includes regulated lending for business purposes (e.g. non-exempt lending to a sole trader). The FCA does, however, remind firms that “the Principles, including the obligation to treat customers fairly, extend to all customers within the scope of the consumer credit regime. Firms may still find the Guidance helpful when considering how to comply with the Principles in relation to businesses.”
- Arrangements which facilitate the payment of an insurance premium by instalments but which do not involve the provision of premium finance fall within the scope of the Guidance e.g. many pure protection contracts.
- The Guidance confirms that the elements which apply to insurers and insurance brokers apply only to ‘eligible complainants’ as defined in DISP 2.7.3R. This includes natural persons and small business customers.
Clarifications: when firms should act
- Some respondents were concerned by the broad obligations placed on firms as a result of the proactive approach suggested by the FCA in its draft guidance and so the amended Guidance provides that the FCA wants to see firms focus on where a customer:
- contacts the firm because they are having difficulty making repayments, wishes to reduce cover or has made enquiries about their insurance cover in light of the pandemic; and/or
- has missed payments during the crisis period which may indicate that the customer is suffering financial distress (even if they haven’t contacted the firm).
In the FCA’s view this should ensure that those customers in greatest need of support can access it while enabling firms to take a proportionate approach in response to the pandemic.
- Firms should not make changes to a customer’s account without first having had a dialogue with that customer.
Clarifications: actions firms can take
- The Guidance is largely unchanged from the draft form save that the FCA has highlighted that where firms assess what steps may be appropriate for their customers, firms should be mindful of the Guidance’s objective “to ensure that customers continue to have insurance that meets their demands and needs and mitigate the risks of underinsurance.”
- The Guidance therefore notes that there will be instances where it is not appropriate to reduce or suspend cover e.g. where a customer seeking to take out new cover later may have to have their health re-assessed and could potentially face more expensive premiums. The Guidance suggests that where it’s not in the customer’s best interests to reduce cover, firms should instead consider providing forbearance measures.
Clarifications: interest rates
- The Guidance has been clarified to provide that firms are not required to review and possibly reduce interest rates before considering whether a temporary payment deferral is appropriate for a customer – albeit that the Guidance still recommends that firms consider reviewing interest rates to ensure they are “consistent with the obligation to treat customers fairly in the light of the exceptional circumstances arising out of coronavirus”.
Clarifications: payment deferrals
- Where amendments to insurance cover do not help to alleviate temporary payment difficulties for a customer paying an insurance premium by instalments, the Guidance provides that the FCA expects firms to grant the customer a payment deferral – unless it is obviously not in the customer’s interests to do so.
- Firms should consider both a customer’s need for immediate temporary support and the longer-term effects of a payment deferral on the customer’s situation e.g.
- A payment deferral would not be in a customer’s interest if it gives them a greater overall debt burden compared to other solutions that could equally meet their needs (e.g. reduced or waived premiums) and if that burden would be unsustainable.
- A payment deferral may be appropriate where there is or will be a temporary reduction in household income that would otherwise be used to make repayments related to the premium.
- As per the draft guidance, where a payment deferral is not in a customer’s interests, firms should, “without unreasonable delay” offer other means of temporary relief to the customer.
- The draft guidance provided that payment deferrals could be for a period of between 1 and 3 months. The Guidance allows firms to go beyond the 3 month period if they wish to do so and if it is in a customer’s interests.
- Whilst the Guidance does not require a firm to make enquiries with each customer to determine if the circumstances regarding payment deferral requests are connected with coronavirus, the Guidance does require firms to have “sufficient information” and to “consult with customers when determining the payment deferral period that is in the customer’s interest”. Relevant factors to determine a payment deferral period that is in a customer’s interest include:
- The remaining term of the credit agreement.
- The customer’s ability to repay the accrued debt within the remaining term once the payment deferral ends.
- Whether it’s possible to give the customer an extension to the insurance policy and credit agreement.
- The impact of the payment deferral period on the customer’s ability to get credit to pay an insurance premium via instalments in the following year.
- As noted in the draft guidance, where a payment deferral is granted, the FCA does not expect any party to seek payment from the customer until the end of the payment deferral period. The Guidance also includes an encouragement from the FCA that “all firms in the distribution chain [should] work together in a joined-up way to ensure that best outcomes are achieved.”
- The Guidance requires firms to give customers “adequate information to enable them to understand the implications of a payment deferral” including the customer having to make increased repayments or a lump sum repayment within the agreement term, and the potential consequences for a customer seeking to secure credit to fund an insurance policy in the following year if the sums due are not repaid within the agreement term.
- The Guidance clarifies that where a claim is made on a policy during a deferral period (or where other forbearance measures are in place), firms can deduct outstanding premiums from sums due, in line with current practice, so long as firms meet their obligations to treat customers fairly and act in a customer’s best interests.
- The fact of a payment deferral should not, of itself, be a determining factor when considering credit risk and affordability risk when a customer seeks additional credit to finance a new premium. Firms “can look beyond the stressed circumstances that led to the deferral or other solution”.
The Guidance seeks to address the “current exceptional circumstances” which are arising as a result of the pandemic and as such the Guidance will be reviewed and, if appropriate, revised in the next three months.
* This note reflects the position as at 21 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.
If you have any queries the Corporate team at Carson McDowell would be happy to help.