The Financial Conduct Authority (the FCA) has published a guidance consultation on its proposal to issue guidance on the FCA’s view of enforcing security under the Consumer Credit Act 1974 (the CCA) (the Guidance). The Guidance states that in the FCA’s view, lenders are required to serve a default notice on both borrower and guarantor for non-payment of a debt by a borrower before taking or demanding payment from the guarantor.
In September 2015 the FCA published a policy statement (PS15/23), which stated that there was no requirement to serve a default notice on a guarantor before taking or demanding payment from the guarantor if a borrower failed to make payments.
Reversing the view in PS15/23, the FCA has stated in the Guidance that failure to serve a valid default notice will mean that lenders cannot take or demand payment from a guarantor. If payment is taken without a default notice being served, the borrower or guarantor may have a cause of action against the lender and the FCA may consider taking regulatory or disciplinary action against the firm.
Why the change in view?
PS15/23 published final rules and guidance following the FCA’s consultation on proposed changes to the consumer credit rules and guidance, including in relation to guarantor loans (CP15/6). In response to the feedback received on CP15/6, the FCA announced its intention to undertake further work to better understand how the guarantor lending market operates.
As part of its further work the FCA has considered respondents’ views to CP15/6 that there should be tighter rules on guarantor lending. Some respondents argued that firms should be required to provide prior warning or a default notice before demanding or taking payment from a guarantor. Having considered the issue further, the FCA has revised its view.
Change in interpretation of the meaning of ‘enforcement’
Section 87 of the CCA provides that a notice must be served on the borrower before the lender can take certain specified actions if the borrower does not make payment and this includes where it proposes ‘to enforce security’. The definition of ‘security’ includes both guarantees and indemnities.
In PS15/23, the FCA stated that it did not consider that taking or demanding payment from a guarantor would amount to ‘enforcement’ of security and so it would not require a default notice. Lenders were free to demand or take payments from a guarantor for outstanding debts without first serving a default notice.
However, the FCA now believes that its previous interpretation of section 87 in PS15/23 was incorrect. The FCA’s current view is that a court is likely to interpret section 87 of the CCA to mean that taking or demanding payment from a guarantorwill amount to enforcement of security and therefore a default notice will be required to be served on a guarantor before taking or demanding payment from the guarantor.
How will a default notice need to be served and what will it need to include?
A default notice must contain specified information such as including the action the lender intends to take, the action required by the borrower and the consequences of failure to comply. A default notice must allow a period of at least 14 days for the borrower to make payment or carry out any other actions specified in the notice. The lender must serve a copy of a default notice on both the borrower and guarantor.
What does this mean for businesses?
Although the Guidance is not binding on firms, the FCA has stated that it would take compliance with the Guidance into account in deciding whether a firm has followed the law and whether any supervisory or enforcement action should be taken.
The FCA has stated that a lender should not expect disciplinary action to be taken solely on the basis that it has taken payment from a guarantor without issuing a default notice to both a borrower and a guarantor, where the lender had taken this action during the period from 28 September 2015 to 19 February 2016. However, if a lender has taken payment from a guarantor without issuing a default notice after this period, disciplinary action may be taken by the FCA.
It is advised that firms amend their working practices and adopt the revised view held by the FCA in the Guidance. A default notice should be served on a guarantor before a payment is demanded or taken from the guarantor. Failure to do so could risk enforcement action by the FCA.
The FCA has requested responses to the Guidance by 18 March 2016. The FCA will then seek to issue a final statement of Guidance taking into account any responses received. It is likely that the final Guidance will consolidate the current view.