This week the FCA issued revised proposed guidance in respect of the need for default notices under the CCA before taking certain actions following a breach of a regulated agreement. It relates to guarantor loans, under which an individual other than the borrower provides a guarantee or indemnity (or both) in relation to a regulated credit agreement or regulated consumer hire agreement.
In February 2016, the FCA issued draft guidance on this issue but this has now been updated to reflect responses it received to the original guidance. The credit industry was opposed to the guidance, and did not agree with the FCA's analysis of the CCA requirements or its interpretation of the relevant CCA provisions. There were also concerns that it would lead to poor customer outcomes, and potentially negative consequences for consumers' credit files. See: https://www.fca.org.uk/publication/guidance-consultation/gc16-02.pdf
The FCA has sought to clarify what it means to "enforce" security, and therefore, when a lender must issue a CCA default notice.
This is significant for lenders because failure to issue the notice and provide a copy to the surety/guarantor means that the security is unenforceable against the surety/guarantor (in respect of the breach to which the notice relates) without a court order. The borrower or the guarantor may have a cause of action against the lender and the FCA could take regulatory action against the lender.
In the initial February guidance, the FCA said that if the lender wishes to "request or take payment" from the guarantor following non-payment by the debtor, the lender must first serve a default notice on the debtor (and provide a copy to the guarantor) and allow at least 14 days for a response. The credit industry disagreed with this interpretation on a number of grounds, for example, suggesting that the CCA requires a measure of compulsion imposed on the borrower or guarantor by the lender in order to enforce the security, and not merely "requesting" payment from the surety. The industry also argued that if they followed the FCA's approach, this could have a negative impact on customer outcomes as lenders would not be able to accept payments from guarantors, even if voluntarily offered, until the default notice had been issued.
In the revised guidance, the FCA says that there is a distinction between when a lender demands payment from a guarantor or takes payment from them via a Continuous Payment Authority on the one hand, and when the guarantor voluntarily makes a payment or where the lender requests a payment from the guarantor, but makes it clear it is not a demand for payment, on the other. The former two scenarios constitute enforcement while the latter two do not. In turn, the former scenarios require a default notice to be issued while the latter do not.
The FCA suggests that the lender has three options where the borrower is in breach of the agreement:
- issue a default notice in accordance with section 87 and wait 14 days;
- obtain the guarantor’s express consent to payment being taken, or
- notify the guarantor it intends to rely on the security to seek repayment (in writing and with sufficient detail to enable an informed decision) and wait a reasonable period (at least 5 working days), during which the guarantor can cancel the authority
The FCA says that where a default notice has been issued and the breach has been remedied, eg by a payment made by the guarantor, the account should be reported as being in arrears while the breach existed and before payment was made, but that no default should be reported at the CRAs. The reporting of defaults at the CRAs and the issue of a CCA default notice are not dependent on each other, and each are subject to different requirements.
Status of Guidance
Questions of interpretation of legislation are ultimately for a court to determine and the FCA says it can only "express a view". That said, like any formal guidance issued by the FCA, lenders should look to comply. If they choose not to, this will give rise to a regulatory risk. To mitigate this, lenders would need to have a robust and documented rationale for their own approach. They would also be required to demonstrate that their policies and procedures did not lead to poor outcomes for both the borrower and surety.
This year, the FCA has worked to understand how CCA guarantor lending works more generally and the risks to consumers. It has concluded that this guidance is necessary, even though the credit industry argued that it was unnecessary and inappropriate. The FCA has clarified their view and accept that requesting payments (provided that these are clearly not a demand) or accepting payments made voluntarily does not necessarily amount to enforcement and therefore do not require a CCA default notice to be issued. The revised guidance does at least demonstrate that the FCA is willing to take on board feedback from respondents and moreover, is prepared to revisit its original position on a technical point of law.