BBA RESPONSE TO FCA CP15/6 Consumer Credit proposed changes

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1 Nick Waugh Consumer Credit Policy Team Strategy and Competition Division Financial Conduct Authority 25 The North Colonnade Canary Wharf London, E14 5HS Submitted by 6 th May 2015 BBA RESPONSE TO FCA CP15/6 Consumer Credit proposed changes 1. The British Bankers Association (BBA) welcomes the opportunity to respond to FCA CP15/6 and the proposed changes to the Consumer Credit Rules and Guidance. 2. The BBA is the leading trade association for the UK banking sector with more than 230 member banks headquartered in over 50 countries with operations in 180 jurisdictions worldwide. Eighty per cent of global systemically important banks are members of the BBA. As the representative of the world s largest international banking cluster the BBA is the voice of UK banking. 3. We have the largest and most comprehensive policy resources for banks in the UK and represent our members domestically, in Europe and on the global stage. Our network also includes over 80 of the world s leading financial and professional services organisations. Our members manage more than 7 trillion in UK banking assets, employ nearly half a million individuals nationally, contribute over 60 billion to the UK economy each year and lend over 150 billion to UK businesses. EXECUTIVE SUMMARY 4. The main body of the report sets out the responses to the consultation. In summary, the key comments are a. The Guarantor Loan scope should be limited to guarantees that are provided by an individual and not extend to corporate guarantors (and also possibly employer guarantors) b. The guarantor pre-contractual explanation requirements should not be framed in a way as to risk lenders being treated as giving advice to the guarantor and therefore potentially assuming a duty of care. Adopting the Lending Code best practice of the guarantor availing themselves to independent legal advice should be treated as displacing the lender s obligation to provide adequate explanations. c. The guarantor creditworthiness assessment should reflect the contingent liability nature of their commitment and similar creditworthiness considerations as are applicable to the borrower are not necessarily appropriate. d. The creditworthiness assessment should not include the potential for future unknown and unquantifiable default charges to be included. e. Continuous Payment Authorities should be established without a modifying agreement where forbearance is being granted to a customer who is not yet in arrears or in default.

2 2 f. When considering the expected term of a proposed debt management plan, the suitability of a plan being arranged through a free to client Debt Advisory service should be considered as a potential alternative where the debtor s contribution is being reduced by the charging of fees. CONSUMER CREDIT PROPOSED CHANGES TO OUR RULES AND GUIDANCE RESPONSE CREDIT BROKERS SECTION 2 Question 1: Do you agree that the rules in PS14/18 should be retained? If not, please explain what changes you would propose and why. 5. We agree that the rules implemented through PS14/18 should be retained. Question 2: Do you agree with our proposed minor amendments to the reporting requirements? 6. We do not have any objection to the minor reporting requirement amendment. Question 3: Do you have any comments on our proposed minor changes to the CONC rules on credit brokers? 7. We have no comments on the proposed minor amendments. Question 4: Do you have any views on the remuneration processes for brokers, or on the specific issues raised in this chapter? 8. Remuneration for brokers should have regard to the requirements in place for other product types, such as those contained within ICOBS, MCOB and COBS. These requirements are compatible with achieving good consumer outcomes, and any proposed changes within CONC should be based upon tangible improvements in customer outcomes. 9. The existing pre contractual disclosure requirements in CONC 4.5.3R require the disclosure of commissions and fees that might affect the impartiality of the Broker, or impact the customer transaction decision. Any further regulation that might be considered must have a clear identification of the additional value and benefit that it will bring to the consumer. The use of Credit Brokers, and the commission/fee that they receive, can deliver good customer outcomes where appropriate controls and governance are in place, such as disclosure requirements and claw backs. Any future regulation should also have regard to the sector where potential poor consumer outcomes are identified and restrict the requirements to specific segments / products and not be applied to all regulated agreements where this is not appropriate. 10. There is a significant amount of information that is already provided to the consumer when entering into a regulated agreement. Whilst information of the existence and/or amount of a fee or commission is provided to borrowers in specified circumstances, there is a question as to whether the breakdown of the commission payment is useful to consumers or would influence their borrowing decision. In making a choice of lending product, the APR is considered to be the most effective method in allowing consumers to compare the total cost of credit of the product. 11. The consultation states that the Supreme Court decision in the Plevin v Paragon Personal Finance case will be considered. The facts of the Plevin case relate specifically to disclosures of payments where the Insurer, Credit Broker and Lender were only connected by an armslength commercial relationship. BBA CP15/6 consultation response May 2015 Confidential Page 2

3 3 12. The BBA is actively engaged in direct discussions with the FCA on disclosure requirements and the specific details of the Plevin case. The deliberations from these discussions must be considered in any potential rules on information disclosure to consumers. LENDING ISSUES Section 3 Guarantor Loans Question 5: Do you have any comments on our proposed changes to CONC rules in relation to guarantor lending, or suggestions for further changes? 13. The title of this section would typically suggest it relates to what is regarded as a Guarantor Loan product in the market, however the proposed changes to CONC R state that the regulation will apply to any regulated credit agreement (which would include revolving credit facilities such as overdrafts). We would request clarification that the proposed policy is intended to have this broader application of applying to any regulated credit agreement where a guarantee or indemnity is provided. 14. The proposed regulation as it is written will apply to a person which is defined in the Glossary, in accordance with the Interpretation Act 1978, as any person, including a body of persons corporate or unincorporate (that is, a natural person, a legal person and, for example, a partnership). This would have the impact of including Corporate guarantors within scope of the regulation, and extend, for example, to a. Government Professional and Career Development Loans (These usually involve a global guarantee where a guaranteed loan scheme is established and it would be wholly inappropriate to apply the CONC provisions to such guarantee arrangements) b. Employer Guaranteed Loans (Whilst likely to be rare occurrences, there may be sound reasons why an employer would provide a guarantee to assist employees in obtaining finance. Irrespective of how the Employer is constituted, it should not be necessary for the lender to go to the lengths proposed under the CONC provisions) 15. We would therefore recommend that the scope of the regulation is amended to exclude situations of corporate guarantors and also employer guarantors who do not fall into the corporate category by limiting: a. The guarantor rules to an Individual as defined in the FCA glossary as a natural person; or a partnership consisting of two or three persons not all of whom are bodies corporate; or an unincorporated body of persons which does not consist entirely of bodies corporate and is not a partnership. A further exclusion to remove from scope a guarantor who is an unincorporated employer of the borrower should be added. b. The guarantee or Indemnity to those instruments that fall within the definition of security as defined in s189 of the Consumer Credit Act, so that any guarantee or indemnity that is treated as not provided at the debtors request (express or implied) is excluded. This will ensure the proposed CONC provisions are in line with the retained CCA. S189 CCA - security, in relation to an actual or prospective consumer credit agreement or consumer hire agreement, or any linked transaction, means a mortgage, charge, pledge, bond, debenture, indemnity, guarantee, bill, note or other right provided by the debtor or hirer, or at his request (express or implied), to secure the carrying out of the obligations of the debtor or hirer under the agreement; BBA CP15/6 consultation response May 2015 Confidential Page 3

4 4 16. The proposed rules require the provision of adequate explanations to guarantors by lenders. The matters mentioned in R (3) are not ones that a lender would normally allow their staff to explain to a guarantor. Guarantee terms are tightly worded and it is difficult for a guarantor to avoid liability due to an error in the guarantee. Guarantors might however try to assert misrepresentation or undue influence to avoid their liability. To avoid this scenario, a lender would not normally allow staff to explain details of the guarantee, as no matter how well intentioned, there is a risk that they are unable to evidence the position was not misrepresented. 17. It is for these reasons that lenders do not engage with guarantors in this way as by doing so they might assume a duty of care to the guarantor. To avoid such challenges from a guarantor, the practice has developed that guarantors requiring detailed information of their potential liability (as proposed under CONC R) are directed to obtain independent legal advice. 18. CONC R should be amended to remove any requirement on lenders that might be construed as giving advice and thereby assuming a duty of care. If a guarantor opts to obtain Independent Legal Advice before signing the guarantee, the provision of this advice by a solicitor should be considered as fulfilling the need for adequate explanation. 19. The Lending Code contains provisions for subscribers to ensure that the nature of the liability being entered into is understood by the guarantor. It provides protection for the consumer without exposing lenders to the risks associated with engagement with the guarantor on the proposed transaction. Guarantors are encouraged to obtain Independent Legal Advice to ensure the full nature of the commitment and potential implications are explained. 20. If the mandatory provision of adequate explanation is introduced as drafted, the consequential concerns over claims of giving advice and misrepresentation in the guarantee process could lead to lenders insisting that the guarantor obtains Independent Legal Advice in all circumstances (resulting in additional costs to the borrower), or a reduction in the availability of such products for consumers and therefore reduced choice for the consumer. 21. We would request clarification that where a borrower uses the High Net Worth Borrower exemption in CONC App 1, the credit agreement will not be a 'regulated credit agreement' and therefore the proposed CONC guarantor loans regulations will not apply. Guarantor Creditworthiness assessment 22. As referenced in bullets 14 and 15 above, CONC 5.2.5R is proposed to apply if a person is to provide a guarantee. This would extend to the provision of guarantees by corporates. It is recommended that the definition is changed as detailed in point The granting of the credit agreement is subject to the assessment of the creditworthiness of the borrower as confirmed within CONC 5.2.6G. The guarantor is therefore not the primary source of repayment, and the provision of the guarantee provides a secondary source of repayment as a contingency for changes in the borrowers circumstances. The requirement of the guarantor to meet any obligations under the contract is therefore conditional on the borrower breaching / defaulting on their obligation. 24. If the Borrower does not meet their obligations under the contract, demand on the guarantor could require either the payment of the outstanding payment(s), or a full repayment of the debt outstanding. The level of debt outstanding at the point at which demand is made under the guarantee is likely to be on a reducing basis over time as repayments reduce the debt. Sale of any asset financed through the agreement could result in part repayment of the debt, and changes in the borrowers circumstances could result in them being able to meet part repayments and therefore the guarantor might not need to meet the full periodic repayment or demand amount from their sole income or assets. BBA CP15/6 consultation response May 2015 Confidential Page 4

5 25. In assessing the creditworthiness of a guarantor there are therefore the unknown elements of a. whether they will be called upon to meet their guarantee obligation and 5 b. The amount of the debt that will be outstanding at the time that demand is made under the guarantee. 26. The lender will want to assess that the guarantor at the point at which they enter into the guarantee, would a. Be entering into a liability that they are likely to be able to fulfil if called upon, even if they might require time to meet that obligation (which could include the realisation of assets), and b. Demand under the guarantee would not cause the guarantor material detriment and therefore not in the interests of the guarantor to enter into the guarantee. 27. CONC 5.2.5R (1), (2) and (3) define the requirements for lenders to assess the potential impact upon the guarantor and to consider sufficient information to make a reasonable assessment. These requirements (in conjunction with General FCA principles) provide for an appropriate and proportionate evaluation of, and protection for, the guarantor. Lenders will be able to define the policies that they will adopt to cover the broad range of situations where a guarantee might be provided (Personal Loan or Business Lending and whether a sole guarantor or multiple guarantors). 28. The proposed new rule 5.2.5R (4) requires lenders to consider very similar requirements in assessing creditworthiness of a guarantor as is required for the borrower. A full detailed assessment of a guarantor s income and expenditure would not be expected to be considered a proportionate response given the contingent nature of the liability being entered into. The proposed CONC 5.2.5R (4) should be removed, with the remaining rules within CONC 5.2.5R providing for a proportionate and appropriate creditworthiness assessment to be undertaken. 29. With the principles based approach to regulation, we do not believe it is necessary to consider introducing additional requirements for guarantor lending in a subsequent consultation paper. If these proposed rules are intended to cover any regulated agreement where a guarantee has been provided, a broad range of products and customer segments could be impacted. Lenders should develop and implement policy that is appropriate for their products and customer segments, and the policy would reflect the existing FCA Principles. Question 6: Do you have any comments on our proposed changes to CONC rules in relation to joint borrowers? Joint Borrowers 30. The proposed wording whether it may be appropriate provides flexibility for lenders to adopt a practical and proportionate approach to joint borrowings which would be reflective of their products and target customer segments. 31. We do not envisage (and requested confirmation) that the policy is intended to require firms to confirm the ability of each applicant to demonstrate their ability to service the borrowing from their own income, as this would lead to potential customer detriment and potentially financial exclusion. 32. The most common example would be joint household accounts (e.g. husband and wife with joint overdrafts or loans) where there is an imbalance in income (e.g. one party might be a Homemaker, or full time/ part time working patterns). In such circumstances the lender would not automatically decline an application because serviceability cannot be fully demonstrated by both parties on their own income. BBA CP15/6 consultation response May 2015 Confidential Page 5

6 6 Question 7: Do you agree with the deletion of CONC 9 on credit reference information? 33. Yes, we agree with the deletion. Question 8: Do you have any comments on our proposed changes to other rules for lenders and guidance for firms. 34. CONC 4.2.7G (2D) proposes that the level and extent of explanation should consider factors including the sophistication of the customer in credit matters. It is not practicable to make an assessment of sophistication at a customer level, especially where remote channels are used. CONC 4.2.7G (3) already requires lenders to consider the extent it is evident and discernible, the customer's level of understanding of the explanation provided. 35. CONC 5.2.4G (2) proposes that the creditworthiness assessment should consider the cost of the credit, which the summary text advises extends to cover default charges. The creditworthiness assessment is undertaken to establish that the borrower has demonstrated an ability to meet the credit repayments. Whilst unforeseen circumstances could result in customers falling into arrears, there is no ability to predict whether a customer will fall into arrears. Making assumptions of non-payment fees for all consumers in the affordability assessment is not consider appropriate. The rule should remain as the total charge for credit as defined in CONC App1, and the creditworthiness assessment should not include any potential future charges that might arise due to the non-compliance with the credit agreement. The requirement to include default charges would also appear to contradict CONC G (2) which requires the assessment of ability to meet repayments without incurring financial difficulties. CONC 5.2.4G (2) should not include a reference to default charges. 36. CONC G The proposal is for the statement of unenforceability of a debt to be made clear in any request for payment or any communication for payment. Where the customer receives a monthly bill or statement on the credit agreement (e.g. Credit Cards) there should not be a requirement to include this narrative. It is recommended that the CONC G is made clear that the notice of unenforceability should only be included where demand is made on a consumer to pay arrears, or demand has been made for repayment the full balance. It should not be applicable for regular statements that are issued. FINANCIAL PROMOTIONS Section 4 Question 9: Do you agree with the removal of the exemption from the HCSTC risk warning requirement? 37. Yes, we agree. Question 10: Do you have any comments on our proposed changes in relation to clear fair and not misleading? 38. No comments on the elevation of the guidance to a rule. Question 11: Do you have any comments on our proposed changes in relation to prominence? 39. No comments relating to the changes relating to the prominence of information. Question 12: Do you have any comments on our proposed changes to the triggers for a representative APR? 40. No comments. BBA CP15/6 consultation response May 2015 Confidential Page 6

7 7 Question 13: Do you have any comments on our proposed changes to other rules and guidance on financial promotions? 41. CONC 3.5.4G proposes that reference to interest-free credit will trigger a representative example as it indicates that an interest rate of 0% will be charged. Whilst this provides clarity, the use of the term Interest free credit for the entire term of the credit agreement indicates an absence of interest charge and should not trigger the representative APR. DEBT ISSUES section 5 Question 14: Do you have any comments on our proposed changes to the guidance regarding referrals to debt advice? 42. We would request clarification that the referral to a not-for-profit debt advice body would cover charitable organisations, not-for-profit organisations and governmental organisations. 43. We would request clarification on how a not-for-profit organisation is to be defined and whether this is intended to be extended to free to client profit making debt advice bodies. CONC 8.2.4R requires a debt management firm to inform consumers of the availability of free debt advice, and we request clarification whether there is an intended differentiation between notfor-profit and free debt advice. 44. CONC 7.3.7G A (3) will allow firms In addition to provide the customer with contact details of authorised persons that are not defined as not-for-profit organisations. We would expect that firms would be able to design communications that would be able to contain the sources of debt advice that they feel are appropriate for their clients. This will include not-for-profit organisations and might include other free to client and For-Profit organisations too. The communication would distinguish those which are free to client or where the client might be expected to pay a fee. Question 15: Do you have any comments on our proposals to allow the introduction of CPA without a modifying agreement in certain circumstances? 45. We support the ability of CPA s to be established without the need for a modifying agreement. 46. CONC 7.6.2B G (1) highlights that the creation of the CPA supports the fair treatment of the customer and facilitates the exercise of forbearance. This recognises that it is in the customers interest to set up a mechanism to help them maintain an agreed payment plan and assist them in a period of financial difficulty. 47. CONC 7.6.2B G (1) however also states that the CPA can only be set up without a modifying agreement where the customer is in arrears or default. Lenders adopt a pro-active approach to identify customers who, whilst up to date on their credit agreement, are demonstrating characteristics which might indicate that they might be about to enter financial difficulty. Contact can be sought with such customers to encourage them to make contact to discuss their financial situation (or signpost them to the not-for-profit/free debt advice sector). This early identification and action is generally acknowledged as providing the best approach for customers to address their financial difficulties. 48. To support a customer who is up to date on their credit agreements whilst they review their financial position (and potentially seek support from the not-for-profit debt advice sector) forbearance can be granted by the lender. This aligns with Principle 6 (Treating Customers Fairly). CONC (Guidance on financial difficulty) acknowledges a number of scenarios which might indicate a customer is in financial difficulty. BBA CP15/6 consultation response May 2015 Confidential Page 7

8 8 49. To preclude customers in financial difficulty (but not in arrears or default) from establishing a CPA where forbearance is being granted could lead to customer detriment and poor customer outcomes. CONC should be amended to allow a CPA to be set without a modifying agreement where forbearance is being extended or the customer is in arrears or default. 50. We would request clarification on how the legislation is to be amended so that the potential breach of the legislation is removed and replaced by this regulation Question 16: Do you have any comments on our proposal to add guidance on the duration of debt management plans? 51. We would like confirmation that the requirements would only apply to profit seeking debt management firms and not-for-profit debt advice bodies. 52. We support the proposal that firms that carry out debt counselling and debt adjusting consider the expected term in their assessment (and subsequent reviews) of the debt solution being provided. 53. A significant number of consumers wish to repay their debts and should be encouraged to fulfil their obligation to repay their borrowing. Consumers should be allowed time to fulfil these obligations and this might result in an initial offer of low contributions with the expectation that their circumstances will improve in the future. The frequent and timely review of low contribution offers should assess the prospects of an improved financial situation and whether another debt solution is now appropriate. 54. A material consideration when assessing the suitability of a Debt Management Plan and the term, should be the amount of a consumers contribution that is being absorbed in fees, and hence the actual reduction to their debt. Where the consumers debt repayment contribution is reduced by fees (particularly where a minimum fee charged by a debt management provider represents a large proportion of the consumers contribution), the most appropriate debt solution might be the agreement of a Plan through a free to client Debt Advice organisation. The Debt Advice provider as well as the debt solution should be considered as potential alternatives which will be in the best interests of the consumer. 55. In assessing an appropriate debt solution, the consumer s circumstances would be discussed in detail with the debt adviser. It remains the responsibility of the debt adviser from the authorised firm to obtain the necessary information to enable the most appropriate debt solution to be identified based upon the information they receive. Where a Debt Management Plan is considered the appropriate solution, the proposed term of the Plan would need to be taken into account by the adviser. Question 17: Do you have any comments about our proposals to amend rules relating to not-forprofit debt advice bodies and referring customers to information about complaints procedures? 56. We support the ability of not-for-profit debt advice bodies being able to meet their obligation to refer customers to the availability of information regarding complaints in a format other than writing where the initial contact is not in writing. Question 18: Do you have any comments on our other proposals relating to debt? 57. No comments BBA CP15/6 consultation response May 2015 Confidential Page 8

9 THE MORTGAGE CREDIT DIRECTIVE SECTION 6 9 Question 19: Do you have any comments on the proposed changes to CONC resulting from the transfer of the second charge regime? 58. No comments. Question 20: Do you agree with our approach to implementing the MCD for lending not secured on the home? 59. A transaction will be considered as an article 3 (1) (b) transaction where the firm knows or has reasonable cause to suspect that the purpose will be to acquire or retain property rights in land or an existing or projected residential building. The creation of MCOB Chapter 14 to implement regulation for article 3 (1) (b) agreement of the MCD provides a complex cross referencing of provisions within MCOB and CONC. Question 21: Do you agree with the additional MCD changes proposed? 60. Yes NEXT STEPS SECTION We would wish to be engaged in future discussions on the areas under consideration to help inform any consultation proposals. We would particularly be interested in the discussions on a. Responsible lending / creditworthiness and affordability b. Quotation Searches 62. The dual layering of Consumer Credit Act (CCA) legislation and Consumer Credit sourcebook regulation provides an unnecessary level of complexity for consumers and lenders. The retained CCA provisions should be reviewed as soon as possible and requirements transposed into CONC to provide a single source of regulation that provides a fit for purpose environment for consumers and lenders and reflects the increasing digitalisation of the market. Question 22: Do you have any comments on the cost benefit analysis 63. No comments Question 23: Do you agree with our initial assessment of the impacts of our proposals on the protected groups? Are there any potential impacts we should consider? 64. We agree that we do not believe that the proposals will have a particular impact on the protected groups. If you have any questions or would like to discuss any aspects raised in the consultation response, please do not hesitate to contact us. Yours faithfully Ian Fiddeman Policy Director, Retail Ian.fiddeman@bba.org.uk BBA CP15/6 consultation response May 2015 Confidential Page 9