The Financial Services industry has been quick to respond to the struggles facing individuals and businesses during the current coronavirus pandemic, but there are issues they need to consider when implementing their forbearance measures.
As announced by the Chancellor of the Exchequer this week, it’s great that the financial services industry has reacted quickly and considerately to the fact that customers may suffer financial difficulties as a result of the COVID-19 pandemic. Working with our banking, lending and building society clients, we’re already seeing some contacting customers on a case-by-case basis to let them know that they might be able to help.
We’re supportive of the steps being taken but firms need to be careful as to how they implement their forbearance measures. They need to bear in mind:
- in the case of lending, some lenders have already clarified that “payment holidays” might not be available if customers are in already arrears. Whilst some arrears customers might still be eligible, the criteria should be clear and should set out exactly how they will be applied in each circumstance
- some mortgage lenders will be able to direct customers to existing payment holiday rights in their mortgage terms and conditions. However, not all mortgages allow for this. If a mortgage lender is open to giving a customer a “payment holiday”, it should be careful how it explains this to the customer. Will this be forbearance, or a temporary (mutual) variation of the terms and conditions?
- the consequences of any “payment holiday” should be clearly explained to the customer. Payment holidays will inevitably extend the repayment term of a loan and lenders may have to consider a different approach for customers nearing retirement
- on the subject of variations, personal loan providers and credit card issuers should be careful in how they “agree” any payment holiday or credit limit increase with customers. Mutual variations of a regulated credit agreement will trigger rules around modifying agreements – and so should be avoided for that reason
- lenders who have sold or securitised mortgage or loan portfolios may have to look at their arrangements to see if they can offer customers flexible options such as payment holidays, as this may not always be possible
- firms offering fixed term or notice savings accounts will need to consider the capital implications of allowing customers easy access to their savings. While some firms have spoken of allowing “emergency” access, how will this be assessed? There’s a real risk of negative publicity if banks and building societies set criteria for what constitutes an “emergency” and ask customers to evidence this. But equally, there’s a risk that opening their fixed and notice savings books up generally to easy access means that banks and building societies will see opportunistic migration of funds to better-paying products
Many borrowers will see the government’s announcement as a welcome piece of good news in what is an increasingly worrying and challenging time. However, it’s imperative that firms are absolutely clear on the advice they are giving and ensure that the borrowers are fully aware and understand the implications of changes to their existing arrangements.
As the Coronavirus situation is rapidly evolving, our advice may change in light of government announcements and on-going developments; please consult our Coronavirus COVID-19 hub for our latest thinking.