COVID-19 | Working with debtors and debtor forbearance in the current economic crisis
COVID-19 | Working with debtors and debtor forbearance in the current economic crisis
The government, FCA and PRA have urged that certain measures be in place to support small businesses and consumers with regard to credit facilities, but more guidance is still needed in regard to hire agreements, hire purchase, conditional sale, and the multi-billion pounds worth of PCP car loans in the UK.
In this webinar, we will discuss what banks, leasing companies, asset based lenders and other funders should be mindful of when dealing with customers. The different approaches to take when reviewing regulated and non-regulated contracts, and an overview of payment, payment holidays, forbearance and modifying agreements. We’ll highlight how to avoid the regulatory pitfalls and at the same time seek to safeguard debtor credit ratings.
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Afternoon, everybody. Welcome to this afternoon's webinar on debtor forbearance.
This webinar seeks to debate how creditors can interact and support debtors as a result of this financial emergency caused by the global covid-19 pandemic. My name is Eddie Flanagan and I'm a partner in the debt and asset recovery team. Our team handles all aspects of financial services work including both contentious and non-contentious business acting for manufacturers Banks captive and non captive lenders.
Leasing companies Brokers and funders. The team also has particular experience of the UK asset based lending automotive and energy sectors.
I'll be happy to answer questions at the end of this discussions initial considerations that we have to keep in mind turning firstly to housekeeping. Please note that this webinar does not constitute legal advice. The topic discussed is for guidance and information purposes. Only we are happy to assist people fought once we are formally instructed.
The covid-19 global outbreak has brought unprecedented uncertainty to both the UK and Global economies. We are seeing unforeseen disruption to every part of our economy and our daily livelihoods not to mention the suffering of those affected directly or indirectly by this virus.
Many people are now in certain as to how they will pay their mortgages or rent loans credit cards and even their food bills. This uncertainty has affected business greatly and has led to the widespread furloughing of Staff without which we would have seen the imminent collapse of many businesses across all sectors. The government has made its intentions known that creditor should creditors should act with leniency towards debtors.
In addition, they are very quickly made it apparent but they wanted the banks to retain their annual dividends in order to increase their liquidity ratios for this very crisis together with lenders. The government stated that the following release should apply eminently lenders should be willing to agree mortgage holidays of up to three months with customers who are not in arrears prior to this issue renters should be given similar holidays.
up to 3 months landlords cannot evict tenants for a period of at least three months possession proceedings will be limited during the next three months.
And in terms of tax self-assessments are delayed.
In addition business rates relief of up to 12 months for certain categories of business. Most notably retail can be sought the FCA is finishing consultation into Consumer Finance, which can usually take between six months and a year to complete but in this instance in light of the current emergency, one of the shortest consultations ever probably lasting no more than week has called for the immediate.
lamentation of the following creditors should allow payment holidays of three months for personal loans and credit cards that said what now happens to hire purchase conditional sale operating leases and of course the immense business of personal contract purchase, which amounts to a hundred and ten billion pounds in the UK creditors should allow immediate interest-free loans of up to 500 pounds.
And there should be no adverse credit rating entry made in terms of the delayed payments. Now that is fine for personal loans and credit cards. But as we've seen there are many other Financial products that need to be considered. So how do we as businesses deal with customers that are in difficulty? There are two categories of customers. We need to be mindful of they are determined by the following groups firstly is this a regulated contract?
If so, It is covered by the provisions of the consumer credit act 1974 and Associated legislation together with the requirements of the FCA that being the financial conduct Authority or in the in the alternative. Is it unregulated business to simplify this it is essentially business with limited companies or larger Partnerships these entities do not have the protection of the regulatory framework.
So we will start with the second category first as that is the easier to address. So this is unregulated business.
With an unregulated customer if they are seeking for Barons you can deal with the particular merits of the case as you see fit if the factual Matrix shows that the customer should be entitled to your forbearance. Then you should consider the contract that is in place between the two of you however, an act of kindness or commercial forbearance on your behalf must not lead to contractual uncertainty.
It is likely that your terms and conditions or the agreed contract contains an on variations Clause such a clause only permits an agreement variation that is signed by both parties. Therefore such a variation needs to be carefully drafted so that it complies with this failure to do this could undermine the veracity of the underlying contract and create uncertainty between the parties.
So many times we've seen litigation around this subject, whereby any advisor then needs to look at both the documents concerned and the factual Matrix that occurred at the time. The forbearance was granted.
Turning now to regulated business regulated business can consist of loans credit cards regulated higher higher purchase conditional sale agreements and a variety of Lisa's. The immediate point that arises is that amongst the regulated businesses listed much of same does not appear to benefit from the reliefs mentioned above. However, the following considerations are key to navigate the current issues affecting.
Related contracts and business firstly we have treating customers fairly.
This is a Cornerstone of current day.
Regulatory procedures funders are obliged to interact with their customers in a manner that is set out in the FCA handbook being the consumer credit sourcebook charmingly referred to as conch principle six of this requires that creditors must treat customers fairly the requirements of this principle are wide-ranging and could be the subject of Webinar that said engagement with customers is Paramount one needs to be aware of the pressures. They are facing.
Thomas Samuels of God Square Chambers stated in his excellent article that many customers may now be deemed vulnerable because of the unique circumstances initiated by covid-19 in that they are now physically or financially rendered vulnerable.
We now need to look at the principles of conch 7 this deals with the rears default and recoveries conch seven sets out how these arrays default recoveries should be undertaken in light of the extremity of the current financial situation greater understanding of debtors and their circumstances needs to be attended to and evidence for the creditors supervisory requirements with the FCA.
As they regulator creditors therefore need to exhibit unemployment a high level of commercial agility into handling such inquiries.
We now need to look at requests for assistance.
Many funders have received requests for an automatic suspension or holiday for a period of three months.
each matter should be looked at on its merits as stated previously we have seen that the FCA is urgently Consulting on loans and credit cards and indeed has drafted an initial statutory instrument that will allow the Creditor for the purposes of covid to relax certain requirements contained at conch 6 in the coming weeks further relief may be granted in respect of leasing personal contract purchase and Purchase products generally, it is needed very urgently till that point creditors are left with the following predicament.
Forbearance or modifying agreement we have seen that many creditors have had to act in what they believe to be the best interest of the consumer. They have very quickly entered into informal Arrangements Arrangements where no interest or other charges are added they argue that the term for example, 24 months Remains the Same or be it there is a small holiday forward ever period in the interim being one two or three months.
Some are actively stating that they are extending the period making a two-year agreement into a three-year agreement or they are restructuring the payment profile off the agreement.
The problem is some of the above suggestions and I do stress it is some of them is that it may distort the transparency of the contract. Does your consumer really understand what has been agreed section 82 of the consumer credit act 1974 states that parties May and indeed should use a modifying agreement where certain changes are made. Normally.
They are those that have an effect on the total sum payable interest and other charges or Kerr or of course, if it greatly extends the term modifying agreements in the processes that run alongside them are complex and a highly prescriptive. There is very little room for error and if mistakes occur, they can affect the whole of the underlying agreement. Now we have to look at notices and the credit ratings of borrowers or consumers a variety of notices that are used with regular.
Related contracts and have to be issued at certain procedural points. For example, the notice of sums in arrears or nausea as it is charmingly called. Normally you should win two installments have been missed. This can be followed by a notice of default and thereafter by a termination notice. This is not an exhaustive list of such notices. There are others that exist. However, if you are assisting your customer then to issue such notices and to damage their credit rating.
Is in fact counterintuitive of what you are trying to achieve this will not bring about the desired effect between you and your customer careful consideration needs to be given to this issue. Clearly legislative help is urgently required on this point if the Creditor chooses to work with the customer, then it may also decide not to issue such notices presuming the holidays allowed passes without incidents and the contract is full.
Failed all well and good. However, if the customer does not reinstate the payments the procedure including the statutory limits will need to be adhered to before any enforcement action can be taken to take action without the notices would be a matter of conduct on behalf of the credit that may be open to sanction.
So how should creditors proceed there is an opening here for creditors government and debtors to to work together and create a system that will deal with demands created by the covid crisis. Some creditors are intent on shutting that door and enforcing that contractual rights in a desperate attempt to maintain their own Financial well-being.
However, we have seen that the FCA is working at some speed to create a statutory instrument that will relax procedures for creditors and allow forbearance without prohibitive cost in Tons of time and documentation however present that is only there for credit cards and loans and is still not completed in that regard these Provisions must be replicated For Hire purchase personal contract purchase conditional sale agreements and other Financial products that help is urgently needed. Now, let's look at some other considerations that we have to bear in mind that in the current emergency any creditor muster all times.
Main solvent in order to protect all stakeholders including consumers. If not such creditors face sanctions from the FCA whilst considering forbearance creditors should map out the effect. The granting of same will have on their own Financial resilience.
They must remain solvent throughout Soft training is also essential can the creditors show the FCA evidence that they have trained their staff to cope with this crisis.
How is consumer need measured managed and reported on all the creditors policies up-to-date arrears and credit worthiness default vulnerability and sadly death of the consumer all have to be considered all of the problems are real concerns, but many funders will Out of this stronger and it is those with commercial agility and financial resilience that will survive this current crisis.
In summary, therefore it is imperative that businesses seek advice and that they structure their forbearance accordingly.
Whilst there may not be a perfect fit for every situation any agreement reached with a creditor must not breached the principles and outcomes set out in the FCA handbook. I would urge you therefore to seeking advice and proceed with realistic empathy and compassion towards your debtors. This will show that you and your business can be proud of how they have got through these difficult circumstances.
And we'll find that you can Prevail in these current difficulties.
Now just to summarize we have had a couple of questions whilst we've been talking. The first question is can any agreement be concluded over the phone? Well the answer to that differs as to whether we're talking about regulated business under the consumer credit act or non-regulated business. So looking at non-regulated business, you can agree something over the phone, but I would urge.
To consider the terms of your contract because if it has one of those non variation Clauses, you need to agree something in writing. Now I appreciate that needs to be done quickly, but depending and again take advice on the contract if the if you have a written request from your consumer and you agree to that in your correspondence providing that is allowed by the contract you can have a written agreement, but it is very important that it's very straightforward.
And that there's no room for error in regards to interpretation.
The second question that we've had is can we devise a letter that seeks to modify an agreement? And again the answer to that is very different depending as to whether if it's regulated or unregulated business. You can't have a letter with regulated business that seeks to modify the agreement. You can have a letter of forbearance.
It's and that needs to be very carefully drafted and it needs to be careful in its content as to what it seeks to forbear on within the terms of the contract but really should have a a modifying agreement under the ACT. If you are actually modifying a regulated agreement with unregulated business again, it depends on the contract, but you can have variation letters with unregulated business.
It's but I would urge you to seek advice and you could very quickly get that it with either of these questions, and I'm sure that would save you a lot of pain in the long run, please if and if you've got any further questions, please feel free to send these through and we'd be delighted to get back to you. There are a whole list of resources available on our coronavirus resource hub.
Please Avail yourselves of these. I hope they'll be of interest to you. And which Shakespeare Martineau are here to help you get through this crisis the best that you can and in that regard. I wish you all a very good fortune. Thank you very much.
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