Strengthening Protections For Borrowers In Financial Difficulty: Consumer Credit And Mortgages

What you need to know

On 4 November 2024, the FCA will implement its new consumer protection framework in the areas of consumer credit and mortgages.

The purpose of the new rules is to strengthen protection for borrowers in financial difficulty as a result of consumer credit transactions and mortgages entered into to counteract the rising cost of living. The new rules will build on the FCA’s Tailored Support Guidance, the relevant aspects of which will be incorporated into the FCA Handbook. The TSG will be then be withdrawn.

These changes will affect:

• consumer credit lenders (including MCD article 3(1)(b) lenders);
• premium finance firms;
• mortgage lenders and administrators;
• home purchase providers and administrators;
• firms who carry out activities in relation to consumer hiring, operating an electronic system in relation to lending (in relation to a borrower under a P2P agreement) or debt collecting;
• consumer credit and mortgage lenders in supervised run-off under the financial services contracts regime; and
• Gibraltar-based consumer credit and mortgage lenders passporting into the UK.

The key changes reflect the core tenets of the new Consumer Duty and require firms to offer tailored support which takes into account individual circumstances and which ensures that all communication with borrowers is clear, fair, and not misleading. Firm should provide information in a way that borrowers can easily understand.

Firms are expected to proactively engage with borrowers who are showing signs of financial difficulty, rather than waiting for borrowers to reach out for help. This will require firms’ internal systems to flag when a borrower is at risk and to take proactive steps to assist. This could include offering flexible repayment options like reduced payments, loan restructurings and payment deferrals. Special consideration and identification of vulnerable customers is required and firms will be expected to put in place additional assistance for the vulnerable.

Firms should also be mindful to avoid charging unnecessary fees or interest that could exacerbate a borrower’s financial difficulties.
Firms are required to regularly monitor and review their support measures to ensure they remain effective and appropriate for borrowers’ needs. Training will be key to ensuring that all internal employees are up to speed with the key requirements. This will need to be more than a tick box exercise and focus on practical real life situations with competence-based training. Existing policies and procedures will need to be reviewed and updated to ensure they meet expectations regarding customer protection.

Failure to comply with the new rules could result in firms being required to compensate customers who have been adversely affected by their non-compliance. This year alone, the FCA has already secured circa £60 million in compensation for 270,000 customers from over 100 lenders who have failed to look after their struggling customers appropriately.

The FCA can also impose significant fines; apply sanctions such as restrictions on their business activities or requirements to take specific actions to remedy non-compliance; public censure, which can damage a firm’s reputation and credibility. Prohibition orders could also be imposed, whereby individuals within the firm may be prohibited from carrying out regulated activities if they are found to be responsible for the non-compliance. In severe cases, non-compliance can lead to criminal prosecution.

[We can help you evaluate your processes and work with you to help implement and embed the new PS24/2 rules within your business. We can help identify any potential gaps post implementation of the Consumer Duty and the new PS24/2 and provide guidance on the less certain and more technically or operationally challenging areas of implementation.