Out-Law Analysis | 02 Dec 2016 | 4:55 pm | 5 min. read
In October, the FCA opened a consultation on draft new guidelines on guarantor loans (8-page / 311KB PDF) which signal a change of opinion by the regulator on the way in which consumer credit providers can legitimately enforce guarantor loan repayments. The consultation has now closed but the FCA has yet to publish its final revised guidance.
There is significant uncertainty about how lenders can deal with guarantors when a borrower fails to make loan payments. That uncertainty looks set to remain even if the FCA adopts the revised guidance it has proposed. While the FCA’s view would be influential, consumer credit providers should not assume that receiving money from a guarantor by following the guidance would not be challenged in court.
The FCA's proposed new guidance
The origins of the FCA's proposed new guidance on guarantor loans can be traced back to a policy statement it issued in September 2015, where it set out its responses to feedback received on an earlier consultation on proposed changes to rules and guidance on consumer credit.
The FCA recognised that its clamp-down on some of the practices used in high cost short-term credit might lead to an increase in guarantor loans, and so it put forward significant changes to its rules in the consultation. While some changes to the rules in relation to these loans were progressed with via its policy statement, other aspects were deferred for further consideration in light of concerns raised by some within industry.
An important proposal that was deferred was the FCA’s suggestion that a guarantor is to be treated as a ‘customer’ in relation to the rules in the FCA’s Consumer Credit Sourcebook on arrears, default and recovery, including the exercise of forbearance.
Feedback to the consultation the FCA received included proposals that firms should not be permitted to take money from a guarantor using a continuing payment authority (CPA), and that firms should not be able to take money at all from a guarantor without prior warning or issue of a default notice.
In response to the latter objection, the FCA commented that it did not ‘consider that taking or demanding payment from a guarantor would amount to ‘enforcement’ of the security’ and so ‘it would not require a [Consumer Credit Act (CCA)] default notice’.
Earlier this year the FCA opened a consultation on new guidance in which it made an about-turn in its interpretation of the CCA. Having considered sections 87, 88, 105, 111 and 189 of the Act, the FCA reached the conclusion that a lender is enforcing a guarantee when seeking and obtaining payment from the guarantor.
As a default notice must be served before steps can be taken to enforce security, the FCA indicated that it followed that the lender must: serve a default notice on the borrower; send a copy of the default notice to the guarantor; and allow at least 14 days for a response, before requesting or taking payment from the guarantor. This includes taking payment under an existing CPA or direct debit mandate.
The FCA took care to distinguish its interpretation of what constitutes ‘enforcement’ from that which was considered in a 2009 judgment by the High Court in London in a case between the Royal Bank of Scotland and borrower Phillip McGuffick.
The High Court found that, amongst other actions, demanding payment from the borrower did not amount to enforcement, although ‘enforcing security’ did. The FCA is of the view that the McGuffick judgment did not consider the meaning of enforcing security under section 87 of the CCA.
The FCA acknowledged its own change of view, as it advised in its guidance consultation paper that it would not ‘expect to take disciplinary action solely on the basis that a firm has taken a payment from a guarantor without issuing a default notice’ and sent a copy to the guarantor during the period between its publication of its policy statement on 28 September 2015 and the date of guidance consultation on 19 February 2016.
The revised guidance now being proposed
On 25 October, in response to comments received on its February consultation, the FCA published proposed revised guidance in which it has modified its stance in relation to the steps to be taken before requesting or taking payment from a guarantor.
The FCA now considers that a guarantee is not enforced if payment is made voluntarily by the guarantor, following notification of the borrower’s default, and without any element of compulsion, or if the lender requests payment by the guarantor, but makes it clear that this is not a demand for payment.
The FCA amended its earlier advice on CPAs and direct debits to provide that taking payment via a CPA or direct debit may not constitute enforcement of the guarantee where the guarantor is pre-notified before the payment, as the guarantor ‘would have an opportunity to object or cancel the payment authority’. The FCA considers the lender should allow at least five working days before taking payment.
Specifically, before any payment is taken, the FCA expects the lender to inform the guarantor: that the borrower has defaulted on his or her obligations; of the amount of the overdue payment or payments, and the lender’s intention to take payment from the guarantor using the CPA or direct debit; when the payment or payments are to be taken; and that the guarantor has the right to cancel the authority, making it clear this will not cancel the guarantor’s obligations under the guarantee.
According to the FCA's proposed revised guidance, the information should be given in writing, but it does not necessarily need to be on paper.
Options that the FCA considers are available to lenders in relation to CPAs or direct debit
The FCA considers that if the guarantor has given the lender a CPA or direct debit a lender has three options open to it.
The first option is that a lender can issue a default notice in accordance with section 87 of the CCA and wait 14 days. This is the only fail safe option in that it removes any uncertainty as to whether the action taken may amount to enforcement of the security.
The second option, as the FCA sees it, is for a lender to obtain the guarantor’s express consent to payment being taken. The final option is for a lender to pre-notify the guarantor, in writing and with sufficient notice to allow an informed decision, and wait a reasonable period – at least five working days – during which the guarantor can cancel the authority, before taking payment by CPA or direct debit.
Lenders should be aware that the last two options could be challenged in court. They may wish, therefore, to follow the fail safe route.
Consumer credit regulation is a complex area. The processes that lenders put in place andfollow must be looked at objectively by experts in consumer credit. The consequences of getting it wrong can be costly.
Chris Davidson is an expert in consumer credit regulation at Pinsent Masons, the law firm behind Out-Law.com.