Out-Law News | 14 Oct 2020 | 8:25 am | 3 min. read
HM Treasury said the government would legislate to make consumer credit default notices, or debt letters, easier to understand and less intimidating to their recipients. The amount of information that must be made prominent in debt letters will be restricted, and lenders will be required to use bold or underlined text rather than capital letters.
Under the proposals, lenders will also now be able to replace legal terms with more widely understood words, and letters will clearly signpost people to the best sources of free debt advice.
The rules governing the content and format of debt letters have not been substantively updated for nearly 40 years and the proposed changes follow campaigning by a range of consumer debt and mental health charities highlighting the adverse impact that such letters can have on the mental health of those struggling to make repayments, as well as their ability to effectively manage their debt.
Hopefully this first step in updating the notice requirements is a catalyst for the Treasury to look at other prescriptive requirements in the Consumer Credit Act and change them so firms can take a more tailored and helpful approach in communicating with customers.
Consumer lending expert Andrew Barber of Pinsent Masons, the law firm behind Out-law, said: “These changes will be viewed even by many firms as being long overdue. Firms have often struggled to reconcile the strict form and content requirements of these notices with the need for customers to understand what action they have to take in response.
“Hopefully this first step in updating the notice requirements is a catalyst for the Treasury to look at other prescriptive requirements in the Consumer Credit Act and change them so firms can take a more tailored and helpful approach in communicating with customers,” Barber said.
Barber said the nature and timing of the proposed changes was significant given the current economic climate in which an increasing proportion of consumers are facing redundancy, reduced wages and other financial challenges brought about by the Covid-19 crisis. This will, in turn, create greater levels of indebtedness for some consumers, leading to increased stress, anxiety and other cognitive challenges.
Barber said the changes would need to be considered carefully by lenders who have already had to respond and adapt to specific Covid-19 related support measures brought in by the Financial Conduct Authority (FCA), as well as the FCA's high cost credit review in 2019 which introduced a broad range of measures to support over-indebted consumers.
“It follows that the debt letter proposals should not be looked at in a vacuum, but within a wider picture in which law-makers and regulators have been seeking to give greater protection to consumers by bolstering and refining the standards and rules with which lenders are expected to comply. This is an evolving picture on which firms will need to keep a close eye and continue to offer constructive responses – particularly in the context of those struggling with increasing debt and who may be regarded as having vulnerable characteristics,” Barber said.
Contentious financial services and consumer protection expert Jonathan Cavill of Pinsent Masons said the proposed changes to the content and form of debt letters aligned with the FCA's consultation on the fair treatment of vulnerable customers which emphasised the need for firms to assess vulnerability on a “spectrum of risk" taking care to meet the needs of consumers “at the greatest risk of harm”.
“Firms will therefore need to keep this spectrum at the forefront of their decision-making so as to ensure that customers' needs are properly met – even in situations where it is contemplating court action against a customer,” Cavill said.
These rule changes should give firms wider scope to express themselves in a supportive manner in their communications with debtors before taking court action.
“Sending appropriately worded default notices, in accordance with the new rules, will not simply be a matter of lenders having to follow the letter of the law, but it will also form part of the wider regulatory expectation on such firms to treat customers fairly. Failure to do so may heighten the risk of greater regulatory scrutiny: either by way of FCA supervision or enforcement, or through the Financial Ombudsman Service upholding complaints against firms where it regards non-compliance with the rules as evidence of the firm not acting fairly or reasonably in the circumstances,” Cavill said.
The new rules will be delivered through secondary legislation and are expected to come into force in December 2020. All lenders will then be required to make the changes within six months.
Anthony Harrison, a contentious financial services expert at Pinsent Masons, said: “The proposed rule changes are one of a number of markers over the last few years which reflect a substantial 'sea-change' regarding attitudes towards mental health issues and debt management – with the rules enabling lenders to take a more supportive approach to those struggling to make repayments and who may be suffering from challenging personal circumstances.”
Cavill said the changes would build on work carried out by lenders on these issues in recent years.
“These rule changes should add to that by giving firms wider scope to express themselves in a supportive manner in their communications with debtors before taking court action. It may also lead to more favourable resolutions as debtors are signposted to advisory agencies which may be able to help them,” Cavill said.
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