UPDATE 23rd April: Since this blog was published, the FCA has taken steps to close some of the gaps in help that we identified below. It has announced a package of measures that will cover motor finance, and high-cost short-term credit such as payday loans, and rent-to-own and buy-now pay-later agreements.
Whilst we broadly welcome these proposals we are concerned that the FCA has not taken steps to suspend interest accruing on outstanding payments, except in the case of payday loans. We would urge the FCA to extend this principle to all forms of consumer credit. We have all questioned why the proposed payment freeze for high-cost short-term credit, including payday loans, is only for one month. Our full response to the FCA consultation can be found here.
Last week the FCA announced proposed guidance and an emergency consultation into the support that it says creditors should provide to customers struggling financially as a result of the Coronavirus outbreak. In this blog post our Policy Manager Meg van Rooyen discusses these proposals and the need for further action to ensure that the people who need it most don’t fall through gaps in the financial safety net.
In a matter of just weeks, the outbreak of Coronavirus has had a huge impact on the finances of millions. This has led the Government to act to try to protect jobs, businesses, livelihoods and more with an unprecedented set of financial support measures.
The Government has been swift in its response to supporting people through the crisis. Measures such as ensuring people with mortgages can access three month payment holidays and struggling businesses being able to access support from the Coronavirus Business Interruption Scheme are welcome. However, these are just the first steps needed, with a number of these schemes not immediately available, while for many people they don’t solve the immediate problem.
There are many gaps in the Government’s response – including on council tax and the need immediate hardship support for self-employed people who cannot wait until June for income support payments to come through. We continue to make the case for further action for people already in debt going in to this crisis, and the many households at risk of falling into difficulty as a result of it.
Help is on the way…
To complement the Government’s response so far, the FCA announced last week welcome proposals to ensure firms provide support to customers struggling financially and dealing with debt problems during this difficult period.These include – as we called for in our Rescue Package proposals last month – a temporary payment freeze for up to three months on loans and credit cards. There will also be no interest on up to £500 for customers with arranged overdrafts who are financially impacted by Coronavirus, and steps to ensure that measures implemented in response to the outbreak do not negatively impact customers’ credit scores.
The FCA’s proposals on consumer credit so far do not, however, offer help to people with debts that fall outside of these narrow definitions. People with debts related to hire purchase agreements (such as car finance) or high-cost short-term credit such as payday loans will not receive any support under the proposals published to date. It appears that – as it stands – those who own micro-businesses and find themselves reliant on their business credit cards to make ends meet while their income grinds to a halt will not be protected, either.
Without a holistic view that takes all areas of consumer credit into account, especially when it comes to high-cost short-term credit, it is inevitable that people in severe financial difficulty as a result of this crisis will continue to fall through the gaps. Furthermore, the proposals do not address the problem of interest accruing during payment deferral periods – potentially storing up greater financial difficulty later on.
This is why we are calling for further steps from the FCA on the following:
- Action on other types of borrowing including hire purchase agreements and high-cost short-term credit products – and clarity on guarantor loans
- Requiring firms to suspend interest on credit card or loan payments that will otherwise be accrued during payment deferrals.
- Extending the measures to cover micro-businesses with business credit cards, business overdrafts and other business lending products.
Is three months long enough?
It is not yet clear how long the measures put in place to limit the spread of Coronavirus will last, but most policy arrangements and regulatory measures have been built around the three month mark. It is therefore vital that any measures put in place by the FCA to help people through this financially challenging period are adaptable; not only to the length of time that the Government’s social isolation measures remain in place, but to the length of time these financial shocks are felt.
The FCA should signal now that it will be open to extending the time limit of these measures beyond three months, to ensure they provide the financial support that they have been designed for.
It is also important for the FCA to consider the impact that these temporary crisis provisions will have in the longer term; consideration of possible “off ramp” approaches to avoid the unwelcome consequences of removing this support overnight. Further forbearance measures may be required as well as more longer-term policies to tackle the extra debt and interest that many are likely to be faced with as a result of these proposals as they stand.
The biggest test yet on vulnerability
It is likely that this crisis will also lead to more people finding themselves in vulnerable circumstances as a result of the financial strain that Coronavirus brings, and in many cases existing vulnerable circumstances are likely to be exacerbated by this outbreak.
Financial services firms have made significant progress on vulnerability in recent years, but as our chief executive Joanna Elson said yesterday, Covid-19 will be the industry’s biggest test yet when it comes to supporting vulnerable customers. In our consultation response, we have suggested that the FCA issues a formal reminder to all firms on their responsibilities to vulnerable customers in the specific context of the Covid-19 outbreak, in addition to encouraging firms to assess their vulnerability policies and future planning, taking into account the long-term effects of the outbreak on vulnerable people.
In the meantime, Chris Fitch and colleagues here at the Trust are already working to help firms support their customers through the outbreak.
A meaningful contribution
If that sounds like a long list of problems, it is worth saying that as a debt advice charity it is our job to find the holes in announcements like these – and to make the case for decision and policy makers to do more. That shouldn’t take away from the fact that the steps the FCA proposed last week will make a very meaningful contribution in helping households through Covid-19 – and they should be congratulated for stepping up at this difficult time.
We look forward to working with the FCA and others to, we hope, build further on these measures –and get more help to people who will have never needed it more than in the coming weeks and months.
Read our full set of recommendations in our response to the FCA’s consultation.