The Financial Conduct Authority (FCA) has issued new guidance on how firms should notify guarantors of their intention to take payment, before any such request is made of the guarantor.
Section 189 of the Consumer Credit Act makes clear that any guarantee attached to a loan meets the Act’s definition of a ‘security’ on the loan. Section 87 requires firms to serve a default notice before exercising any form of security, including a demand for payment from a guarantor.
A default notice must explain:
• How the credit agreement has been breached
• What action is required to remedy the breach, and by what date this action must be completed (the date must be no less than 14 days from the date of the notice)
• The action the lender will take if the breach is not remedied
The FCA’s new guidance highlights that the term ‘enforcement of security’ does not just refer to the act of obtaining a court judgment. The security will also be considered to have been enforced if a lender writes to a guarantor making a formal demand for payment, or if it collects a payment from the guarantor via direct debit or continuous payment authority (CPA).
The guidance says that firms must inform guarantors of the following should they plan to use direct debit or CPA:
• That the borrower has breached their obligations under the agreement, and the nature and extent of the breach
• The exact amount of the overdue payment
• That the lender now intends to take payment from the guarantor using the CPA or direct debit
• When these payments are likely to be taken
• That they have right to cancel the CPA, however here the lender must also highlight that cancelling the CPA will not remove their obligation as guarantor to pay the outstanding sum
The FCA also says that lenders should wait for at least five working days from providing this information before taking payment from the guarantor.
Throughout the process of collecting payment from a guarantor, firms must always be mindful of the FCA requirement for communications to be ‘clear, fair and not misleading’.
The FCA has highlighted to firms that it can use this guidance in deciding whether to take enforcement action. It also re-iterates that guarantor lending remains an area of priority, and that it may issue further rules and/or guidance in the future.
In November 2016, the FCA issued a ‘call for input’ on proposals to introduce price caps on guarantor lending, as well as home-collected credit, catalogue credit, rent-to-own arrangements, pawn-broking, logbook loans, motor finance, credit cards and overdrafts. Responses to this call for input are invited up until February 15 2017. A consultation on formal proposals may then take place later in 2017.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.