Coronavirus is pushing the UK into a deep recession, as millions of jobs vanish, small businesses go bust and lots of self employed people are reduced to claiming for benefits as the lockdown continues. Furlough wages won’t last indefinitely for those in full time employment – what then? Many families have booked and paid for holidays costing over £4000 and have little chance of getting a refund if travel companies and airlines are allowed to go bust.
One knock-on effect of the downturn this year is that people may struggle to pay lease agreements on rented cars. Some households are going to put rent, mortgage and food expenses before car payments – tough decisions loom ahead for many of us.
The UK car market has shifted from ownership to rental in the last decade as drivers twigged that the cost of depreciation was the sometimes over £3000 a year on some unpopular models. But if lenders recover all those indebted cars, who would buy them? Nobody, except the People’s Republic of China perhaps.
Faced with this potential spike in unwanted cars as renters hand back the keys on their shiny Audi, Toyota or BMW, the car finance sector could then get into serious difficulties. It’s a tricky situation and the FCA has asked the lenders to come up with ideas rapidly. Here’s the press release;
The FCA has today announced another proposed package of measures to directly support consumers facing payment difficulties due to coronavirus (Covid-19). The range of targeted temporary measures covers motor finance and high cost credit agreements, which include: high-cost short-term credit (including payday loans), buy-now pay-later (BNPL), rent-to-own (RTO) and pawnbroking.
Commenting on the FCA’s proposals on motor finance forbearance for customers facing payment difficulties due to coronavirus, Adrian Dally, Head of Motor Finance at the Finance & Leasing Association, said:
“The proposals announced by the Financial Conduct Authority broadly mirror the forbearance measures that motor finance lenders have been providing to their customers over recent weeks.
“During this unprecedented period, every lender has recognised that forbearance is a vital bridge for customers whose income has been disrupted, and the industry has committed significant resource, human and financial, to meeting requests for support. “To enable this level of support to be maintained for customers, the industry will need some help from Government, and those discussions need to begin in earnest, with decisions reached rapidly.”
The proposals are intended to complement the measures already announced by the government to support consumers during the coronavirus pandemic. The FCA is open to receiving comments on its proposals. Stakeholders are asked to respond by 5pm on Monday 20 April. The short timescale for this work is in recognition of the significant impact coronavirus is having on consumers’ finances right now.
Christopher Woolard, interim Chief Executive at the FCA, said:
‘We are very aware of the continued struggle people are facing as a result of the pandemic. These measures build on the interventions we announced last week, and will provide much needed relief to consumers during these difficult times.
‘We have tailored our measures to specific products. For most of these proposals, firms and consumers should consider the amount of interest which may build up, and balance this against the need for immediate temporary support. If a payment freeze isn’t in the customer’s interests, firms should offer an alternative solution, potentially including the waiving of interest and charges or rescheduling the term of the loan.’
The FCA expects firms to provide a 3-month payment freeze to customers who are having temporary difficulties meeting finance or leasing payments due to coronavirus. If customers are experiencing temporary financial difficulties due to coronavirus, firms should not take steps to end the agreement or repossess the vehicle.
The FCA has also proposed that:
- Firms should not change customer contracts in a way that is unfair. For example, firms should not try to use temporary depreciation of car prices caused by the coronavirus situation to recalculate Personal Contract Purchase (PCP) balloon payments at the end of the term. We will expect firms to act fairly where terms are adjusted.
- Where a customer wishes to keep their vehicle at the end of their PCP agreement, but does not have the cash to cover the balloon payment due to coronavirus-related financial difficulties, firms should work with the customer to find an appropriate solution.
High-cost short-term credit (including payday loans)
We are proposing that high-cost short-term credit (payday lending) firms will be expected to provide a 1 month interest-free payment freeze to customers facing payment difficulties due to the coronavirus pandemic. This shorter period reflects both the much shorter length of most loans and, given interest rates tend to be higher than for other high cost credit products, prevents firms from accruing additional interest during the freeze period. After the end of the freeze, the firm should allow the consumer to pay the deferred payment in an affordable way – whether for example, by 1 single payment after the end of the term or by a number of smaller instalments.
High-cost-short-term-lenders are also reminded, like all lenders, to consider whether immediate formal forbearance may be more suitable if a customer was already in financial difficulty before the impact of coronavirus.
Other credit products – Pawnbrokers must store items free for three months
We are proposing that firms that enter into RTO, BNPL, or pawnbroking agreements will be expected to provide a 3–month payment freeze to customers facing payment difficulties due to coronavirus.
The FCA is proposing that firms should also take the following steps in relation to specific products:
- pawnbrokers should extend the redemption period for the 3-month freeze period or, if the redemption period has already ended, agree not to serve notice to sell an item that has been pawned for that period. If the firm has already informed the consumer they intend to sell the item, they should suspend the sale during the payment freeze
- if a BNPL customer is within the promotional period, firms should extend this by the length of the payment freeze
- RTO firms should provide a 3-month payment freeze. In addition, if a customer needs the goods during the guidance period, repossession should not take place
- if social distancing means that pawnbrokers and RTO firms are unable to redeem, collect or repossess goods, they should not pass on any additional charges or fees to the consumer
As for most of our other loan freeze arrangements, firms will be able to continue to charge interest during the payment freeze (except in the case of high-cost short-term credit). However, in the event that a customer requires full forbearance that interest should be waived. If a customer was already in financial difficulty, the FCA has existing forbearance rules which apply. These will include for example the firm considering suspending, reducing, waiving or cancelling any further interest or charges, deferring payment of arrears or accepting token payments for a reasonable period of time.
The measures outlined today do not prevent firms from providing more favourable forms of assistance to any customer, including a longer payment freeze if appropriate.
The FCA welcomes comments on these proposals until 5pm on Monday 20 April 2020 and expects to finalise proposals by Friday 24 April 2020, with them coming into force shortly afterwards.
Rent Your Lifestyle vs Ownership
As UK consumers switch from owning stuff to renting it, car-sharing/leasing, renting electric bikes to commute around cities or hiring expensive luxury villas, ski chalets, boats etc might well grow as people begin to conserve their capital as the global economy suffers a downturn. Those who fancy an RV/campervan adventure holiday after lockdown might want to check out their credit rating with lenders and vehicle leasing companies in San Jose California, Florida or Las Vegas, before they travel, so they can get the best value for money.