Proposal to Issue Guidance on the FCA’s View of Enforcing Security under the Consumer Credit Act 1974: GC 16/2
The FCA have published in February 2016 a guidance consultation (GC 16/2) on a proposal to issue guidance explaining how it will interpret provisions of the Consumer Credit Act 1974 (CCA) regarding the enforcement of security in relation to a regulated credit agreement or a regulated consumer hire agreement involving a guarantor or surety.
In February 2015, the FCA had brought out a consultation paper on proposed changes to its consumer credit rules and guidance, including in relation to guarantor loans. They published a feedback statement and final rules in policy statement, PS15/23, in September 2015 and stated that, in their view, taking or demanding payment from a guarantor (for example, under a direct debit or continuous payment authority) would not amount to “enforcement” of security for the purposes of section 87 of the CCA and so would not require a default notice.
After reconsidering the matter the FCA have now revised their view of how a court is likely to interpret the relevant CCA provisions. They are therefore consulting prior to issuing guidance to update the statement made in PS15/23.
The FCA’s revised view is that if the creditor wishes to request or take payment from the guarantor following non-payment by the debtor, the creditor must first serve a default notice on the debtor (and provide a copy to the guarantor) and allow at least 14 days for response. This applies to all regulated credit agreements (and regulated consumer hire agreements) involving a guarantee or indemnity. Similar principles would apply in other cases involving enforcement of security.
Also, in the FCA’s view, failure to serve a valid default notice means that the creditor cannot take payment from the guarantor. If payment is taken, contrary to section 87, the debtor or the guarantor may have a cause of action against the creditor. In addition, in such cases the FCA may consider taking regulatory or disciplinary action against the firm.
The FCA have stated that they would take the finalised guidance into account in deciding whether a firm has followed the law and whether, therefore, any supervisory or enforcement action is warranted. In light of the statement made in PS15/23 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 to the borrower and a copy to the guarantor, in relation to such actions taken by firms during the period from 28 September 2015 to 19 February 2016. Comments have been called for by 18 March 2016.
(Lightfoots have made a detailed submission on behalf of one of its clients asking the FCA to potentially revert to their previous position on this, highlighting some of the potential legal and regulatory issues with regards to their revised view about the enforcement of security in relation to guarantor loans)