FCA change their guidance on guarantor loans

The FCA had earlier consulted on their draft guidance (GC16/2) published in February 2016 when they set out their view, in relation to a guarantor loan, that a default notice is required if a lender wishes to request or take payment from a guarantor following non-payment by the borrower, as it amounted to enforcing the security (guarantee). This includes where payment is taken using a continuous payment authority (CPA) or direct debit mandate previously provided by the guarantor. Whilst the consumer organisations supported FCA’s interpretation, trade bodies and firms were largely opposed to the proposed guidance as most considered that their view was not in line with relevant case law, or with a proper interpretation of the CCA. The revised guidance consultation addresses some of the issues raised by firms.

 

In partial modification of their guidance contained in the February paper, the FCA have now clarified that a guarantee is enforced where, following breach of the agreement by the borrower:

  • the lender demands payment by the guarantor, or
  • the lender takes payment from the guarantor by using a CPA or direct debit mandate that was previously provided and without at least appropriate prior notification to the guarantor

 

On the other hand, a guarantee is not enforced in FCA’s view if:

  • payment is made voluntarily by the guarantor, following notification of the borrower’s default, and without any element of compulsion, or
  • the lender requests payment by the guarantor, but making clear that this is not a demand for payment

 

The FCA have stated that, in effect, in order to collect any payment from the guarantor, a lender will have the following three options:

  • issue a default notice in accordance with section 87 (and wait for at least 14 days)
  • obtain the guarantor’s express consent to payment being taken, or
  • pre-notify the guarantor (in writing and with sufficient detail to enable an informed decision) and wait a reasonable period (at least 5 working days), during which the guarantor can cancel the authority