The Financial Conduct Authority (FCA) has issued a short consultation before finalising its guidance on enforcing security under the Consumer Credit Act 1974 (CCA).
The guidance relates to the requirement under s87 CCA to serve a default notice before taking certain actions following breach of a regulated agreement in relation to guarantor loans. The guidance will be of particular interest to motor finance companies that accept guarantees and/or indemnities from third parties in relation to regulated credit agreements or regulated consumer hire agreements.
The consultation (GC 16/2) has been published after feedback received on guarantor lending following the FCA’s proposed changes to its consumer credit rules and guidance (PS15/23 September 2015). In that document the FCA had stated that it did not consider that taking or demanding payment from a guarantor would amount to ‘enforcement’ of the security and so it would not require a CCA default notice (Annex 2 page 43).
The FCA now considers that position was incorrect.
Having reviewed the CCA and underlying regulations, the FCA now considers:
– The CCA provisions on security are intended to provide a surety (including a guarantor and an indemnifier) with appropriate protections.
– The definition of security in s189 includes both guarantees and indemnities, and the CCA treats both types of security in the same way.
– S111(2) expressly contemplates that security is capable of being enforced without a court order.
– In the case of a guarantee or indemnity, security is realised if the creditor/owner seeks and obtains payment from the surety. This therefore also constitutes enforcement of the security.
– S87 requires a default notice, and s111 requires a copy to be sent to the surety before steps can be taken to enforce security.
– The statutory statement prescribed by the s105 regulations (The Consumer Credit (Guarantees and Indemnities) Regulations 1983) states: "if the debtor fails to keep to his side of the agreement, the creditor must send him a default notice (and a copy to you) giving him a chance to put things right before any claim is made on you".
The FCA’s position now is that if the creditor wishes to enforce a guarantee following non-payment by a debtor, it must first serve a default notice on the debtor, provide a copy to the guarantor, and allow at least 14 days for a response. Failure to serve a valid default notice means payment cannot be taken from the guarantor. If it is, the FCA may consider taking regulatory or disciplinary action against the firm.
The guidance is not binding on firms, but the FCA will take it into account in deciding whether a firm has complied with the law and whether any supervisory or enforcement action is warranted. Of note, given its change of view, is that the FCA will not take any disciplinary action solely on the basis a firm took payment from a guarantor without first issuing a default notice to the borrower and copying it to the guarantor between 28 September 2015, when the FCA published its incorrect view, and 19 February 2015, when it published this guidance.
The consultation ran until 18 March 2016.
Greg Standing is a motor finance partner at Gowling WLG