Motor finance lenders will all have been breathing a huge sigh of relief at reading the FCA’s most recent draft guidance for motor finance.

After a very long and turbulent period of Covid restrictions, the FCA has helpfully confirmed that motor finance companies may begin to repossess vehicles from customers affected by Covid-19 from 31 January 2021, provided only that this is a ‘last resort’.  At the time of writing this (24/01/21), the guidance hasn’t been made final but we anticipate this change will be finalised before 31 January 2021.

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We welcome this decision from the FCA and its recognition that, “For customers who remain in payment difficulties under a relevant consumer credit agreement, continuing to restrict repossessions may not be in their interests.  The shorter terms and higher interest rates on these agreements, combined with the depreciating value of the goods or vehicles, means that they could end up owing more in the long term if repossessions are prevented.”

Despite the Payment Deferral Guidance only being applicable to customers who are in temporary payment difficulties as a result of circumstances arising out of coronavirus, many lenders have, out of an abundance of caution, suspended almost all non-consensual terminations and repossession activity on their book since April 2020.

This position was not sustainable for lenders. However, it is equally understood that as the months passed it became more and more difficult to precisely determine whether a customer’s financial difficulties were as a result of Covid or not and to define ‘temporary’.  Lenders were in many cases erring on the side of extreme caution and as a result, there will inevitably now be some huge backlogs for lenders to work through and a used car market which will be flooded with vehicles.

Motor finance lenders should note there are now two guidance notes which are potentially applicable. Where a customer indicates they are experiencing payment difficulties as a result of circumstances relating to coronavirus, a firm should treat them in accordance with the Payment Deferral Guidance and permit eligible customers to defer up to six monthly payments up to July 2021.

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The Tailored Support Guidance then applies to Covid affected customers who are not receiving payment deferrals or are no longer entitled to do so. Section 6 of that guidance (Repossession) applies more widely to all Covid affected customers whether they are receiving any support or not.

When making plans for 31 January, lenders should consider the following practical considerations:

  • Segment the book to approach the backlog in an orderly fashion. Consider prioritising the highest arrears, those customers who may not be Covid affected or who have not been in touch with you at all.
  • Ensure that you can evidence and demonstrate that the termination and repossession is a “last resort”. This is not a new concept and has always been the case, but lenders should consider final engagement attempts to include letters, emails, texts and calls. The FCA would not expect a termination to take place after several months of limited collection activity.
  • Consider carefully which cases have paid over a third and consider a Voluntary Surrender strategy for those clients before starting Return of Goods (ROG) proceedings – noting the courts are likely to be very busy and there will be delays in obtaining orders. Ensure that you send out any ROG cases to your panel lawyers as soon as possible.
  • The FCA expects firms to take extra care to identify and deal with vulnerable customers regardless of whether they are affected by Covid. Consider revised contact strategies for these customers and ensure you take steps to provide adequate modifications from normal collections practice. This should include allowing extra time for those customers to respond, and softer contact strategies with relevant signposting to try and encourage contact.
  • Ensure your standing instructions to repossession agents are clear and documented. Ensure that you have referred agents to the FLA’s best practice on conducting vehicle repossessions during the pandemic. Note that this guidance requires a two-stage process and lenders (or their agents) are encouraged to try and contact a customer to agree on a consensual repossession in the first instance. It is important to note that hostile repossessions should not be carried out if it is not possible to complete the repossession in a Covid-secure manner, at a distance.