We talk to the motor finance industry to gauge their reactions to the FCA’s package of measures to support consumer credit customers during the coronavirus crisis.
Nobody has emerged unscathed from the effects of the coronavirus pandemic, and while the first priority has to be people’s safety it’s important to recognise that serious economic impact the lockdown has had on every industry. The motor finance sector in the UK is a £75bn market consisting of 7m customer contracts, and those customers are among those who have been placed in a vulnerable position by the crisis. This is why last month the FCA announced a package of measures for the industry to take to protect those consumers.
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These measures have been welcomed by the industry, who in many cases were already stepping up to aid customers during the crisis.
“We welcome the guidance from the FCA on the support that should be offered to motor finance customers who have been impacted by Covid-19,” says Richard Jones, managing director of motor finance and leasing at Lloyds Banking Group. “Since the start of the pandemic we have already helped more than 80,000 customers using the temporary support measures we have introduced. Customers can apply to defer their payments for up to three months on Personal Contract Purchase, Hire Purchase and Contract Hire agreements by using our new online service which enables most customers to action their request instantly. There are no missed payment fees and a customer’s credit rating will not be adversely impacted.”
The targeted temporary measures include a three-month payment freeze for motor finance, buy-now pay-later (BNPL), and rent-to-own (RTO) agreements. High-cost short term credit payments will be frozen for one month with no additional interest to be charged.
Christopher Woolard, interim chief executive at the FCA, has said: “We have worked at pace to introduce temporary financial relief tailored for a range of specific credit products. Many firms are already working with their customers, but these measures ensure all consumers affected by the coronavirus emergency can apply for a temporary freeze on their payments.”
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By GlobalDataUnder the new measures, financiers will provide a three-month payment freeze to customers facing temporary difficulties meeting finance or leasing payments because of the coronavirus. The FCA has also stated that customers who are experiencing temporary payment difficulties due to coronavirus but need the use of their vehicle will not have their vehicle repossessed or the agreement ended. Meanwhile, Personal Contract Purchase (PCP) or Personal Contract Hire (PCH) agreements must not be altered in any way that is unfair, such as recalculating PCP balloon payments based on a temporary depreciation of car prices caused by the coronavirus situation. Firms will work with customers who want to keep their vehicle at the end of their PCP agreement but don’t have the cash to cover the balloon payment to find an appropriate solution.
The FCA has pointed out that this crisis offers increased potential for disparity between the balloon payment and the value of the vehicle in the current climate, and has said that firms should ensure their solutions do not lead to unfair outcomes, such as refinancing the balloon payment where it isn’t appropriate.
Suiting the solution to the customer
While the reaction to the FCA’s measures has been broadly positive, many in the industry have pointed out the importance of treating customers as individuals, and not following a one-size-fits-all strategy.
“The FCA announcement today was pretty much what we were expecting, and essentially it is doing what we expected the FCA to do which is set out expectations of what forbearance looks like,” says Adrian Dally, head of motor finance at the Finance & Leasing Association (FLA). “They’ve put a three month payment freeze or holiday as the started point, but they’ve also said that won’t be suitable for everybody, so it‘s about what a suitable forbearance option is.
“It’s not a right to a payment holiday, customers can request one but it is about what their needs are and there are other options available. So for example another forbearance might be if a customer has an income reduction, then you can have a shorter payment holiday, but if you’ve had a loss of employment the best option might be a reduction in payments not a holiday. The implications are some customers won’t need the car any more so termination options remain there. So that’s essentially where we are.”
Indeed, the FCA specifically states that the measures they have announced do not prevent firms from providing more favourable forms of assistance to any customer, such as a longer payment freeze if appropriate. The FCA welcomes the initiatives already announced by firms, and has noted that some going further than required.
“The FCA’s proposals are centered in consumer needs, in what are unprecedented circumstances. So it’s a strong consumer-centric move for consumers that are most in need,” says Karen Hilton, chief commercial Officer of Heycar UK. “We would still advise consumers to look into their own personal circumstances before simply jumping on the bandwagon though. The FCA’s payment freeze doesn’t remove them from their financial responsibilities, it simply gives them some breathing space should they require it.”
While paying attention to a customer’s specific situation is important, Hilton also acknowledges the importance of there being a broader policy for the industry and customers to understand.
“The FCA has made a clear move to offer an easy to understand offering for all customers. It’s difficult as an industry to know the ins and outs of different consumer situations, so a blanket agreement that is easy to understand goes a long way to providing reassurance to consumers during these tough times,” Hilton points out. “We’d still recommend consumers speak to their finance house and don’t suffer in silence, from the captives we’ve spoken to they’re doing all they can to support customers in their own specific circumstances, so if you’re struggling – make that call.”
Jones points out that to support those financially impacted by coronavirus, Black Horse’s motor finance customers can access up to a three-month payment deferral to provide customers who are experiencing short-term and temporary financial difficulty with options to help see them through this difficult period, without impacting them significantly in the longer-term by ensuring their credit file is not impacted.
Black Horse’s payment holidays have no administration fees, and customers can request one online, and as is standard across the industry, will pay slightly more in interest over the course of their agreement, as they take longer to pay back the amount borrowed. But again, Black Horse points out that this is not a solution for everybody, noting that payment holidays are designed to provide short-term breathing space from debt repayments. If a customer is in more serious long-term financial difficulty, a payment holiday might not be the right solution, and Black Horse already has well-established support options in place to help such customers.
MotoNovo Finance is another company that has welcomed the announcement by the FCA, and the firm had already introduced a range of measures mirroring the FCA’s proposals. Their customers have been able to access a range of services including a flexible period of breathing space and zero or reduced payments for up to three months to ease any immediate anxiety associated with their ability to meet regular monthly repayments.
As well as support for regular monthly repayments, MotoNovo is keen to ensure that customers are aware that no customers will be charged default interest or arrears related fees during this period of uncertainty. Indeed, the company is going so far as to refund any fees that have applied in recent weeks. They also make clear that customers who take advantage of any of MotoNovo’s ‘forbearance’ support can be reassured that MotoNovo is protecting their credit file with credit reference agencies implementing a measure called ‘Emergency Payment Freeze.’
Dally points out there are a number of possible solutions to the crisis, but that the rules will need modifying to accommodate the new status quo. For instance, the Consumer Credit Act states that to do a modifying agreement physical contracts need to be signed, something impossible and undesirable during a lockdown.
“Those traditions still apply under new circumstances. We’ve formally asked the government to enact temporary legislation to bypass that and make it much slicker,” Dally says. “That hasn’t been delivered yet but we’re still maintaining that request.”
Meeting Demand
A big challenge facing many companies in implementing these measures is simply one of meeting demand.
“Those issues have affected every service provider in the land including the FCA itself. Up to the end of the third week of the period, I think we received 52,000 requests for forbearance or inquiries about forbearance,” Dally observed when the FCA’s proposals were announced. “Week one there was a 140% rise in forbearance requests. Week two it was 220%, so a significant spike, and today may bring about a further spike in requests.”
To meet that demand, digital solutions are becoming more essential than ever. MotoNovo developed and deployed an online instant approval three-month payment deferral process to meet demand, enabling their team to spend more time speaking with people who urgently want to discuss their individual situation.
“Customer feedback has been overwhelmingly positive and understanding. That said, I recognise that the scale of enquiries and our need to adapt has seen delays for some people, for which I apologise, says MotoNovo’s chief executive, Mark Standish. “Our customers can be assured our commitment to care is absolute.”
In the Aftermath of Coronavirus
Of course, the measures will come at a cost to the motor finance industry.
“This is the forbearance society needs but it doesn’t come at no cost. Over the medium term there are some significant impacts from this,” Dally tells us. “The nub is the type of forbearance required here is not a normal type of forbearance done on a scale that’s unprecedented. Doing the morally and economically right thing is a given but there is an impact from that.”
Standish is particularly proud of the way MotoNovo has responded to the crisis.
“The coronavirus crisis has been challenging for everyone in financial services. At MotoNovo, my overwhelming reflection on our approach is one of pride for the way our team has reacted and continues to adapt to help our customers and support one another,” Standish says. “As a business, our purpose is to provide products and services that deliver a compelling customer experience. In achieving this, COVID-19 has been the ultimate challenge to date. Doing the right thing to help customers meant first securing our team and a new home-working model.
“We reallocated over 170 extra team members to our customer facing teams and well ahead of the FCA proposals developed a broad forbearance proposition to help many people impacted by the pandemic. All of this was up and running immediately when lockdown was invoked.”
While the motor finance industry is taking every possible precaution to protect customers, people in the industry are concerned not only with how their businesses will weather the crisis, but what will happen when the crisis is over and restrictions are finally lifted. While the industry is stepping out to aid customers, ultimately it will also need support of its own.
“The governments agenda is that there should be a smooth transition away from the COVID period,” Dally says. “In the automotive sector there’s a lot that needs to be in place to make that happen. The movement of vehicles, finance has to be available, but ultimately there is a well-worn path for this. It is not new. What you’re looking for is the source of support for lending that banks got from day one. You need something similar to ensure lending is there when the economy needs it.”
