Coronavirus and customers in temporary financial difficulty: draft guidance for insurance and premium finance firms

This guidance builds on Principle 6 which requires a firm to pay due regard to the interests of its customers and treat them fairly, and ICOBS 2.5.-1R which requires firms to act honestly, fairly and professionally in accordance with the bests interests of its customer. It sets out our expectations for firms when considering the fair treatment of existing customers, and in particular those customers experiencing or reasonably expecting to experience temporary financial difficulties due to circumstances arising from coronavirus (a ‘qualifying customer’).

The aim of the guidance is to prompt firms to help qualifying consumers, where possible, in order to:

1. Minimise the impact of temporary financial distress.
2. Ensure that customers continue to have insurance that meets their demands and needs.

All insurance firms should also consider our guidance on assessing product value in light of coronavirus[1]. However, we do not anticipate that product-level pricing adjustments alone will address all customer-level financial difficulties, so the measures discussed in this guidance should also be considered in addition to any actions that may have been taken for whole product lines, for qualifying customers.

Application

This guidance applies to regulated firms operating in the insurance and premium finance markets. This includes:

• insurers
• insurance intermediaries (including appointed representatives)
• premium finance lenders that provide credit to fund the payment of insurance premiums in instalments
• premium finance brokers that carry on regulated activities relating to credit granted for the purposes of financing insurance premiums in instalments
• debt collectors  
• other firms that may be involved in insurance arrangements and/or in relation to the provision of premium finance

This guidance applies to all non-investment insurance products, i.e. general insurance and protection policies.

The elements of the guidance that apply to insurers and insurance brokers only apply to eligible complainants as defined in DISP 2.7.3R. This includes natural persons and small business customers.

For premium finance agreements, this guidance is not intended to capture lending for business purposes.

Premium finance typically refers to the credit that is provided when a regulated credit agreement is entered into with a customer, specifically for the purposes of facilitating the payment by the customer of an insurance premium in instalments. There are other arrangements available to customers which facilitate the payment of an insurance premium in instalments, which do not involve the provision of premium finance. These include where credit is provided under an exempt credit agreement, and where an insurer and consumer enter into arrangements whereby the consumer pays for their insurance on a pay-as-you-go basis.  For the avoidance of doubt, such arrangements are included within the scope of this guidance.

For consumers paying by premium finance, this guidance does not apply where a customer was in financial difficulty prior to coronavirus. In these cases our existing forbearance rules and guidance in our Consumer Credit Sourcebook (CONC) continue to apply. We remind lenders of the obligation under CONC to treat customers in default or arrears difficulties with forbearance and due consideration. This obligation is unaffected by any separate arrangements or security that lenders may have in place relating to the payment of sums due under a credit agreement. Examples of the types of forbearance a firm might consider include suspending, reducing, waiving or cancelling any further interest or charges, deferring payment of arrears or accepting token payments for a reasonable period.  

This guidance is potentially relevant to enforcement cases and the FCA may take it into account when considering whether it could reasonably have been understood or predicted at the time that the conduct in question fell below the standards required by Principle 6.

We expect all firms carrying on regulated activities relating to insurance and premium finance arrangements to act in accordance with this guidance. The extent to which this guidance is relevant to a firm would depend on its role and the relationship with the customer. Firms should work with other relevant firms in the distribution chain to assist qualifying customers in line with the guidance set out below.

When firms should act

There are a number of circumstances in which firms should consider actions to support customers who may be in financial distress as a result of coronavirus.  These might include:

• Where a customer contacts the firm because they are having difficulty making repayments, wishes to reduce cover (whether having paid in-full or on a monthly basis) or has made enquiries about their insurance cover in the light of coronavirus.
• Where the firm has reasonable basis for knowing, or has identified (or should reasonably have identified) that there are customers who are suffering financial distress (eg, those who have missed payments during the crisis period), even where those customers have not contacted the firm.

Actions firms can take

Where a firm has identified a customer in financial difficulties associated with coronavirus it should consider how it will meet its obligations under our rules, including PRIN 6 and ICOBS 2.5.-1. A firm should consider what options it can provide to the customer and whether there are steps that can be taken which could deliver a fair outcome for the customer, considering their changed circumstances.  The following actions may be steps which the firm considers will help the customer understand their options, taking into account their information needs:

• Re-assessing the risk profile of the consumer. It might be that some customers will have a risk profile that has changed because of coronavirus. For example, some motor insurance customers might not be using their vehicle at all or might no longer be using it for business purposes, and customers could potentially be offered materially lower premiums.
• Considering whether there are other products the firm can offer which would better meet the customer’s needs and revising the cover accordingly.  It might be that a customer has revised their demands and needs as a consequence of coronavirus. For example, a motor insurance customer might no longer need associated add on cover such as legal expense insurance, key cover or other products, or a business may not need certain cover for a period of time. 
• Working with consumers to avoid the need for cancellation of necessary cover such as considering payment deferrals as set out below. Where consumers in these circumstances determine that it is in their interest to cancel their policy, without encouragement or suggestion from their provider, firms should waive any cancellation fees where the firm needs to do so to ensure it is treating its customers fairly. In addition, firms should consider fair treatment of consumers when assessing new premiums for consumers who cancel and then return to the insurer.  
• In addition to waiving cancellation fees, firms should waive any fees associated with adjusting a qualifying customer’s policy in line with the assessments outlined above.

Firms should make clear in their communications, including on their websites and apps, the different solutions available to customers, and encourage them to make contact if they are experiencing temporary financial difficulty as a result of coronavirus. Firms should make it as easy to contact them as possible, and consider the needs of vulnerable consumers (eg, those needing to communicate through channels other than telephone) to ensure all consumers that need help can access it easily.

Firms should consider taking these steps for all products that the customer holds with the firm. 

These actions could result in a reduction in the monthly premium for customers paying by instalments. For customers who have paid up front, this could result in a partial refund of the premium. We generally do not expect firms to increase premiums as a result of any reassessment and this is very unlikely to meet our expectations.   

Where firms adjust cover to take account of a temporary change in the customer’s circumstances, this could be done on a short-term basis (affecting a period within the cover period) or for the longer-term (affecting the entirety of the remainder of the cover period). For shorter-term adjustments firms should take reasonable steps to ensure that the customer’s situation is reassessed when that temporary period comes to an end to avoid the risk of underinsurance. For example, this could be done by introducing an expiration date for any changes to a policy, or by inviting consumers to contact the firm when their circumstances have changed.   

Expectations in relation to rates of interest (for firms providing premium finance)

If amendments to the insurance cover do not help alleviate the temporary payment difficulties for customers paying their premium in instalments then firms should consider reviewing any interest rates associated with the instalments. They should ascertain whether they are consistent with the obligation to treat customers fairly in the light of the exceptional circumstances arising out of coronavirus.

If after reviewing and possibly reducing interest rates, customers are still facing temporary payment difficulties arising from coronavirus then we would expect firms to consider granting customers a payment deferral unless it is obviously not in the customer’s interests to do so.

Payment deferrals

In this guidance, ‘payment deferral’ means an arrangement under which a firm permits a customer that pays their insurance premium in instalments (whether the payments are due under a regulated credit agreement, an exempt credit agreement or pay-as-you-go arrangements) to make no payments under their particular arrangements for a specified period, without being considered to be in arrears, and without the authorised party exercising the right to cancel the insurance policy unilaterally because of the payment deferral.

For example, where an insurer allows a consumer to pay via pay-as you-go arrangements or provides credit under an exempt credit agreement, and a payment deferral has been granted, the insurer should not cancel the policy solely because of non-payment. Where third-party premium finance is provided and the arrangements give a broker (or other party) the right to cancel the policy for non-payment, the broker should not exercise the right to cancel the policy for non-payment where a payment deferral has been granted.

Where a customer wishes to receive a payment deferral, a firm should grant it unless the firm determines (acting reasonably) that it is obviously not in the customer’s interests to do so.

We expect that the payment deferral period, which can be rolling, should be granted for a minimum of 1 month and up to 3 months.

Customers should be able to request a payment deferral at any point after the guidance comes into force for a period of 3 months.

There is no expectation under this guidance that the firm makes enquiries with each customer to determine if the circumstances surrounding a request for a payment deferral are connected with coronavirus. We have temporarily disapplied CONC 6.7.18R and 6.7.19R to give effect to this.

We would not expect a customer to be liable to pay any charge or fee in connection with the granting of a payment deferral under this guidance.

Where a payment deferral has been granted in accordance with this guidance, we would not expect any party, such as a broker or debt collector acting under recourse arrangements, to seek payment from the customer until the payment deferral period has ended. 

A firm should give customers adequate information to enable them to understand the implications of a payment deferral. 

We expect firms to use the deferral period to engage with their customers to understand the likelihood of their being able to resume payments at the end of the deferral period.

Firms are not prevented from continuing to accrue interest charges for customers during a deferral period, but they should not actually seek payment of these until the deferral has ended (hence the importance of considering these accrued charges when determining if a payment deferral is, overall, in a customer’s interests).

If the customer is unable to resume repayments at the end of the payment deferral period because of payment difficulties, the firm should work with the customer to resolve these difficulties in advance of payments being missed.

Firms should take account of the need to reduce the possibility, to the extent possible, of a customer suffering adverse consequences as a result of accepting a payment deferral or a different solution where a payment deferral has been deemed not in the customer’s interests. For example, when considering the credit risk and affordability risk presented by the customer when they seek additional credit to finance a new premium, the fact of the deferral should not itself be a determining factor. The firm can look beyond the stressed circumstances that led to the deferral at whether the customer’s financial position has improved or is reasonably likely to improve over the term of the new credit agreement.

Where a customer, who received a payment deferral, or a different solution where a payment deferral has been deemed not in the customer’s interests, is entitled at the end of the period to forbearance under our existing rules, then as part of this, we expect any interest accrued during the relevant period to be waived. 

The payment deferrals described here should be regarded as being offered in exceptional circumstances outside of the customer’s control. In accordance with the relevant coronavirus Data Reporting Guidance published by the Credit Reference Agencies in consultation with SCOR, firms should not report a worsening arrears status on the customer’s credit file during the payment deferral period. However, where additional forbearance is required, for example in the form of waived interest and charges, we would expect this to be reflected in the usual manner.

Where customers have been unable to reach timely agreement with firms for a payment deferral because of firms’ operational difficulties and subsequently miss a payment which is reported to their credit file, or where they have entered into a similar temporary payment deferral arrangement with their lender as a result of the coronavirus situation which has resulted in a worsening arrears status being reported, we would expect firms to work with customers and Credit Reference Agencies to ensure that any necessary rectifications are made to credit files to ensure no worsening arrears status is recorded during the payment deferral period. Firms should also ensure no default or arrears charges are levied in relation to payments missed in these circumstances.

Factors that might mean a payment deferral is obviously not in a customer’s interest include the customer’s ability to repay any accrued interest once the payment deferral ends, and over what period. The interest rate and remaining term will also be relevant considerations.

Where a payment deferral is not considered appropriate, firms should without unreasonable delay, offer other ways to provide temporary relief to the customer in accordance with treating the customer fairly.  These could potentially include (but not be limited to):

• accepting reduced repayments, or rescheduling the term
• waiving missed or late payment fees
• permitting a customer to amend their repayment date without any cost

This guidance does not prevent firms from providing more favourable forms of assistance to customers, if the firm deems this appropriate, including writing off unpaid repayments as well as any associated interest, fees or charges.

Process and next steps

We want to act quickly to protect consumers in these difficult times. We consider that the delay involved in publishing a formal consultation accompanied by a cost benefit analysis would be prejudicial to the interests of consumers. We are therefore not doing so. There is no statutory requirement to prepare a cost benefit analysis in relation to guidance.

Please respond with any comments to [email protected] and [email protected] by 5pm on Tuesday 5th May.

Timing

If confirmed, the measures would come into force by 15 May 2020.

We will review this guidance in the next 3 months in the light of developments regarding coronavirus and may revise the guidance if appropriate.

The FCA’s objectives and regulatory principles

The proposals in this consultation support our consumer protection objective and are designed to protect consumers by providing them with temporary support in the light of the current exceptional circumstances arising out of coronavirus.

Equality and diversity

We are required under the Equality Act 2010 to ‘have due regard’ to the need to eliminate discrimination, harassment, victimisation and any other conduct prohibited by or under the Act, advance equality of opportunity between persons who share a relevant protected characteristic and those who do not, and to foster good relations between people who share a protected characteristic and those who do not.

As part of this, we ensure the equality and diversity implications of any new policy proposals are considered. We do not consider this guidance will adversely affect consumers with protected characteristics.