Jonathan Newman

Cutting through the inconsistency

At the beginning of June, the FCA published further final guidance on temporary financial relief for customers impacted by coronavirus, following feedback on its draft guidance for mortgages.

In addition, it has now been announced by the government that the moratorium on Part 55 court possession proceedings, which was due to come to an end on 26th June, is to be extended until 23rd August. There was not, as was hoped, any clarity and distinction for bridging lenders, for whom the enforcement moratorium is disproportionately damaging.

So, in light of the latest guidance, what are the current lender considerations for enforcement?

1. Regulation

The FCA comments that the purpose of the guidance is to deliver a “consumer protection objective”. It affects “home finance providers and administrators and authorised firms in respect of unregulated agreements to provide credit that is secured on land”, and will have regard to “smaller business borrowers borrowing against their home, or mixed-use property, and how they should benefit if their borrowing is by way of a regulated mortgage”. The guidance is not intended to apply to “other business borrowing”, but states that “unless there are exceptional circumstances, any form of repossession is unlikely to be in the customer’s best interests.”

Within the guidance, the FCA used the word home rather than property, which is revealing. ‘Home’ has natural meaning, i.e. a place where private individuals reside and live. Accordingly, it may follow that recovery of vacant, commercial or even residential property (subject to continuing occupation) may be within guidelines. How that plays before the court is of course a separate consideration. But to my mind, a judicial determination based on individual fact and circumstance on cases which have been carefully and sensibly considered may not offend the spirit or letter of the guidelines. There may, for example, be circumstances where repossession is likely to be in the customer’s best financial interest, provided there is no public health risk. 

2. Reputation

Adhering to the guidelines of the regulator isjust one consideration for lenders and even where action is considered permissible, and commercially necessary, recovery of property in an environment where the government and regulators have set a clear tone, poses a potential reputational risk. But the pandemic has created significant liquidity problems. That unknown incalculable long-term reputational damage versus commercial efficacy balance may well have shifted for the moment.

3. Legal

In addition to the lack of clarity or sufficient detail within the FCA guidance, there is inconsistency in the message that is being delivered to lenders by the courts, which are in the midst of planning to implement safe arrangements for possession hearings again from 23rd August - or so they are saying in letters addressed to practitioners on the subject.

The new rule makes it very clear that a possession claim can be brought under Part 55 but it will be automatically stayed. The floodgates are likely to open in August, when the courts efficiency in listing and hearings will doubtless be reduced - expect a barrage of new claims added to those pre-coronavirus claims which have not been concluded. So, for those with defaults on the books, there is good reason for making the claim now, even if it is to be automatically stayed, and positioning yourself as early in the queue as you can.

It is worth noting that it is permissible to apply to lift the stay in exceptional circumstances. As to what is exceptional, that will be determined by a court on a case-sensitive basis. Given the variety of loans and circumstances, I expect there may well be cases which could meet that threshold and so need not be caught. 

4. Commercial

The fourth consideration for lenders is commercial. Where a lender is under pressure to repay a funding facility, for example, it may be more prepared to take a stronger view on regulation/ reputational risk considerations.

Consequently, there will be no one correct approach to recovery and every lender will require its own carefully crafted strategy and implementation plan based on its own current regulatory status and future plans, attitudes towards reputational risk and commercial imperatives.

The positive news is that, by implementing sensible strategies sensitively and operating proactively, it is possible, on a case-by-case basis, to meet strong regulatory concerns as well as your own commercial needs.

What is also positive and encouraging, is the engagement being received by lenders from their borrowers where preliminary legal steps have been taken, often resulting in payment, or consensual arrangements for resolving claims without need for formal delayed court action. 

However, there do remain many inconsistencies and, as part of my role on the executive committee of the ASTL, I have been proactive in calling for greater engagement between the industry and policy makers to arrive at a joined-up approach that overcomes these inconsistencies and also makes concession for the specialist type of lending carried out by short-term lenders. I continue to push for clarity and a constructive dialogue about a more appropriate route forward for bridging finance and will continue to communicate any developments.

In the meantime, the onus remains with lenders to tread carefully and develop thoughtfully crafted strategies to manage collections both now and for the future. This requires partnering with an expert with experience that can cut through the inconsistency and deliver a bespoke approach based on its individual considerations.

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