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News for Members

15 March 2016

FCA Revised Guidance on Default Notices

The FCA has published a new guidance consultation which states that lenders are now required to serve a default notice on both borrower and guarantor for non-payment of a debt before taking or demanding payment from the guarantor.  If payment is taken by the lender without a default notice being served, the FCA may consider taking regulatory or disciplinary action against the firm.

This reverses the FCA's previous policy statement (PS15/23) in September 2015 which stated that there was no requirement to serve a default notice on the guarantor before taking or demanding payment from the guarantor if a borrower failed to make payment.  There are two reasons for the FCA's change in view:

The FCA now believes that taking or demanding payment from a guarantor amounts to 'enforcement of security', as described in section 87 of the Consumer Credit Act.  Previously the FCA stated that taking or demanding payment from a guarantor would not amount to enforcement of security and lenders were free to demand or take payments from a guarantor without serving a default notice.

Having considered the feedback received following the consultation process, particularly the view that there should be tighter rules on guarantor lending, the FCA has revised its view.

The default notice should include the following information:

the action that the lender intends to take

the action required by the borrower

the consequences of the failure to comply

Plus:

the borrower must be allowed a period of 14 days to make payment or carry out any other actions specified in the notice

the default notice must be served on both the borrower and guarantor

Consequences for firms

If a lender has taken payment from a guarantor without issuing a default notice during the period 28 September 2015 to 19 February 2016, the lender should not expect disciplinary action from the FCA. However if the lender has taken payment from a guarantor without issuing a default notice after this period, disciplinary action may be taken by the FCA.

The FCA has requested responses to the Guidance by 18th March and will then issue a final statement having taken into account the responses received.

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