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FCA Final Guidance on Guarantor Loans and Default Notices

The FCA has now published its finalised guidance (FG17/1) concerning default notices and guarantors under regulated consumer credit and consumer hire agreements.

The FCA previously consulted on its draft guidance twice during 2016, resulting in revised draft guidance in October which took a more burdensome view of funders’ obligations. The Final Guidance is largely unchanged from the October revised draft.

The Final Guidance makes clear that funders may request payments from the guarantor without first having to issue a default notice to the hirer/borrower and a copy to the guarantor. Nevertheless, funders must take care to ensure that their communications are clear that they are notifying or requesting payment from the guarantor and not demanding payment, otherwise the FCA considers that a default notice is necessary.

Where the guarantor has already provided a Continuous Payment Authority or Direct Debit mandate upfront, the FCA does not necessarily consider drawing on either a CPA or Direct Debit mandate will constitute enforcement. However, the funder should take care to ensure that the guarantor is given reasonable advance notice of any intention to use it in order that the guarantor can, if they wish, rescind either the CPA or the Direct Debit mandate. The FCA suggests that what constitutes a reasonable period of notice will depend on the circumstances, but that it should be at least 5 working days.

The FCA also states that before any payment is taken, any communication should set out clearly:

– That the hirer/borrower has breached the terms of the agreement and the nature of the breach;

– The amount of overdue sums (and any intention to draw on a CPA or Direct Debit mandate already provided by the guarantor);

– The likely timing of any payments to be taken; and

– That the guarantor may withdraw permission for a CPA or Direct Debit previously granted, but that the guarantor’s obligations under the guarantee will remain.

Only where the funder is seeking to ‘enforce’ payment by the guarantor must a default notice have been issued to both hirer/borrower and guarantor first. The FCA regards ‘enforcement’ as meaning more than simply obtaining judgment from the courts. In its view, any step which requires or otherwise coerces a guarantor into making payment may constitute ‘enforcement’ for these purposes.

The full FCA Guidance is available here.