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    FCA Guidance Proposes Next Stage of Support for Mortgage Borrowers

    August 26, 2020

    FCA published for consultation the updated guidance for firms in relation to mortgage payment deferrals, with comment period on the draft guidance ending on September 01, 2020. The draft guidance explains that, at the end of the existing, widely available COVID-19-specific payment deferrals, if the borrowers involved are not able to resume payments in full immediately with all deferred sums either paid in full or capitalized, tailored forbearance arrangements provided in accordance with the draft updated guidance should be considered. Such tailored forbearance arrangements are likely to be as good an indicator of significant increase in credit risk, credit impairments, or defaults as forbearance was prior to the pandemic. PRA also issued a statement that clarifies its approach to IFRS 9 and capital requirements, in response to the updated FCA guidance on retail mortgage payment deferrals.

    The FCA guidance proposes that firms should consider the appropriateness, and use, of a range of different short- and long-term support options to reflect the specific circumstances of their customers. This could include extending the repayment term or restructuring the mortgage. Where consumers need further short-term support, firms should offer arrangements for no or reduced payments for a specified period to give customers the time to get back on track. Under the proposed guidance, firms should prioritize giving tailored support to borrowers who are at most risk of harm, or who face the greatest financial difficulties. Firms should also provide borrowers with the support they need in managing their finances, including through self-help and money guidance, and refer borrowers to debt advice if this meets their needs and circumstances. Where borrowers require further support from lenders, either at the end of payment holidays under the FCA guidance or where they are in need of support for the first time, this would be reflected on credit files in accordance with the normal reporting processes. This will help to ensure that lenders have an accurate picture of consumers’ financial circumstances and reduce the risk of unaffordable lending. Firms should be clear about the credit file implications of any forms of support offered to borrowers.

    In its statement, PRA sets out that, prior to COVID-19, loans subject to forbearance would not automatically have been treated as having experienced a significant increase in credit risk, or become credit impaired or in default, and that will also be the case with tailored forbearance provided in accordance with the draft updated guidance. While in some cases the position will be clear-cut, in other cases a judgment will need to be made. The guidance in the PRA’s June letter on a framework for making holistic assessments of loans subject to payment deferrals for indicators of significant increase in credit risk or credit impairment will be relevant when making that judgment. Additionally, the guidance in the March letter of PRA on the treatment of borrowers that breach covenants due to COVID-19, on IFRS 9 expected credit loss (ECL) model risk, and on the need for post-core ECL model adjustments continues to be relevant. PRA considers the guidance in its statement to be consistent with IFRS and the EU Capital Requirements Regulation (CRR). However, it is the responsibility of firms to satisfy themselves that they have prepared their annual and interim financial reports in accordance with the applicable reporting frameworks and for auditors to reach their own audit or review conclusions about those reports. Similarly, it is for firms to ensure that they comply with the requirements of CRR.

     

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    Keywords: Europe, UK, Banking, COVID-19, Payment Deferrals, CRR, IFRS 9, Regulatory Capital, Basel, Credit Risk, SICR, ECL, PRA, FCA

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