A recent FCA update advised that repossessions have resumed in the Asset Finance sector… but should this lead to asset recovery or asset inspection?
One question that’s obvious to me, is as the UK economy takes its first faltering steps into the post lockdown period, how will asset based lenders deal with their debtor books and funded assets?
The FCA was quick to act a year ago in that they stressed that funders must be mindful of the pressures borrowers are under as a result of the pandemic; job losses, furlough and reduced hours. They were adamant that it would be a matter of conduct if funders were to adopt anything other than a consumer-friendly engagement strategy with borrowers. Any other approach could lead to the removal of permissions and authorisations.
But, updates provided by the FCA have stated that now, asset repossessions can resume, but should be a “last resort” and can only be enforced when circumstances and regulations dictate. Any repossession should be conducted in line with public health compliance and should not put any consumers at risk of contracting COVID-19. Firms have also been expected to consider the impact on vulnerable customers when making any decision to repossess goods or vehicles.
Treating customers fairly, a cornerstone policy of those regulated by the FCA, also needs to be considered in detail when taking steps to default or terminate an agreement. Firms also need to consider the relevant provisions found within the Consumer Credit Act 1974, including section 87 (default notices) and section 90 (retaking protected hire purchase goods).
Whilst the FCA has lifted restrictions on hire purchases, hire and other regulated products, the repossession of homes is slow to resume. The FCA has also lifted the repossessions ban for other consumer credit products, but has announced the repossession of homes is still under consideration.
How the pandemic has impacted the motor industry
There is still a demand for vehicle finance agreements, but there has unfortunately been a fundamental decline in sales over the last 12 months due to the effects of the pandemic. This is largely in correlation to financial strains and also the transition to remote working, whereby perhaps many road users no longer need a vehicle.
According to a statement by the Society of Motor Manufacturers and Traders, registrations of new cars “crashed to a 28-year low in 2020, with year-on-year demand down almost a third.”
That being said, sales in March rose considerably which is a much needed boost to that industry.
FLA welcomes FCA update
The Finance and Leasing Association (FLA) has welcomed these proposed changes from the FCA. Adrian Dally, Head of Motor Finance at the FLA, said: “This is a welcome move as it allows lenders and consumers to decide together on the best outcome.
“If a customer still needs their vehicle due to vulnerability, lenders will of course take that into consideration, but where a customer’s circumstances have changed so that they do not need their vehicle any longer and repossession is the best option, it is absolutely right that lenders can now offer that solution” (AM Online).
Other asset sectors
The IT and office furniture sectors have in some ways been boosted by the transition to WFH. Other areas are less fortunate while businesses remain closed, with catering and retail being affected particularly hard.
Default lending strategies
Many lenders are now finding that the forbearance has in some situations caused problems of another nature. With smaller companies such as SMEs they may not be in a formal insolvency process, but they may have entered either a zombie state, as seen post 2009 or have simply shut up shop. Asset Finance funders are now having difficulty locating assets where landlords may have entered premises or the assets have been sold out of trust as part of the business’ attempts to stay afloat.
It is not necessarily in the interests of funders to snatch back assets. That being said, how can the funder maintain the integrity of their “own books”?
The key may be in the terms and conditions; well-drafted conditions will have a provision that the funder is entitled to inspect the goods. We have seen careful application of this with some taking place by way of Zoom or Microsoft Teams. This can avoid misunderstandings and the termination of agreements. The right to inspect together with a landlords waiver should provide reassurance to funders.
Best practice for funders
Funders should ensure the following;
- That their terms and conditions have been reviewed and contain the necessary permissions
- Where they have regulated agreements that their processes stack up and are compliant
- They have balanced their forbearance obligations with their liquidity requirements
- Their agents act in a proper manner
- That it is a common occurrence that recovery of goods and or injunctive relief may be required
- Keeping a careful eye on the assets whereabouts will keep value in the business.