‘Breathing space’ for debtors: responding to regulatory changes this May

‘Breathing space’ for debtors: responding to regulatory changes this May

The Debt Respite Scheme (‘breathing space’) comes into force on 4th May, providing people in problem debt with the right to legal protection from their creditors. It’s the perfect opportunity then for us to look at these new regulations, offering advice for creditors and lenders wanting to prepare for the industry change.

Compliance goes beyond avoiding legal repercussions, and can help to instil confidence in your customers and guide your business towards a sustainable future.

It’s reported that 54 per cent of low-income adults had to borrow more to cover costs like food last year, with many people’s savings depleted due to strains brought on by COVID-19. Additionally, with entire sectors such as hospitality put on hold, many people have been left in long-term unemployment while coping with new environmental pressures from the last 12 months. Experts predict a ‘mental health pandemic’ is due soon, making the latest financial regulation increasingly important.

 

Breathing Space explained

The new Debt Respite Scheme (breathing space) comes into effect this May. There are two types of breathing space, each giving someone in problem debt protection from their creditors for up to 60 days. This includes pausing contact or enforcement, freezing interest and charges, though there are specific, sometimes stronger, requirements for each one.

Creditors and lenders will receive an electronic notification whenever a breathing space is started, which must come into effect the following day.

Standard breathing space: This applies to anyone with problem debt, and can only be started by an FCA authorised debt advice provider, or a local authority.

Mental health crisis breathing space: Only available to people receiving mental health crisis treatment. They receive stronger protection which lasts for as long as they are receiving medical treatment plus an additional 30 days. There is no limit to how long treatment can last. This is also started by a debt advisor, but they must have certification from an Approved Mental Health professional to confirm the debtor is receiving treatment. This type of breathing space can also be started alongside a debt advisor by other parties including the debtor’s carer, mental health nurse and the debtor themselves.

Creditors and lenders must read the new regulations to understand the specific requirements of the scheme, including eligibility, protection offered, information required to process the application and the exact debts it covers.

 

Putting wellbeing first

The effects of COVID-19 have been devastating for what was an already struggling consumer. Research shows that pre-pandemic the UK already had £1.45 trillion in mortgage debt, up from £500 billion in 2000. 12.8 million households had no savings at all or less than £1,500 in March, 2020. Without any funds to fall back on, a sudden loss or reduction in income – such as that posed by the mass unemployment and the furlough scheme – would push them into financial difficulty.

These factors have also led to predictions of an upcoming ‘mental health pandemic’, as existing conditions are accelerated and new cases are logged. A new survey found that of the 67 per cent of people who experienced a mental health issue in the last five years, 85 per cent had been negatively impacted by the pandemic. Almost half (48 per cent) of those who hadn’t experienced any kind of mental health issue previously also noted the detrimental effects.

Wellbeing, mental health and vulnerability has always been a key concern for debtors and creditors. But as the Breathing Space scheme suggests, it’s set to come into clear focus.

 

Adaptability is key

But what does this mean for creditors, especially when a debtor requests a Mental Health Crisis breathing space with no end date?

It’s worth pointing out that while the consumer is protected from action such as paying interest under the Breathing Space scheme, a debtor is still legally required to pay their existing debts. It is not a payment holiday, so creditors and lenders can still expect to accept payments. Instead, it’s important to be able to adapt your offering, your communication and your existing processes. This is key in order to align with these new requirements with as little disruption to your operations as possible.

 

Technology as a tool  

Effective communication is essential for breathing space compliance. Any delays or mistakes made including confirming when a breathing space is started, or ensuring external agents adhere to the no-enforcement requirements for each client, could lead to legal action, while diminishing the reputation of your company. If you’re already using products or software to manage customer and stakeholder engagement, consider how it can be used to boost quick communication in this way. If not, investing in an electronic solution could prove invaluable for ensuring no messages are delayed, and no debtors are left disappointed or embarrassed.

The new breathing space regulation this May follows a previous FCA announcement in February, offering guidance on the treatment of vulnerable customers. In the future, the industry looks set to bolster its regulation around diversity and inclusion too. As the world adapts to the huge economic and social upheaval of the past year, alongside any further challenges of Brexit, it’s important for financial services companies to keep pace.

 

Sign up to our webinar – What Lenders need to know about Breathing Space – to find out more.