Consumer protection in the context of payment restructuring
Loan payment delay events
The FIN-FSA reminds lenders of good lending practice under consumer protection regulation, which obliges lenders to conduct themselves responsibly in the event of payment restructuring concerning a consumer. In accordance with the law, in these events, the lender must provide the consumer with information and advice to prevent the emergence or worsening of payment difficulties and to manage insolvencies, as well as take a responsible stance towards payment restructuring.
A responsible stance towards payment restructuring is a flexible concept. In the rationale of the Act, it is deemed to mean for example the agreement on a new due date, reduction of the monthly instalment, extension of the loan period, combination of loans, agreement on grace periods and change of the reference rate to reduce the interest. Furthermore, the rationale of the Act states that the requirement of a responsible stance also extends to collection procedures and other settlement and concession possibilities included in insolvency procedures1.
Granting of grace periods
The FIN-FSA considers that the granting of grace periods offered by lenders represents a responsible stance as referred to in the law towards consumers’ payment difficulties caused by the COVID-19 pandemic. However, in particular situations, the bank may apply discretion in terms of whether to grant a grace period to its customer. In considering various forbearance options, it should be borne in mind that, according to legislation on consumer credit, the bank may not unilaterally change the interest on a contract to the consumer’s detriment.
As a rule, it is not possible to call in a debt in the event of a social impediment
A loan may be called in for repayment only subject to certain preconditions laid down in the law. The FIN-FSA would like to point attention to the statutory requirement concerning a social impediment, which as a rule prevents the lender from calling in a loan in the context of a repayment delay caused by the consumer’s illness, unemployment or comparable reason beyond the control of the consumer.
Credit process and capital adequacy aspects
In order to manage the operational challenges caused by a substantial number of changes to the payment plan, credit institutions are allowed to apply a risk-based approach in their credit processes on a temporary basis as described in a release and statement published by the EBA on 25 March 2020.
Temporary liquidity constraints due to the COVID-19 pandemic do not automatically mean a significant increase in credit risk
In its credit process, the credit institution should consider whether the reason underlying the customer’s need for relief is a permanent problem, potentially manifesting itself already before the COVID-19 crisis, or a temporary liquidity issue. In accordance with the statement published by ESMA on 25 March 2020, a significant increase in credit risk is not automatically deemed to have occurred if the forbearance is only based on a temporary liquidity constraint.
Not all changes to payment plans are classified as forbearances, but the classification decision may not be based on the duration of the grace period
A change to the payment plan is a forbearance referred to in Article 47 b of the Capital Requirements Regulation (“CRR”) in situations where the obligor is experiencing or is likely to experience difficulties in meeting its financial commitments. Hence, the assessment is not based on the duration of an agreed grace period. However, the duration of the grace period has an impact on the calculation of the value of the exposure when assessing the distressed restructuring of the credit obligation referred to in Article 178(3)(d) of the CRR.
Adoption of a transitional provision under the CRR may be used to mitigate the impact of expected credit-loss provisioning under IFRS 9 on CET1
Where a credit institution has not previously applied the transitional provision under Article 473 a of the CRR, it can still be adopted until the end of 2022 subject to approval from the competent authority. The transitional provision allows credit institutions, subject to certain preconditions provided in the Article, to add-back part of the impact of expected credit losses provisioned under IFRS 9 to their Common Equity Tier 1 capital. The amendments proposed by the Commission on 28 April 2020 to the CRR2 extend the scope of application of the transitional provision further to consider the growth in expected credit losses under IFRS 9 due to the COVID-19 situation.
For further information, please contact
- Sanna Atrila, Senior Legal Adviser, telephone +358 9 183 5552 or sanna.atrila(at)fiva.fi (consumer protection aspects)
- Torsten Groschup, Senior Risk Expert, telephone +358 9 183 5333 or torsten.groschup(at)fiva.fi (Capital Requirements Regulation)
- Jaana Ladvelin, Senior Capital Adequacy Expert, telephone +358 9 183 5313 or jaana.ladvelin(at)fiva.fi (IFRS)
- FIN-FSA’s Supervision release: EBA and ESMA to clarify the prudential framework, IFRS 9 and consumer protection due to the coronavirus epidemic
- 1 EDILEX: Government Bill 24/2010 (in Finnish)
- 2 European commission: Banking package to facilitate lending to households and businesses in the EU