Are you ready for the Government's new Breathing Space initiative?

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Breathing Space is a Government initiative to stop creditors chasing customers struggling with money, to give “space” to allow customers to work with debt advisors to strategise how they are going to deal with their debt.

The scheme comes into force on 4 May 2021 and in a “May the Force” (excuse the May 4th pun!) fashion, is designed to shield and protect borrowers whilst they focus on what to do next, without the worry of receiving calls from creditors demanding payments.

What actually is it?

Introduced by the Government Debt Respite (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020, the regulations are statutory.

There are two types of breathing space:

  1. Standard breathing space: will be available to anyone with debt problems. It gives legal protections from creditor action for up to 60 days.
  2. Mental health crisis breathing space: will only be available to someone who is receiving mental health crisis treatment. Consequently it has stronger protections and lasts as long as the person’s mental health crisis treatment, plus 30 days.

Only qualifying debts are included in the breathing space remit, but cover a far-reaching range, including:

  • credit cards and store cards
  • personal loans and pay day loans
  • overdrafts
  • utility bill arrears
  • mortgage or rent arrears.

Note, that although guaranteed loans can be included in a breathing space, the protections do not extend to the guarantor of such loans. However, the guarantor can apply for their own breathing space, if they’re eligible based on the thresholds.

Breathing space treats “secured debts” differently, and for these purposes an agreement which includes an option to purchase – i.e. hire purchase and conditional sale agreements, are treated as though they were secured lending. The statutory definition requires that there is an “option to purchase” in order for a hire / conditional sale agreement to fall outside of the included debts. There is limited commentary on leasing with no purchase option – but we are expecting further guidance on this from the FCA.

A debtor can only enter into a breathing space moratorium in respect of their “arrears” under such “secured” agreements. Any interest, fees and charges will continue to accrue on the usual monthly payments (which should continue to be made) during the breathing space period. Note, any new secured debt arrears that happen after the breathing space starts are not protected.

What do we need to do?

If you are notified that a qualifying debt owed to you is in a breathing space, you MUST STOP all action related to that debt and apply the relevant protections.

A breathing space is initiated by a debt advice provider, who will be responsible for the administration of a breathing space. They will also be the contact for the debtor, their creditors and the Insolvency Service.

The Insolvency Service will send out all notifications and also maintain a private register of details of people whose debts are in a breathing space and the date a breathing space ended or was cancelled in the last 15 months. Currently, we are advised that this service portal WILL NOT be running by 4th May – and therefore not operational at inception. We are waiting for an update regarding how a notification will be sent and how creditors can search the register whilst the portal is still being built. This is not ideal for creditors.

When you receive a notification, you must search your own records to identify the debt owed to you by the debtor. You need to do this as soon as possible.

If you have only received notification about one debt, but you are owed two debts (for example, there may be a personal loan and a hire purchase agreement) then it is recommended that you apply the protections to both debts and, in all cases, you must notify the debt adviser about the second debt (who will decide if this additional debt also qualifies for the breathing space).

You must make sure you stop immediately:

  • charging certain interest, fees, penalties or charges for that debt during the breathing space
  • any enforcement or recovery action to recover that debt
  • contacting the customer to request repayment of that debt.

What about interest?

Interest can still be charged on the principal for secured debt, but not on the arrears. Further, if systems do not allow you to stop charging interest, fees, penalties or charges relating to the debt, then the statute permits for this to continue to accrue. However, you cannot require the customer to pay charges or interest that accrue in this way, either during or after the breathing space.

Government guidance advises:

“Nothing in the regulations changes what a customer is contracted to pay. For example, if a payment is due during the breathing space and it includes interest that would have been due normally, creditors are not expected to make complex system changes to recalculate these payment amounts. Instead, creditors can make an adjustment to the overall balance owing on the debtor’s account as soon as they can.

Ideally, communications you send debtors should not show interest, fees or charges that accrue during a breathing space. However, it does not breach the regulations to show them, as long as you do not require the debtor to pay. You must make sure you are not asking the debtor for payment. You might want to tell the debtor how you’ll deal with this accrual during the breathing space. You can contact the debtor with information about how you will deal with their breathing space.”

It will be interesting to see how this works in practice. The biggest concern in industry is surrounding compound and pre-applied interest – and whether this can be separated from the principal outstanding during a breathing space. There is also a question whether this interest can be recovered after the breathing space ends (if it is contractually applied to the principal only and not penal or on the arrears). We are waiting for further guidance on this.

What should you do to prepare?

For now – it’s a watch this space until the FCA publish its detailed guidance for creditors. We are attending industry working groups on a regular basis and contributing to questions that are being submitted to the FCA regarding this topic.

We recommend you begin checking your systems and their capabilities so you are aware of what can and can’t be done – in respect of stopping charges, interest and the issue of automatically-generated letters to customers. You should also check that your systems are able to cross-check any account an individual has with you.

If you have any questions, speak to our experts below, or visit our Financial services regulatory page.

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