If a borrower defaults on a regulated credit agreement, a creditor must issue a default notice before it can enforce the agreement . However, a question often asked is what is the position if a creditor wants to take enforcement steps against an individual who has provided a guarantee and/or an indemnity under the agreement? Is a default notice required?
In September 2015, the FCA published Guidance Consultation (GC 16/2) stating that, in its view, the courts would find that the mere taking or demanding of a payment from a guarantor under a regulated credit agreement would not amount to ‘enforcement’ of security and therefore a default notice would not be required. However, in February 2016, the FCA reconsidered its analysis and changed its view. The FCA published a guidance consultation stating that since under section 189 of the Consumer Credit Act ‘security’ includes a guarantee, that demanding payment from a guarantor would in itself involve the enforcement of a security and thus require a default notice to be served on the debtor. This would result in the 14 days minimum period expiring before demand could be made of the guarantor.
So what does this mean for creditors? The FCA have indicated that following the publication of its revised position, that any creditor who since February 2016 continues to make demands from guarantors without serving a default notice could be at risk of facing disciplinary action from the regulator. This stance may seem slightly surprising bearing in mind that its view has been set out in draft guidance that is being consulted on and which is not yet finalised. Nevertheless it would be prudent for creditors to comply with the FCA interpretation as this stage and to change their procedures if they have not already done so.
The impact of this will not just affect specialist guarantor lenders but other more mainstream lending, for example motor finance hire purchase loans where often young drivers will require their parents to act as guarantors.
What remains unclear is whether simply notifying the guarantor of non payment by the debtor and keeping him/her informed as to the state of the account could be construed as a demand and thus an enforcement of a security. Creditors will need to tread carefully in all of their communications with guarantors.
 Section 87 of the Consumer Credit Act 1974