Consumers across the UK could be set to receive intimidating ‘Default Notices’ in the post, even though they have opted to take an FCA and lender approved payment holiday.

Section 87(1) of the Consumer Credit Act 1974 sets out in law that creditors must send a letter to any borrower that is behind with the payments set out in the credit agreement between the two parties. It is normally sent went you have missed (or paid less than the full amount) payments for three to six months.

The problem is that this regulation is still in place, meaning that lenders are legally obliged to send these letters – including pre-prescribed wording – to consumers, even though many of those will have explicit permission to have taken a payment holiday.

Payment holidays were one of the first measures put in place by the FCA to try and help consumers struggling or fearful of their ability to cope financially during the coronavirus crisis. With millions of people either furloughed on lower incomes or out of work completely, the measures were designed to give some breathing room without fear of damaging Credit Ratings or triggering short-term debt collection procedures.

Now, the two forms of legislation are at loggerheads and although some lenders have taken steps to let consumers know that they can disregard a Default Notice should they receive one, the potential for increased stress and worry is huge.

Campaign groups and financial charities are working to try and get both the procedure and the wording of letters updated, but getting this done before letters are due to be sent is challenging and unlikely.

Protecting consumers’ Credit Ratings was a key point within the FCA payment holiday legislation. It meant that while interest would still accrue during any break from payments, it would not be recorded as a negative marker.

Default Notices only apply to debts regulated by the Consumer Credit Act, such as personal and payday loans, store cards, hire-purchase and ‘buy now pay later’ agreements – all of which have seen a payment holiday of some description introduced.

Mortgages are not covered by the Consumer Credit Act. They are regulated by the FCA and are covered by a set of rules known as the Mortgage Conduct of Business (MCOB) rules. Whether or not similar letters are sent out to mortgage customers remains to be seen.

In the short term, there are two main issues. Firstly, any additional financial stress caused by doom-laden yet unnecessary letters is unwelcome to put it mildly. Even with ‘wraparound’ letters from lenders explaining that the Default Notice can be ignored, the contradictory advice is likely to cause extra worry for borrowers.

The other problem is that where consumers haven’t opted to take a payment holiday, Default Notices would still apply. A key piece of advice when the initiative was first introduced was that it wasn’t enough to simply stop paying, consumers had to gain explicit permission (even if it was just a box ticking exercise) from their lender in order to ensure that the arrangement was formalised. This led to huge backlogs at call centres, as consumers rushed to get approval.

Without that agreement, not only could (and legally, should) consumers begin the process of issuing a default, but the customer is unlikely to see their Credit Rating get protection either.

Checking the information being reported for yourself is the only way of being sure that everything is reported as it should be. Different lenders share information with different Credit Reference Agencies in the UK and so the quickest and easiest way of checking everything held about you, with no missing pieces is with checkmyfile.

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