UPDATE 1-UK watchdog warns banks over treatment of customers in debt

* Second coronavirus payment holidays due to end

* Banks told to be flexible with struggling customers

* Customers should be offered lower interest rates if needed
(Adds banking industry reaction)

By Huw Jones

LONDON, Sept 16 (Reuters) - Britain's Financial Conduct
Authority told banks and other lenders on Wednesday not to crack
down on customers who will struggle after repayment holidays
come to an end.

When the economy went into lockdown in March to fight the
pandemic, regulators set out how providers of credit to
consumers like personal loans, overdrafts, motor finance,
buy-now-pay-later and pawnbrokers should offer payment
deferrals.

Millions of consumers have requested three-month payment
holidays. People can request a holiday until Oct. 31, meaning it
could stretch to the end of next January.

The FCA set out guidance on Wednesday on how it expects
banks and others to provide tailored support for those still
struggling once a second three-month payment holiday ends.

Banks should provide support before a payment is missed, be
flexible, such as by offering lower interest rates, or agreeing
staged reductions in overdraft limits to minimise stress and
anxiety for customers, it said.

They must not pressurise customers into repaying their debt
within an unreasonably short period of time, the FCA said.

"Our proposals are designed to help people who have been
facing payment difficulties because of the pandemic get back on
track with tailored support from firms," FCA interim CEO
Christopher Woolard said.

"For those who can restart payments, it is in their best
interests to do so."

UK Finance, which represents lenders, said the industry has
provided over a million credit card payment deferrals, 738,000
personal loan payment deferrals, and over 27 million
interest-free overdrafts since the pandemic began.

Lenders stand ready to offer tailored support and
flexibility to customers in difficulty due to the coronavirus,
UK Finance said.

Firms regulated by the FCA are required to treat customers
fairly at all times, and breaching this rule under the proposed
guidance could lead to enforcement action.
(Reporting by Huw Jones;Editing by Elaine Hardcastle, Kirsten
Donovan)