With great power comes great responsibility; responsible lending in a regulated world
The Financial Conduct Authority has one major concern at the forefront of its mind when it comes to regulating financial services; what works to the best advantage of the consumer? Now that consumer credit also falls under its regulatory remit (and has done since the 1st of April this year), it might help you to view its requirements from this angle.
When the FCA began to look at the regulation of the consumer credit world, its research led it to identify three distinct categories of borrower; survival, lifestyle and reluctant.
Survival borrowers use credit on a very regular basis to pay for day to day expenses and, as a result, tend to go for less mainstream lending sources. Major motivators for this type of lender are low weekly repayments and ease of access, such as catalogue or home credit.
Lifestyle borrowers tend to have sufficient income to live day to day, but use credit for large and one-off items. This type of borrower is also likely to use less mainstream forms of credit.
Reluctant borrowers limit their use of credit and tend to focus on paying back existing debt. In the majority of cases, reluctant borrowers are likely to use mainstream credit to pay back existing debt, probably borrowed at a stage in their life when they had more disposable income available to them.
Of course, borrowers can move between these three categories, and not everyone is going to fit cleanly into just one category. With such a strong focus on the consumer, the FCA’s major group for protection is ‘consumers in vulnerable circumstances and with unmanageable debt’. As you may expect, due to the subjectivity of this description, it’s quite tricky to ascertain specifically who the regulator would classify as vulnerable and its lengthier definition; “We consider a vulnerable consumer to be someone who, due to their personal circumstances, is especially susceptible to detriment” is also fairly vague. However, the regulator does give some more tangible points which might help to identify vulnerable borrowers which include those who have chosen the wrong product, are paying too much or are being treated unfairly by their provider. The biggest issue is when a borrower, through the use of consumer credit, finds themselves with unmanageable or problematic debts, leaving them in an untenable situation which causes both financial and non-financial problems on a long-term basis.
In its consumer credit guidebook, CONC, the FCA sets out its requirements for responsible lending, centring on the avoidance of putting vulnerable persons at further financial risk. The onus for assessing the suitability and affordability of consumer credit for borrowers now rests upon the lender. In practice, this means that you will need to be confident that the repayments for any debt that will arise from the proposed agreement between you and the borrower can be met without an adverse impact upon the borrower’s financial circumstances. You will also need to assess whether it is realistic for the borrower to make the proposed repayments within the specified time period. You will be expected to demonstrate that you had access to ‘sufficient information’ to assess the borrower’s suitability for the business you propose to undertake with them and will need to cover;
- the type of credit;
- the amount of the credit;
- the cost of the credit;
- the financial position of the customer at the time of seeking the credit;
- the customer's credit history, including any indications that the customer is experiencing or has experienced financial difficulties;
- the customer's existing financial commitments including any repayments due in respect of other credit agreements, consumer hire agreements, regulated mortgage contracts, payments for rent, council tax, electricity, gas, telecommunications, water and other major outgoings known to the firm;
- any future financial commitments of the customer;
- any future changes in circumstances which could be reasonably expected to have a significant financial adverse impact on the customer;
- the vulnerability of the customer, in particular where the firm understands the customer has some form of mental capacity limitation or reasonably suspects this to be so because the customer displays indications of some form of mental capacity limitation.
Given the uncertain nature of life, it’s inevitable that some customers will have a change in circumstances which renders them less suitable for the debt than they were at the time the business was conducted, and this is impossible to predict. Similarly, the FCA states that you can only judge the suitability of the customer based on the information that you – the firm – have at the time of conducting the business. If you cover the above points in your dealings with the borrower, and use a credit analysis agency, then you have satisfied the requirements of the FCA as you can neither predict the future nor speculate on information which has not been disclosed to you.
Hopefully your process will already cover all of the information above, or at least be somewhere close to it. If you do need help with the best way in which to ensure your sales process fits the FCA’s definition of responsible lending, then please contact the Consumer Credit Centre (www.ConsumerCreditCentre.co.uk) for help. I’m sure we can all agree that any work you need to do on your own process will be worth it, if it helps vulnerable lenders avoid spiralling into unmanageable debt.