Lenders and those responsible for introducing consumers to lenders must act in their customers’ best interests at all times. With a growing number of people borrowing money, lenders have an increased responsibility to ensure complete transparency over every part of lending. With that in mind, we’ve put this summary together covering responsible lending, including the work Deko and its panel of lenders do to ensure only those who are suitable for finance are offered it.
Responsible lending covers a wide variety of aspects, but it essentially comes down to only approving those who can afford it. To do that, you need to put the customer first and assess areas like affordability and the likelihood they can repay the amount to be borrowed without impacting their financial situation.
Lenders need to be confident before lending that a customer can pay back the amount borrowed by conducting the required checks, such as looking at their credit report. Repayment rates and schedules, which need to be affordable and manageable for the customer before an offer can be made, must take into account the information sourced from these checks.
Lenders must provide customers with terms and conditions that detail every aspect of the borrowed amount. This includes the terms of the payment plan, including any interest, as well as the necessary steps if the borrower can't make payments. During the process of selling a finance product to a customer, lenders or those introducing customers to them, must allow customers sufficient time to read and understand these terms and conditions before they sign the agreement.
Lenders are also required to offer full support if the borrower has financial difficulties and is struggling to repay the amount. There should be a process to manage such issues and help the customer as much as possible.
Lenders are required to report accurate and up-to-date information to the UK Credit Reference Agencies regarding the repayment behaviour of customers’ credit accounts. This informs other prospective lenders about the financial position and credit usage of a customer and assists their affordability and creditworthiness assessments. As a result, accurate CRA reporting promotes responsible lending across the industry and can help avoid lenders offering unaffordable credit to customers.
Assessing affordability is a primary requirement of the Financial Conduct Authority (FCA Consumer Credit handbook). FCA rules state that a lender must show a customer's ability to repay the amount over the term of the finance agreement was considered before a decision was made to accept the application.
Beyond that, lenders must consider the customer's actual or anticipated income and non-discretionary expenditure before they reach a decision. This is a core component of a lender’s responsible lending checks and, when undertaken in conjunction with other checks and assessments, helps a lender to reach a suitable decision and demonstrate that they have lent responsibly.
*Currently, FCA regulation doesn’t apply to lenders in the buy now, pay later space offering products which do not have any interest or charges and are repaid over a term of 12 months or less (often known as short-term interest-free credit). But that doesn’t mean finance providers offering this type of lending don’t have the same responsibilities for ethical and fair lending. The FCA has recently taken action against firms in this sector to update their customer loan agreements, as they were not clear on important legal rights afforded to customers. The FCA has also recently issued a Dear CEO letter to merchants and lenders offering these products, urging them to review their financial promotions. The FCA Consumer Credit Handbook sets out some rules that are specifically relevant for these products.
Lenders and brokers are required to ensure that any promotion or marketing for these finance products is clear, fair and not misleading, and that it is well balanced by including information about the risks of the product as well as the benefits.
When tackled correctly, a climate of responsible lending can be good for individuals, businesses and the economy. But when proper processes aren't adhered to, those customers, businesses and the economy can suffer.
There will always be some scenarios where it's impossible to avoid customers running into financial difficulties. But by doing their due diligence, lenders and brokers can reduce the chance of shoppers defaulting on payments and exacerbating any existing financial difficulties customers may be facing.
At Deko, we pride ourselves on connecting customers to responsible lenders, and it's at the heart of everything we do. We undertake careful due diligence on our lenders when they join our panel to be satisfied that they have policies, systems and controls in place to lend responsibly. Through our multi-lender platform, we ensure shoppers receive finance options catered to their needs with a panel of lenders working in the background.
We also offer Will I Qualify, which allows lenders to check a shopper's eligibility before applying for finance. These features enable shoppers to have more transparency and understanding over the amounts they can borrow.
Being a responsible lender means doing the right thing for customers and the business. It will help avoid repayment issues and only see those who can comfortably afford the repayments able to borrow. By being transparent and upfront about the cost of borrowing through promotions, sales processes and terms and conditions, performing due diligence before signing off on applications and offering excellent customer support to those struggling to pay the loan, lenders can do their part to responsibly offer finance to UK shoppers.