Unlike their parents and grandparents, the millennial generation is less likely to save up for a big ticket item such as a four-figure saddle. They’re happy to buy now and pay later, so retailers need to consider offering credit, says Adam Bernstein.
Modern consumers expect to be offered credit terms when they make expensive purchases. Yes, they can always turn to their credit card or apply for a personal loan; but when retailers can arrange credit there and then, sales are sure to increase.
However, as Jeanette Burgess, head of compliance at Walker Morris LLP, knows, consumer credit is a highly regulated business with a number of legal and compliance standards to meet.
Most firms selling to the public do not provide credit terms themselves, they partner with one or more specialist lenders. In these circumstances, the seller is a ‘credit broker’. To operate this way, Jeanette says, “firms must either be authorised by the Financial Conduct Authority (FCA) or be an ‘Appointed Representative’ (AR) of another business (usually the lender to which you refer business) which is so regulated.”
Practically speaking, getting regulated as an AR is quicker and cheaper than applying to be directly authorised.
In both cases, you need to agree a contract with the lender, setting out your respective legal roles and responsibilities. This is likely to include provisions under which you are obliged to compensate the lender for losses they suffer because of your acts and omissions outside the scope of the agreed activities.
Whichever route you choose, your role as a credit broker means you are subject to a wide range of FCA rules.
As Jeanette says: “You must be assessed as ‘fit and proper’ by the FCA to undertake regulated activities. You may receive compliance visits from the regulator and will need to report details about the business you write every year. A failure to comply can result in FCA disciplinary action, including fines, and in some cases may mean the loan agreements you introduce are unenforceable without a court order.”
She outlines the rules:
Advertising - any ‘invitation or inducement’ you make to a customer to take out a credit agreement is subject to strict rules; certain adverts must include a Representative APR or a Representative Example of the loan product you are offering.
Sales process - as a broker, you must explain key features of the loan to the customer and take reasonable steps to ensure that it is not unsuitable for the customer’s needs/situation. You need to give them time to read the terms and conditions and must not pressurise them to take out the credit.
Your fees - in most cases ‘retailer’ credit brokers don’t charge the customer for their services. Some receive commission from lenders,
but some don’t on the basis that their benefit is in improving their sales penetration via the credit offering. However, if you are charging a customer for the service, you need their express consent to pay you. If you receive a commission for the introduction, you need to disclose this too.
Complaints - you must have a customer complaints policy and you will be subject to the jurisdiction of the Financial Ombudsman Service (FOS). When a customer complains about your credit broking services, you must issue a final response within eight weeks, failing which they can complain to FOS which has the power to award compensation up to £150,000.
“Get the process right, and everyone wins.”
On the face of it, partnering with a lender to give your customers credit options is a win/win for everyone. You sell more, the lender gets more business and your customers can spread the cost of payment to suit them.
However, as Jeanette points out, it isn’t quite that simple. As a broker, you need to be fully aware of the risks and responsibilities you are taking on, for example:
Section 75 rights: Just as when you buy goods on a credit card, when a customer uses credit to pay for goods and services, the lender is jointly liable with the retailer for claims arising from misrepresentation or breach of contract. So if retailers go out of business, the lender will be liable for any claims from your customers, which is why lenders are often very careful to undertake due diligence on their broker partners which supply goods and services.” Lenders also tend to build in contractual protections to seek to claw back from the retailer any payments they have to make. Sometimes this may extend to requiring personal guarantees from directors.
Rules governing remuneration: In 2015 - updated in 2017, the FCA undertook a review of how retail credit brokers paid their staff and found that the commission and incentive/bonus schemes presented a high risk of mis-selling in 64% of cases. This is because the people selling credit to customers were sometimes paid more if they met sales or performance targets. Even if related to the goods/services rather than the credit itself, this meant sales people were more likely to prioritise the sale over the suitability or affordability of the credit used to pay for it. To combat this, the FCA has introduced new rules which require retail credit brokers to ensure that their payment structures don’t risk consumer detriment.
Selling via credit can most certainly increase the revenue a business can generate. However, there are onerous obligations to meet which, if ignored, may lead to penalties and unenforceable contracts. But get the process right and everyone wins.
IS CHANGE ON THE WAY?
The FCA has published a guidance note (see bit.ly/2ikygbA) outlining how firms become authorised, supervision and enforcement. The FCA says: “We have the power to make rules that are legally binding on firms. Where we find problems, we will generally seek to work with firms to resolve issues voluntarily in the first instance. However, if we can’t agree a voluntary solution, we may rely onour formal powers in order to limit ongoing risks to consumers.”
The FCA was due to report to HM Treasury by
1 April 2019 on current law relating to consumer credit. In other words, change may be coming.
About the author:
Adam Bernstein is a business writer with 25 years’ experience
ETN | Better Business - June 2019