Official statistics released by the BBA in June reveal that demand for personal loans has increased over the last two consecutive years.[1] On the surface, the news that UK consumers are borrowing suggests increased confidence in the economy. At the same time, however, average household debt remains worryingly high at £55,083[2]. A recent study from Moody’s warns that ‘British consumers are taking on personal debt at an alarming rate,’ beating pre-financial crisis levels.[3]

While the Financial Conduct Authority (FCA) can’t regulate how much consumers want to borrow, it can work to ensure they get a good deal when they do, and will continue its ‘fight for fairness’ in the consumer credit market. Back in March, the first annual report from the body cited a staunch focus on eradicating poor conduct and bad practices in affordability assessments. As demand for borrowing increases, the FCA wants to ensure that the credit market remains stable, offering consumers access to products and services they need and can afford. At the heart of the FCA’s policies is a promise to protect consumers from practices which could exacerbate spiralling, uncontrollable debt; a problem which has plagued a vast number of consumers in recent years.

The ongoing transformation of the market under the FCA’s rule should be enough to make lenders rush to fall in line. In the first year alone, the FCA issued a massive £1,471,431,800 worth of fines, coming down hard on short term creditors and banks, with a number of lenders ceasing to trade altogether. In addition, its determination to realise responsible lending industry-wide means that lenders must demonstrate that have the right processes and tools in place to satisfy stringent affordability assessments – and fast. Mortgage assessments have already been subjected to this rigour[4] and it won’t be long before unsecured lending practices are also put under the spotlight.

Lenders must ensure that personal loans are only granted to an individual in circumstances where they can make affordable repayments, now and in the future, based on their financial profile. Lenders and brokers will also be heavily reprimanded should they be seen to be promoting products that are unsuitable for the individual borrower. The FCA fully expects some lenders to exit the market as a result of its raised standards. So what can lenders do to ensure they are compliant?

Automated technologies are already available that enable lenders to implement digital affordability assessments to determine whether or not a loan application should be granted. This technology is designed to automate the underwriting process by connecting multiple sources of information, such as credit and fraud agencies, and filtering an application through a series of set parameters, to quickly and accurately underwrite applications. This process will ensure customers are only offered loan products that are suited to their individual circumstances. In effect, the technologies only permit lenders to say ‘yes’ when all eligibility criteria, as defined by the lender, have been met. In this way, they can control these assessments in line with FCA changes and hardwire responsible lending into their assessment processes.

For some consumers, however, these increased rules could mean that they will no longer be able to access credit at all. The FCA has acknowledged this, and advised that in these cases it is in the individual’s best interests not to borrow more, as this will only worsen their financial situation in the long run. But with high street banks likely to clamp down hard on who they will accept for a loan, questions remain over how consumers can access additional credit when it is really needed. FCA registered loan comparison services, like FairMoney.com, may help in these situations, by searching for and presenting ‘responsible’ options, again, according to the consumers credit profile. 

Demand for consumer credit remains high across the lending spectrum, but lenders should be conscious of the FCAs intentions and take steps to shape up before they’re shaken down. Implementing responsible lending practices is no longer an option but a necessity if they are to survive the next year under the FCA and ensure that consumers of all borrower profiles are being given the fairest treatment possible.

Graham Donald is Managing Director at Equiniti Pancredit, a leading provider of loan application, administration and collection systems, intelligent credit sourcing solutions and business intelligence tools for banks, lenders, intermediaries and price comparison sites.

[1] https://www.bba.org.uk/news/statistics/high-street-banking/june-2015-figures-for-the-high-street-banks/#.Vchg0flViko

[2] http://themoneycharity.org.uk/money-statistics/

[3] http://www.ibtimes.co.uk/uk-consumer-debt-moodys-warns-credit-card-mortgage-lending-time-bomb-1510964

[4] http://www.fca.org.uk/firms/firm-types/mortgage-brokers-and-home-finance-lenders/mortgage-market-review