The consumer credit industry is highly regulated. When thinking about offering your customers finance, you need to know about the legal and regulatory requirements that need to be met. The Financial Conduct Authority (“FCA”) is the regulatory body responsible for authorising and supervising firms in the consumer credit industry, including merchants offering their customers finance.
When offering your customers finance to buy your goods or services, you introduce them to a lender. This is known as credit broking and is a regulated activity. Some finance products, however, are currently exempt from regulation. It’s important that you know whether you will be performing a regulated activity or not, so you know which legal and regulatory matters need complying with.
This guide will help you understand some of the key legal and regulatory requirements that need navigating when thinking about offering your customers finance.
FCA authorisation demystified
‘Do I need a consumer credit licence?’ or ‘Do I need to be FCA authorised?’ are two of the most commonly asked questions by merchants. It can be confusing, considering there are numerous types of consumer credit permissions, and regulation is continuously evolving to keep up with industry trends.
First, let’s take a look at the type of credit products currently exempt from FCA regulation. If you only offer interest-free credit, which is repayable within 12 months or less, then you don’t require FCA authorisation because the credit product is currently exempt.
The UK Government and the FCA are planning to bring these credit products into the scope of regulation in the next 12-24 months, but the Government has indicated merchants will not require FCA authorisation to introduce their customers to lenders of these credit products.
These products tend to be best suited to merchants who sell goods or services at relatively low value or single purchases, meaning that the monthly repayments are not unsustainably high for their customers.
For merchants selling higher-value goods or services, or whose customers may purchase multiple goods at one time, finance over a longer term may be more suitable. Those offering interest-bearing finance options or finance repayable over more than 12 months will need FCA authorisation.
In most cases, merchants will need to apply for a “limited permission” secondary credit broking authorisation. It is a “limited permission” because credit broking is not merchants’ primary business activity (selling their goods or services is).
When applying for FCA authorisation, you will need to make clear how you sell to your customers - online, in-store, over the phone or in the customers’ homes. If you sell in your customers’ homes, you will need to apply for a “domestic premises supplier” permission. Customers can be more vulnerable to pressure sales tactics or more easily misled in these sales scenarios, and so the FCA will grant specific permission for this type of sales activity.
You can apply through the FCA website and don’t need a lawyer. You will however need to take your time to ensure your business is set up in a way that meets the FCA’s expectations for authorised firms and you will need to demonstrate this in your application. The application typically costs around £500.
Make sense of your FCA reporting requirements
Reporting to the FCA helps ensure your permissions are still correct and you meet the authorisation requirements. FCA reporting is submitted in their “RegData” online platform, which you’ll need to sign up to when you get authorised. Reporting is relatively straightforward, but we do sometimes receive questions about some of the data points in the reporting form.
One query, for instance, asks about revenue earned from credit-related regulated activity. This relates to any income received through the act of offering finance. It does not refer to revenue for selling goods and services that the customer simply pays for on finance. You will only declare revenue from credit-related regulated activities if you earn a commission or other type of fee for your credit broking activity.
Other questions are easier to answer, such as the number of transactions involving credit-related regulated activities in the reporting period. The best way to navigate and simplify all these questions is by familiarising yourself with the requirements from the start.
Making sure your financial promotions are FCA compliant
Businesses offering credit to customers must be clear about the costs and risks involved in taking out a loan to pay for goods. The FCA has recently focused on how firms advertising finance help their customers understand these costs and how the financial product works.
Therefore, you need to ensure your financial promotions are FCA compliant. This involves not producing adverts with misleading wording, such as ‘no credit check’, ‘guaranteed loan’ and ‘pre-approved’.
Ads also need to include the Representative APR or the Representative Example where necessary. As a credit broker, it’s also vital to include a clear ‘credit brokerage disclosure’ in adverts to ensure customers understand the nature of the service provided.
At Deko, we require all of our merchants to seek our approval of any financial promotions before they are published.
What is responsible lending?
With a growing number of people borrowing money, lenders have an increased responsibility to ensure complete transparency over every part of lending. But what does that mean for you? Responsible lending involves performing the necessary checks to ensure a consumer can afford to pay back the amount borrowed.
If you’re a merchant offering finance in-store then you must provide the terms and conditions detailing every aspect of the borrowed amount. However, merchants offering finance online only don’t need to worry as this is managed by the lender/broker.
Lenders must also offer support should consumers face difficulties paying instalments. On top of this, lenders must also report accurate and up-to-date information to the UK Credit Reference Agencies regarding the repayment behaviour of customers’ credit accounts.
As recession looms and the cost of living crisis tightens, it is more important than ever to understand the impact that offering finance to those who can’t afford to repay it could have on their lives.
All FCA-authorised merchants must have a Vulnerable Customer Policy, setting out how they consider the individual needs and characteristics of their customers, and how they address any specific needs of customers experiencing vulnerable situations.
Vulnerability is a very broad term and could include customers who are physically or mentally unwell, have learning difficulties or disabilities, have carer responsibilities for a family member, are recently bereaved or have suffered a significant life event, such as a relationship breakdown, or those who are struggling with their finances.
Your policy should address how you ensure your staff are suitably trained to identify vulnerability, and how to adapt their approach to customers to meet their needs and ensure that their actions (or lack of actions) do not worsen the customer’s situation.
The UK General Data Protection Regulation (“GDPR”) and the Data Protection Act 2018 set out the obligations on businesses in the UK that process personal data.
During the course of your business, you will collect personal data from your customers to process their orders and deliver goods or provide services. If you introduce them to finance, then you will be sharing some of their personal data with Deko, or the lender.
To comply with the GDPR, you must register with the Information Commissioner’s Office and pay the data protection fee. This is usually a £40 annual fee but if your annual turnover is between £632,000 and £36 million, your fee will be £60. You must also ensure that any personal data you collect and process about your customers is protected with robust systems and controls, so as to prevent unlawful disclosure, access or loss of the data.
Under the GDPR, your customers have a number of fundamental rights, which you must honour. One of these rights requires you to inform your customers about what data will be processed, how, why, when and how long you process their personal data, who you share it with and why you share it.
You can find out more about the data protection rights of individuals on the ICO website.
As a merchant, the FCA won’t expect you to have a dedicated army of staff for compliance monitoring. However, you will need to demonstrate that you have controls in place to check that your staff are following your policies and procedures and are treating your customers fairly.
Management should undertake regular monitoring of activities and record the outcomes of the monitoring. In particular, you should monitor your financial promotions, sales practices and customer support processes.
If any poor practice or unfair customer outcomes are identified through your monitoring, you must act to put things right as soon as possible.
There are many opportunities for merchants to drive and grow their businesses. But ensuring compliance with legal and regulatory matters remains one of the most vital aspects of good business practice for organisations and customers. You can use these tips as a guide to gain a better understanding, but if you have any specific questions, please speak to a compliance specialist who will be able to provide an in-depth response to the matter.