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To finance or not to finance?

Key legal and compliance considerations for practices planning to offer credit options to clients

08 March 2019, at 1:21p.m.

Twenty-first century consumers are credit savvy. Unlike their parents and grandparents, the millennial generation is less likely to save up for that new bike, lavish holiday or home improvements – they are happy to buy now and pay later. Consumers expect to be offered credit terms when they make expensive purchases; if they aren’t, they can always turn to their credit card or apply for a personal loan.

But what about situations involving owners with pets that need care? Injuries and illness tend to come along when they’re least desired – or affordable – leaving owners in an expensive bind. Those practices that can offer a “one stop shop” by selling them the credit alongside treatment are likely to increase sales.

And pet treatment credit is available. One firm offers loans at 0 percent APR over 12 months, or 9.9 percent APR over 24 months. It will lend between £250 and £25,000 to pay for treatment for uninsured pets, including horses and other farm animals, or for treatment that isn’t covered by pet insurance policies.

The company says it can afford to sell interest-free loans because it charges vets who sign up for the service £10/month, as well as a small arrangement fee on any loan granted, also paid by the vet. The loans are only offered via veterinary practices signed up to the scheme.

But consumer credit is a highly regulated business and before you can offer credit to your clients, there are a number of legal and compliance standards you will need to meet. The following sets out the key issues you will need to consider.

Becoming regulated

Most businesses serving the public do not provide credit terms themselves; they typically partner with one or more specialist lenders. In these circumstances, the practice is a “credit broker”.

To operate this way, they must either be authorised by the Financial Conduct Authority (FCA) or be an “Appointed Representative” (AR) of another organisation (usually the lender to which you refer business) which is so regulated.

Getting regulated as an AR is quicker and cheaper than applying to be directly authorised, which requires the completion of detailed forms, the provision of considerable amounts of information and payment of a fee.

In both cases you will need to agree a contract with the lender, setting out your respective legal roles and responsibilities, and 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.

Regulatory responsibilities as a credit broker

Whichever route you choose, however, your role as a credit broker will mean you are subject to a wide range of FCA rules set out in its handbook. 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.

Advertising

Any “invitation or inducement” you make to a client 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 have to explain the key features of the loan to the client and take reasonable steps to ensure that it is not unsuitable for the client’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 client 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 the client for the service, you need their express consent to pay you and if you receive a commission for the introduction, you need to disclose this too.