As reported in The Times and other publications, one of the UK’s guarantor lenders has admitted that the Financial Conduct Authority (FCA) has requested that improvements are made to the firm’s procedures.
The regulator’s main area of concern appears to be whether lenders are fully explaining the risks of guarantor loans, including whether guarantors understand all of their responsibilities and whether guarantors fully understand exactly how likely it is that they will need to make one or more payments on the loan.
The lender in question has just published its half-yearly report. The picture painted by this report is one of a firm that is expecting their regulatory burden to increase: more complaints, more staff needed to service these complaints, more arrears, introducing new lending criteria, reducing repeat lending as a share of new business and additional FCA requirements likely to be announced in the future, such as the finalised guidance on the treatment of vulnerable customers.
The report speaks of the lender having adopted “a more conservative approach to repeat lending”. New lending accounts for 69% of the firm’s loan originations in the first half of the 2019/20 financial year, up from 62% in the same period in 2018/19. Indeed, in the second quarter of 2019/20 this figure is 78%. Proportions of repeat lending have suddenly dropped. They made up 39% of the firm’s originations in Q4 2018/19 and in Q1 2019/20, yet in Q2 2019/20 this is now 22%.
The firm wishes to make it clear that the FCA has not identified issues with the design of the guarantor loan product, nor does it have issues with the lender’s overall business model.
Its focus on reducing repeat lending appears to be a sensible approach to take. Some guarantor lenders are reporting that they are more likely to have complaints upheld by the Financial Ombudsman Service (FOS) when the complaint comes from a customer who took out several loans. For example, FOS might decide that for the later loans, the lender should have checked the borrower’s and guarantor’s income by requesting payslips, rather than simply accepting the income figure declared by the customer. Alternatively, FOS may decide that repeat lending should prompt the firm to conduct a detailed income and expenditure analysis, instead of using a ‘typical’ living expenses figure provided by the Office for National Statistics.
For a guarantor lender, a sensible and proportionate series of pre-loan checks might include:
- Emphasising to a guarantor that their liability might not be restricted to making one or two monthly payments that the main borrower might miss. The worst-case scenario is that the borrower stops paying completely, which means the guarantor would need to make every remaining payment, even if the loan still has several years to run
- Asking the guarantor to describe their responsibilities in their own words, rather than a member of staff simply reading out the guarantor obligations
- Giving both the borrower and the guarantor some time to consider the loan’s terms and conditions, rather than encouraging them to sign the agreement quickly
- Asking the nature of the relationship between the main borrower and guarantor, and how long they have known each other
- Checking that the guarantor trusts the borrower to make payments and is not aware of any financial difficulties the borrower might be experiencing
Lenders should also train their staff to identify any signs that a guarantor may have been pressured by the main borrower into agreeing to provide a guarantee.
When the FCA announced its rent-to-own price cap in March 2019, Christopher Woolard, the regulator’s Executive Director of Strategy and Competition, was to be found speaking on the record to the national press. He told The Times that he was not sure why guarantor loans had such high interest rates when guarantors were meant to have strong credit records. His comments may mean that guarantor loans are next in line for price capping.
Without providing any figures, the FCA has said that recent data suggests that the proportion of guarantors making loan payments on behalf of the borrower has increased. Debt charity StepChange says the number of people contacting them about guarantor loan-related debt problems more than doubled between 2016 and 2018.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article