This June, the government announced plans to reform and modernise the consumer credit industry by changing its foundations of legislation and regulation. First written in 1974, the Consumer Credit Act (CCA) has become increasingly outdated and has proven to be confusing for loan providers and consumers alike.
At the same time, businesses like ours could do so much more to innovate on behalf of our customers and partners but, too often, we are held back by an overly prescriptive regulatory regime under existing legislation. Consumers are equally challenged by the status quo with a lack of personalisation and confusing wording regarding their policies and rights.
Customers must be put first by businesses and regulators as the reform of the CCA proceeds. In a time when British people are faced with a looming recession and the cost-of-living crisis, it’s vital that we rethink how we treat our customers. Companies must be empowered to find innovative ways to solve systemic issues in the industry.
Pairing flexibility with customer protection
Currently, the CCA insists companies must communicate with customers, particularly those in financial difficulty, with language consumers often struggle to breakdown. This inflexibility means that, despite having technology that could provide a more personalised service, firms must present standard messages in formats which hamper customer understanding.
Equally, there is currently no scope to trial solutions. Rules are too prescriptive, limiting capacity to find better messages to engage and assist customers. Even if a lender has data that supports a different approach, their hands are tied by current regulations. In a principles-based approach, lenders would have more freedom to serve their customers in a way that suits them, rather than one-size-fits-all.
Coupling a principles-based framework with the outcomes mandated by the Consumer Duty rules would provide firms with the flexibility to innovate whilst maintaining important consumer protections.
The need for greater fairness
When founding Fluro in 2014, my business partner Matt and I recognised the space for technology to revolutionise the consumer lending space. For too long, we had seen industry leaders take advantage of their customers, pushing unfair representative APRs.
In theory, APRs were invented for consumers to compare lending products like loans or credit cards. However, as advertised APRs are only “representative”, they are often ironically, unrepresentative: representative APRs have unintentionally enabled mainstream lenders to game the system by offering advertised rates to a minority. The reality is “representative” means 51% of customers are offered the promoted rate or less, whilst the other 49% will go through quote requests only to be offered a higher rate. Rates can be over 10 times higher than advertised. This is both deceptive and time-wasting, but also risky, as customers often become tired of the process and accept unfair rates that are unrealistic to pay back or go to efforts to take out multiple loans.
To combat this, we pioneered “real rates” where customers know the rate they’ll receive from the get-go. This means that customers don’t waste time or need multiple loans. Instead, we offer full transparency for all our customers. At a time when many people are struggling financially, we need a consumer lending industry that puts transparency and honesty at the centre of its products.
We are pleased to have seen our “real rates” mantra being adopted by a significant minority of the industry, but we would like to see all lenders follow our lead. However, to do so, regulators and the government must build further incentives for companies to follow suit and build innovative solutions that protect customers. Otherwise, the industry risks falling back into its troubled past.
Prioritising the future
Any rewrite of the existing legislation must be future-proofed given the rapid advances brought about by technology. At Fluro, we believe that regulators should take advantage of the knowledge, data, and technology within the lending industry to facilitate a principles-based framework more suited to keeping pace with technology developments. There is consensus across the industry that the current legislation is unfit for purpose in the digital world and a shared desire to make positive change.
It is important to remember that the CCA was written long before smartphones – and even the internet as we know it. Regulations were created for multi-page documents rather than small screens. We must look to rethink the boundaries of regulations to account for the technological growth that we have experienced and will continue to experience as we enter the next technological era.
Whilst our “real eligibility” technology seeks to harness digital innovation to challenge market norms, we believe that regulatory bodies can do more to encourage greater creativity in the space. In the meantime, we are working to drive real, positive change by utilising data through open banking, streamlining customer experiences and offering smoother, safer access to credit. Not only does our 4.8 Trustpilot rating demonstrate the popularity of using data in such a way, but we have also removed jargon and complexity to give customers clarity and control over their finances.
We believe our approach is working and we continue to build on successes like our recently announced £200 million funding facility with global bank BNP Paribas. However, we need the government and regulators to help us and, most importantly, to help consumers. We invite other consumer lending businesses to work with us and the regulatory bodies to improve legislation and follow our lead.
Sadly, all the economic indicators suggest that the cost-of-living crisis is here to stay for some time to come. In this context, the consumer lending industry must be able to provide customers with realistic rates they can afford, coupled with a cautious approach to risk management. Technology and data are the main driving force behind being able to reach such goals. Therefore, ministers must not let CCA reform fall by the wayside.
This article was originally published on Fintech Herald.