Adam Bernstein discusses the issue of financing options for your customers. Is this an area where you could gain a unique selling point over your competitors?
Consumers in the 21st century are credit savvy. Unlike their parents and grandparents, the millennial generation is less likely to save up for a new bike, lavish holiday, or new TV – they are happy to buy now and pay later. And the same is true for their purchases for their home.
Consumers now 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 if you can offer a ‘one stop shop’ by selling them the credit alongside their new boiler, you are likely to increase sales.
One solution comes via Gas App, which not only offers a multitude of tools, manuals, and news for gas engineers, but also features the Gas App Finance Scheme, which connects customers to a finance provider that can offer them loans over three to 10 years for sums of between £500 and £15,000.
However, as the app notes, and Jeanette Burgess, Head of Regulatory & Compliance at Walker Morris LLP, points out, consumer credit is a highly regulated business.
She said: “Before you can offer credit to your customers, there are a number of legal and compliance standards you will need to meet.”
Most firms selling to the public do not provide credit terms themselves, instead partnering with one or more specialist lenders. In these circumstances, as Jeanette notes, the seller is a ‘credit broker’.
To operate this way, she explains that “firms must either be authorised by the Financial Conduct Authority (FCA) or be an ‘Appointed Representative’ (AR) of another business (usually the lender to which you refer business) which is so regulated”.
Practically speaking, 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 any acts and omissions outside the scope of the agreed activities.
Whichever route you choose, however, Jeanette says that 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.”
Jeanette outlined the rules:
Any ‘invitation or inducement’ you make to a customer 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.
As a broker, you have to explain the key features of the loan to the customer and take reasonable steps to ensure that it is not unsuitable for the customer’s needs/situation. You need to give them time to read the terms and conditions and must not pressure them to take out credit.
In most cases, ‘retailer’ credit brokers don’t charge the customer 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 customer for the service (possibly the 4% that Gas App will charge), you need their express consent to pay you and, if you receive a commission for the introduction, you need to disclose this too.
You must have a customer complaints policy and you will be subject to the Financial Ombudsman Service (FOS).
When a customer complains about your credit broking services, you have to consider their complaint and issue a final response within eight weeks, failing which they can complain to FOS which has the power to award compensation up to £150,000.
On the face of it, partnering with a lender to give your customers credit options is a win/win for everyone – you sell more, the lender gets more business, and your customers can spread the cost of payment to suit them.
But, as Jeanette points out, it isn’t quite that simple and, as a broker, you need to be fully aware of the risks and responsibilities you are taking on.
She said: “Just as when you buy goods on a credit card, when a customer uses credit to pay for goods and services, the lender is jointly liable with the supplier for claims arising from misrepresentation or breach of contract.
“If suppliers go out of business, the lender will be liable for any claims from your customers, which is why lenders are often very careful to undertake due diligence on their broker partners which supply goods and services.”
She adds that they also build in contractual protections to seek to claw back from the supplier any payments they have to make. Sometimes this may extend to requiring personal guarantees from directors.
In 2015 (updated in 2017), the FCA undertook a review of how retail credit brokers paid their staff and found that the commission and incentive/bonus schemes presented a high risk of mis-selling in 64% of cases.
This is because the people selling credit to customers, sometimes in the home, were paid more if they met sales or performance targets.
Even if related to the goods/services rather than the credit itself, this meant salespeople were more likely to prioritise the sale over the suitability or affordability of the credit used to pay for it.
To combat this, Jeanette notes that “the FCA has now introduced new rules which require retail credit brokers to put policies in place to ensure that their payment structures don’t risk consumer detriment”.
To conclude, selling via credit can most certainly increase the revenue a business can generate. However, there are onerous obligations to meet which, if ignored, may lead to penalties and unenforceable contracts. Get the process right and everyone wins