The Lending Standards Board (LSB) has recently published a new document entitled “The Standards of Lending Practice” (the Standards). The Standards came into effect on 1 October 2016, and replace the Lending Code. But what’s changing?
As with the Lending Code, the Standards remain a voluntary set of standards that financial institutions who register agree to adhere to. Those financial institutions continue to include most of our high street banks. The Standards outline the way registered firms are expected to deal with customers throughout the entire life cycle of a product. They apply to unsecured loans, credit cards and current account overdrafts.
At the moment, the Standards apply to personal customers and cover six main areas:
- financial promotions and communications;
- product sale;
- account maintenance and servicing;
- money management;
- financial difficulty; and
- consumer vulnerability.
When agreeing to conform to the Standards, each registered firm also agrees to ensure that any third party or agent acting on their behalf in relation to any relevant products or services show a similar level of compliance.
Rules v Outcomes
The LSB Standards reflect a move away from the traditional rule based approach to one of customer outcomes. As with much regulation now, the LSB recognises that a strict rule based approach can be inflexible when it comes to meeting the needs of each scenario and individual and that there can be several ways to achieve the right customer outcome. The best solution in a specific situation may differ depending on the individual circumstances.
The Standards comprise a list of overarching Principles for Lending. They are then split into the six main areas outlined above. Each of the six areas contains both “customer outcomes” and an overall statement of how each registered firm can demonstrate the desired outcome. Many of the six areas are already covered by the existing regulation however, there are some newer areas reflecting the expansion of the LSB’s approach, for example consumer vulnerability.
A Governance and Oversight section sets out the framework that firms should have in place to ensure that the Standards are implemented and operated effectively.
The LSB will look at how registered firms are demonstrating the customer outcomes rather than their strict adherence to rules
Unlike the previous Lending Code, the Lending Standards make connections between the Consumer standards, outcomes and the regulations set out in the Consumer Credit Sourcebook (CONC) and the Consumer Credit Act 1974 (as amended) (CCA). Firms will already be regulated by the Financial Conduct Authority (FCA) and it is important to note that the LSB Standards do not replace existing FCA, CONC or the CCA requirements. Maintaining compliance with these requirements is outside the LSB’s remit.
The LSB has a range of sanctions but rarely takes actual enforcement action. It requires firms to ensure they have a process in place for identifying a failure to meet the standards and outcomes. It takes a collaborative approach to helping firms identify, report and manage issues based on materiality.
Finally, as well as plans to widen the areas of consumer lending covered by the standards, work is already in progress to develop standards of lending practice for micro-enterprises. The LSB is also extending their scope beyond micro-enterprises to larger SMEs and expects to issue these new standards in early 2017. In the meantime, the existing Lending Code will continue to apply for micro-enterprise customers.
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