The OFT irresponsible lending project scoping consultation is the first shot in this campaign around the OFT’s assessment of fitness to hold a licence responsibilities. New concepts were introduced by the Consumer Credit Act 2006 in relation to how a firm’s approach to consideration of credit competence influences the OFT’s assessment of fitness to hold a licence and how explicit evidence of irresponsible lending should be relevant to such assessment. This consultation is looking to shape the project work to be undertaken in relation to the OFT’s commitment to revisit and review lending practices which are inconsistent with responsible lending with reference to the OFT’s fundamental licensing objective of assessing fitness.
What is critical is that this consultation clearly indicates the OFT’s wish to go significantly beyond what is strictly required. Not only does it want to influence lending decisions, it seeks to include the whole product life cycle from design to arrears management. Aside from licensing issues, given that OFT published guidance is often applied by the courts as the benchmark when assessing the behaviour of creditors, industry should be alert to the potential implications of such wide-ranging guidance, especially in light of the new unfair relationships provisions.
In most cases, businesses consider the key responsibility issue to be the process around the decision to lend and how any available information was used to underpin that decision. Factors such as affordability, repayment and risk levels are highly relevant. The precise weight to be given to each issue and the information needed will vary according to circumstances and the OFT is mindful it needs to allow for appropriate flexibility. The OFT also wants to avoid any unintended side effects - such as the shutting off of responsible lines of credit or overlapping regulation.
The OFT believes that consumers see the transaction differently - and therefore the consultation is looking to explore the extent to which the project should also consider areas such as advertising, marketing and use of behavioural manipulation techniques, sales techniques, product design, credit scoring, assessing appropriateness of product to borrower (including a recognition that borrowing can be beneficial), sales of linked products and account management (e.g. handling of defaults and arrears) in the assessment process.
Clear guidance - what will the OFT consider to be “irresponsible lending”?
While there is existing guidance in this area, the irresponsible lending project aims to set out a clear OFT position on the test for irresponsible lending (see Consumer Credit Act 1974 section 25, as amended). The project intends to lead to publication of guidance on basic standards licence holders need to reach when offering or extending lines of credit and the nature and extent of assessments around the borrower’s ability to repay.
Why does this initial consultation matter?
This consultation is the first step in a process which will see publication of guidance on the OFT’s position on the test for irresponsible lending. Irresponsible lending is a key issue for creditors, particularly in the current challenging market conditions. Given the potential impact of the guidance, which will be used not only by the OFT when assessing fitness to hold a CC licence but also, we anticipate, by the courts when assessing unfair relationships, it is important that it is not used as an opportunity by the OFT to legislate by the backdoor on a wide variety of issues, as seems the intention. If the proposed scope is adopted, the guidance will not only cover the behaviour and practices around the decision to lend and the assessment of the borrower’s ability to repay but the whole credit product life cycle and the sales of associated products.
As a result, those involved in the consumer credit industry should carefully consider what the implications to such a wide scope could be a fully engage in the process. Responses to the consultation need to be received by the OFT no later than 24 October 2008. A copy of the consultation document is available here.