Carl Virgo of Southern Finance looks at the challenges facing motor lenders.
We’re out of recession, just, but the cost of living for the average household is still increasing. Many families are of course cutting back wherever possible and one area where savings can sometimes be made is by trading up to a newer, more fuel efficient car.
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Certainly, as fuel costs and general household expenditure has risen in the past couple of years Raphael’s Bank has experienced an increased demand for motor finance from its consumer finance division, Southern Finance.
There is a likelihood that as the UK economy starts to recover, consumer lending practices may become a little less stringent, and with this the risk of bad debt will increase. However, lessons learned from the past and continually improving credit assessment tools now give lenders a clear picture of an applicant’s status, helping to reduce risk and comply with an increasingly demanding regulatory framework.
Credit risk profiling offers an important layer of protection when evaluating consumer credit applications, benefiting both the lender and the consumer. For example, this might include exercising caution when applicants’ credit reports show that they have reached their lender agreed limits through multiple credit cards. Clearly, stringent underwriting policies, adopted by lenders like Raphael’s Bank, support responsible lending while protecting customers from taking on unmanageable debt.
Credit reference agencies hold a powerful amount of information, helping lenders both to assess credit-worthiness and confirm the identity of applicants, using information from their financial history and existing financial commitments. Increasingly, utility organisations and mobile phone provider data can show early signs of slow payment and the future ability to repay a debt. In some circumstances, lenders can also use bank references to help make decisions.
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By GlobalDataFrom a regulatory perspective, the Financial Service Authority’s (FSA) Treating Customers Fairly (TCF) initiative, demands that fair consideration for the consumer must always be at the heart of lenders’ systems and processes. The FSA TCF initiative focuses lenders to follow the FSA Consumer Outcomes which includes ensuring that products and services supplied meet the consumers’ requirements.
All lenders must take appropriate due diligence measures when committing to a credit agreement with a customer and conform to those regulatory requirements set out by bodies such as the Office of Fair Trading and FSA.
Inevitably, lessons will have been learnt since the global financial crisis, with all lenders generally adopting far more prudent approaches. As a consequence, future exposure to bad debt should be reduced for many. Enhanced regulation with better understanding of consumer risk profiles will help to facilitate improved and sustainable lending practices, benefitting customers and lenders alike.
Carl Virgo is head of consumer finance at Southern Finance
