SAF initiative gives an advantage to motor finance lenders, reports Nicola Hoskins.

The Office of Fair Trading’s Irresponsible Lending Guidance (ILG) has been with us for a while now, and was recently updated, but there is still little steer on its likely practical effect. To re-cap briefly, its purpose is primarily to inform lenders of the principles they should have regard to when developing and implementing lending practices and procedures, as well as setting out examples of behaviour which is likely to attract the adverse attention of the regulator.

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It applies to all consumer credit businesses, and the key components can be succinctly stated as follows:

  • the pervasive elements – transparency, proportionality, fairness;
  • the pre-contract issues – including clear advertising and adequate explanations;
  • the post-contract issues – including credit limits, minimum repayments and the monitoring of payment records;
  • the borrower in difficulty – handling arrears and defaults; and
  • the borrower’s responsibility to borrow responsibly – this is a two way relationship after all.

Perhaps the most problematic aspect of the ILG is the need to provide adequate explanations. While the legislation has always required certain information to be given, the guidance goes further and places the onus on the lender to assess subjectively the potential borrower’s understanding of the credit relationship he is contemplating entering.

The ILG makes it clear that the lender is not absolved of this responsibility simply by working through a pro forma and then asking the borrower to tick a box for the purpose of confirming that the explanation they have received was adequate. Nor is it sufficient to rely on an assertion by a borrower that no explanation is required because he has done his homework in advance.

It is a potential difficulty for most lenders, but the motor finance industry could be at an advantage in this area, thanks to the Specialist Automotive Finance (SAF) initiative.

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SAF focuses on the staff’s knowledge of the financial products available, and the legislation supporting them, rather than on selling techniques.

In essence, the assessment of the customer and his needs focuses on the suitability of the product offered for his needs, rather than his eligibility to be offered that product. This is very much within the spirit of the guidance.

So the industry is likely to be better placed than others in terms of being compliant on this aspect of the ILG and, just as importantly, demonstrating that it is compliant, which is good news for everyone involved.

The author is a solicitor at Optima Legal