The Standards for business customers

The Standards of Lending Practice are voluntary and set the benchmark for good lending practice in the UK, outlining the way registered firms are expected to deal with their customers throughout the entire product life cycle.

The protections of the Standards of Lending Practice for business customers apply to businesses/organisations, which at the point of lending, have a consolidated turnover of up to £25m.

The Standards of Lending Practice for business customers cover nine main areas:

  • Product information
  • Product sale
  • Declined applications
  • Product execution
  • Credit monitoring
  • Treatment of customers in financial difficulty
  • Business support units
  • Portfolio management
  • Customers in vulnerable circumstances

A separate section covers governance and oversight, setting out the framework firms should have in place to ensure that the Standards are implemented and operate effectively.

What products do they cover?

  • Loans
  • Overdrafts
  • Commercial mortgages
  • Credit cards
  • Chargecards

Introduction

The Standards of Lending Practice for business customers set out, good practice in relation to lending to business customers, across the lifecycle from the product design phase to the initial offering of the product through to dealing with customers who find themselves in financial difficulty.

The Principles for Lending outline the overarching areas of focus for registered firms and underpinning these are the more detailed Standards of Lending Practice which are broken down into the following topics:

  • Product information
  • Product sale
  • Declined applications [1]
  • Product execution
  • Credit monitoring
  • Treatment of customers in financial difficulty
  • Business support units
  • Portfolio management
  • Customers in vulnerable circumstances

There is also a separate section on Governance and Oversight, which sets out the framework registered firms should have in place to ensure that the Standards are implemented and operate effectively.

The Standards represent a move away from its predecessor, the Lending Code, which was focused more on compliance with provisions than customer outcomes. This acknowledges that there may be several ways to achieve the right customer outcome and that the best solution in a specific situation may differ depending on the customer’s individual circumstances. This avoids firms having to rigidly follow a set of rules which may not always be appropriate and allow for flexibility. The LSB’s oversight regime recognises this and focuses on how firms are demonstrating that they are meeting the outcomes.

Each section contains both a ‘customer outcome’ and an overall statement of how a firm will achieve this; both are supported by a more detailed set of standards to enable firms to demonstrate how they achieve the desired outcome.

 

Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic, issued 5 August 2020.

It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under Government established Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) in reliance on the Government guarantee under each scheme.

The LSB is clear that in order for firms to meet their obligations under the relevant schemes, there is a need to facilitate fast and efficient lending decisions. The LSB would, therefore, consider participating firms’ compliance with the requirements of the Government’s schemes to be compliant with paragraph 4 of the provisions on Product sale and with the provisions on Product information.

The LSB also recognises that by participating in the Government schemes firms may not be able to apply in full effect some provisions within the Standards as certain aspects of the products have been determined by Government, and as such firms will have a limited role in the design and review of these products. This applies to the following provisions within the Standards:

  • paragraph 3 on Credit monitoring, for the first 12 months of an agreement under these schemes;
  • paragraph 1 and 2 on Treatment of customers in financial difficulty, so far as they relate to the identification of customers in financial difficulty or vulnerable circumstances, at the point of origination and for the for the first 12 months of an agreement under these schemes;
  • paragraph 8 and 9 on Governance and oversight, so far as they relate to the design and review of products; and
  • the provisions on Customers in vulnerable circumstances, so far as they relate to the identification of customers in vulnerable circumstances and the design and review of products.

However, where it is reasonably practicable and where doing so is in accordance with the guarantee agreement under each scheme and is in line with relevant guidance or directions that may be issued by the Government from time to time, firms should continue to apply any relevant provisions of the Standards to lending under the Government schemes.

This update is a temporary measure relating to the Covid-19 pandemic and is designed to support firms in delivering products to business customers under the Government schemes. The update will be reviewed as appropriate. It does not apply to any other products offered by firms.

 

 

Application

In 2019, the Standards of Lending Practice for business customers were extended to apply to lending to business customers with a consolidated turnover of up to £25m, previously the threshold was set at £6.5m.

When applying the Standards to businesses with a consolidated turnover of more than £6.5m, the LSB recognises that the increased scope takes into account a broader range of business customers with varying degrees of sophistication, complexity of business model and internal infrastructure. The Standards acknowledge the more bespoke nature of lending which occurs at the higher end of the turnover threshold. The sophistication and complexity of businesses operating within this space can vary and when considered in isolation, turnover cannot always be taken as a proxy for sophistication. The Standards have been drafted to take account of the lending journey for business customers up to the £25m turnover threshold. However, in terms of the application of the Standards the following distinction is made:

      a. Businesses with a turnover of up to £6.5m

For business customers falling within the following definition the Standards apply, in their entirety, where at the point of lending the business has:

  • an annual turnover of no more than £6.5 million in its last financial year (exclusive of VAT and other turnover related taxes), and;
  • which does not have a complex ownership structure (for example, businesses with overseas, multiple, or layered ownership structures).

      b. Businesses with a turnover greater than £6.5m

As a minimum, the LSB expects firms to be able to evidence how the customer outcome, set out at the front of each section, has been achieved. For some business customers, the relevant section may apply in its entirety whilst for others, only particular elements may be applicable. Where this applies, non-compliance with individual elements of the Standards will not constitute evidence that a firm is not compliant with the overall customer outcome. This approach provides firms with discretion, based on their understanding of the business, its sophistication and complexity, as to how the required outcome is achieved. The exception to this is the section on governance and oversight which firms must adhere to in full.

 

Third parties

Firms which agree to adhere to the Standards should ensure that any third party acting on their behalf adheres to these in relation to any products or services which are covered by the Standards of Lending Practice. However, where a customer is referred to a third party because the Firm has declined a customer’s application, the extent of a firm’s liability for ensuring the customer receives the protections provided by the Standards is limited to the point at which the customer is transferred/handed off to the third party.

 

Products covered under the Standards of Lending Practice

The Standards apply to products offered for business lending purposes: overdraft, loan, credit card, commercial mortgage and chargecard products. The Standards do not apply to trade loans or invoice financing. A separate set of Standards which apply to asset finance products can be found on the LSB’s website.

 

Alignment with statutory regulation

Registered firms offering products to sole traders or partnerships may be regulated by the Financial Conduct Authority (FCA) for this type of customer and, depending on the type and value of the borrowing may already be required to adhere to the Consumer Credit Sourcebook (CONC). For completeness, the Standards of Lending Practice may include where relevant, references to other legislation or statutory rules such as data protection legislation. The Governance and Oversight section acknowledges that the FCA’s Senior Management Arrangements, Systems and Controls (SYSC) requires firms to have adequate governance arrangements in place.

The intention is that the Standards of Lending Practice for business customers provide an overview of the entire lending process but adherence to any legislative or statutory requirement referenced is outside of the LSB’s oversight regime. In the event that legislation or statutory rules replicate or conflict with the wording of the Standards , the relevant legislation or statutory rules will supersede its content.

 

Terminology

Any references in the Standards of Lending Practice to customer or customers applies to a business or businesses from the point at which it enters into discussions with a registered firm regarding a relevant lending product.

 

Statement of Lender and Borrower Responsibilities

A separate one-page customer facing document, which applies to business customers which fall within the £6.5m turnover threshold, has been developed to sit alongside the Standards of Lending Practice and is available on registered firms’ websites, customers may wish to read the Standards alongside this document.

 

 

 

[1] Also referred to as ‘unsuccessful applications’ under the Small Business, Enterprise and Employment Act 2015.

Principles for Lending

Below are the overarching principles that Registered Firms which lend, and/or undertake associated debt collection activities, to business customers should use to govern their relationship with them.

The Principles for Lending and Standards of Lending Practice apply to:

  • Overdraft, loan (excluding trade loans), credit card and chargecard products.
  • Registered Firms and any third parties that retail and service the lending products listed above on behalf of a Registered Firm.

Registered Firms will ensure that their business customers:

a. Are told about the products the Firm has to offer and provided with clear information to enable them to choose a product that meets their needs.

b. Are provided with information about how to apply for the different products a Firm offers; what the application process entails and any other requirements a Firm may have.

c. Are aware of the high level basis on which the Firm will make its decision to lend to them. If the customer’s application is declined the primary reason for this will be provided.

d. Are aware that they have the right to appeal a Firm’s decision to decline their application and, where appropriate, have the option to be referred to alternative sources of finance.

e. Will be provided with clear and understandable documentation which sets out their obligations under their agreement with the Firm.

f. Are aware of the options open to them if they anticipate, or a Firm becomes aware, that they will have or are experiencing difficulty in repaying their borrowing.

g. Will know what happens when they have repaid their borrowing or no longer require it.

 

Product information

Customer outcome: all product information presented to business customers will be clear, fair and not misleading and enable the customer to understand the key features of the product, such as the interest rates, fees and charges that apply.

Firms will achieve this: with systems and controls at product design, financial promotion and product review stages that assess product performance and ensure product information is clear, fair and not misleading.

1. Firms should ensure that all financial promotions, across all channels, are clear, fair and not misleading. Where relevant, this also includes material provided to comparison websites.

2. Firms should ensure that employees/agents are trained and knowledgeable about the range of products, across all channels, on offer to customers.

3. Firms should ensure that customers are provided with clear and understandable information which enables them to decide whether the product they are considering applying for meets their needs and is appropriate for the type of business they are engaged in.

4. Firms should ensure that the customer’s consent is sought prior to sharing any business or personal details with a third party or an alternative source of finance. [DPA]

5. Firms should ensure that clear information is provided as to how the product on offer works: its key features and the associated costs for example, charges, interest and any breakage or early repayment fees/costs.

Product sale

Customer outcome: business customers will only be provided with a product that is deemed affordable and which meets the requirements of the business.

Firms will achieve this: with systems and controls that ensure the sales process, training and incentives promote the right behaviours and direct their employees, or their agents, to deliver the right customer outcome.

1. Firms should ensure that customers are provided with clear guidance on the information and documentation they will need to submit during the application process.

2. Firms should inform the customer of the likely time it will take for a lending decision to be made. Following receipt of the required completed documentation, Firms should ensure that customers are kept informed of the progress of their application.

3. Where applicable, customers are informed that checks may be made at Credit Reference Agencies and that information may also be provided to Credit Reference Agencies during the life of the borrowing.

4. Before providing any form of credit, granting a limit or increasing the customer’s borrowing, Firms should assess, from the information available at the time, whether the customer will be able to repay it in a sustainable manner without incurring financial difficulty.

5. If a Firm offers a product which includes an indicative quotation facility, it should provide the customer with clear information as to what this is, and that any quotation provided will be linked to the customer’s financial circumstances.

6. Firms providing a credit card product should present information about the main features of a credit card in summary box form, where appropriate.

7. At the point of sale, Firms should provide clear information to the customer regarding the key features of a product and any breakage or early repayment fees/costs associated with it. This information should be made available to the customer upon request, throughout the lifetime of the borrowing.

8. Firms should inform the customer if any security, for example, a guarantee/debenture/indemnity, is required to support the borrowing or other liabilities and the reason why. The level of security required by the Firm should be appropriate to the amount borrowed.

9. Firms should ensure that the customer is provided with clear information on the circumstances under which the security will be released. The security should not be relied upon beyond the life of the borrowing.

10. Firms should confirm the conditions of any facility in writing and recommend that the customer seeks independent advice before accepting the facility.

11. Firms should ensure that customers are kept informed of the estimated timescales which may apply to the issuing of facility letters or for obtaining any security that may be required to support the borrowing.

12. Before a customer accepts the facility, Firms should agree with the customer as to what form of monitoring information they will require about the business’ performance and how often this will be required.

13. If an individual or a business agrees to be a guarantor or to provide an indemnity, the Firm should make the individual/business aware of their obligations under the agreement and that they have the option to seek legal advice, should they wish to do so.

14. Firms should not accept unlimited guarantees from an individual/business unless it is to support a customer’s liabilities under a merchant agreement[1]; however other forms of unlimited third party security may be taken, if available.

 

 

[1] A contract between a business and a credit card service provider.

Product Sale

Declined applications

Customer outcome: business customers whose applications are declined are provided with the right of appeal and are aware of the alternative sources of finance available.

Firms will achieve this: with systems and controls that promote the right behaviours to ensure that their employees, or their agents, are able to treat declined business customers fairly and appropriately.

1. If an application for a product is declined, the Firm should ensure that it understands the reason(s) behind it in order to be able to convey, where appropriate, this information to the customer.  As a minimum, the customer should be provided with the primary reason in writing as to why they have been declined.

2. If the application was declined due to information obtained from a Credit Reference Agency search, firms should either:

a. apply the requirements of s157 of the Consumer Credit Act for relevant customers; or

b. provide the customer with the names of the Credit Reference Agencies used by the firm.

3. Firms should inform the customer of their right of appeal and have fair and effective processes in place to review a decision to decline an application. These should, as a minimum, reflect the Lending Appeals process.

 4. Firms may, where appropriate, signpost a declined customer to alternative sources of finance or third party. The customer should be made aware that the signposting is not an indication that any subsequent application would be successful

5. Firms who are designated banks under the Small and Medium Sized Business (Finance Platforms) Regulations 2015 should offer a customer declined for finance the opportunity for their details to be referred to government designated finance platforms.

Product execution

Customer outcome: information provided to business customers will be clear in terms of presentation and in clarifying any action that the customer needs to take. Business customer requests will be dealt with in a timely, secure and accurate manner.

Firms will achieve this: with systems, processes and controls that aim to provide an accurate view of the customer’s relationship with the Firm and the relevant lending products they hold. This should be underpinned by appropriately skilled and knowledgeable staff.

1. If a customer has been provided with product that has a promotional feature, the customer should be notified of its expiry date/withdrawal in a clear and timely manner and how this will impact, where relevant, upon the costs associated with using the product.

2. Where a Firm offers a fixed rate lending product, clear information should be provided to the customer on any breakage costs associated with the product and how this will be calculated. The customer should have access to this information during the period of the borrowing.

3. Firms should provide customers with written notice of any change in interest rates or charges. This requirement does not apply where the increase relates to a published rate, for example, base rate or other benchmark.

4. Where a customers’ borrowing is linked to an interest rate benchmark and this will be transitioned to an alternative rate, firms should ensure that customers are provided with timely notification of when this change will become effective.

5. Firms should have processes in place to deal with unauthorised credit card transactions. If customer fraud is suspected, the burden of proof is on the Firm to prove this is the case.

6. Firms will maintain the security of customers’ data but may share information about the day-to-day running of a customer’s account(s), including positive data, with credit reference agencies where the Firm has agreed to follow the principles of reciprocity.

7. Firms should ensure that where an individual provides a guarantee/indemnity or other security, they are able to request information regarding their current level of liability, as long as the customer gives their permission and confidentiality is not breached.

8. Firms should comply with the customer’s request to co-operate with their professional adviser(s) during the lifetime of the relationship. All communication with the customer/their adviser will be undertaken in a clear and open manner.

9. Firms should ensure that any changes to the terms of the customer’s agreement are fair and transparent. The customer should be provided with clear information regarding the reason for the changes and provided with a reasonable amount of time to seek further clarification, or where appropriate, alternative sources of finance.

10. Where a change is made to the relationship management process which will impact on the customer, Firms should provide the customer with advance notice, and the reason for the change. Where this will require action from the customer, they should be allowed sufficient time to complete this, taking into account the channel currently used.

11. Firms should comply with a customer’s request to have access to the basic information held by the Firm about their products/accounts. The request should be dealt with in a timely and efficient manner.

12. Firms should ensure that requests for a Deed of Priority[1] or Waiver are dealt with quickly and efficiently, in line with the BBA protocol.

 

 

 

[1] Known as a Ranking Arrangement in Scotland.

Credit monitoring

Customer outcome: business customers will be supported by pro-active and reactive measures designed to identify signs of financial stress. [1]

Firms will achieve this: with systems and controls that are capable of identifying, across the relevant products held, where customers may be showing signs of financial stress at any point in the customer life-cycle, and pro-actively engaging with the customer to agree an appropriate solution.

1. Firms should ensure that the customer understands what information will be required to allow the Firm to monitor the business’ performance and how and when this should be provided.

2. Firms should provide customers with the ability to opt-out of any unsolicited increase in their borrowing limit(s).

3. Firms should ensure that a sufficient level of monitoring, underpinned by appropriate triggers and processes, of a customer’s borrowing is undertaken to help determine if the customer is exhibiting signs of financial stress. Where relevant, firms should engage with these customers in a sensitive and supportive manner.

4. Where appropriate, Firms should initiate a timely review of the customer’s re-financing needs and an assessment of what needs to be in place ahead of any term loan expiry to maximise the prospect of successful re-financing.

5. Firms should ensure that relevant customer facing employees and relevant third parties are sufficiently trained and skilled to help them to identify and deal with those customers who may be showing signs of financial stress.

6. Firms should undertake monitoring and assurance work to ensure that their policies and processes are designed and are operating effectively in identifying and supporting customers who are showing signs of financial stress.

 

 

[1] The customer has not yet defaulted but information available to the Firm suggests that the business may be showing signs of being in financial difficulty.

Treatment of customers in financial difficulty

Customer outcome: business customers in financial difficulty, or in the early stages of the collections process, will receive appropriate support and fair treatment, in order to help them deal with their debt(s) in the most suitable way.

Firms will achieve this: with systems and controls that are capable of identifying and, subsequently, supporting business customers in financial difficulty. Firms should be able to demonstrate that a sympathetic and positive approach has been applied when considering a customer’s financial situation.

This section focuses on the treatment of businesses in financial difficulty and includes a dedicated section on business support units.

The LSB recognises that not all firms have business support units in place and where they are, there isn’t one model which is applied consistently across registered firms. Customers may move in and out of financial difficulty/business support units during the course of their relationship with the firm. For ease of reference a separate set of Standards for business support units can be found below. However, firms will apply a consistent approach to the treatment of businesses in financial difficulty, regardless of where responsibility for the relationship with the customer sits within the firm.

1. Firms should have triggers and processes in place to help identify customers who may be in financial difficulty and should act promptly and efficiently to address the situation with the customer.

2. Firms should have appropriate policies and procedures in place to identify and support vulnerable individuals where this impacts on the customer’s ability to pay.

3. Customers identified as being in financial difficulty should be contacted and provided with clear information setting out the support available to them, the next steps and where relevant, with any action they are required to take. They should not be subject to harassment or undue pressure when discussing their financial situation.

4. Firms should demonstrate an empathetic approach to the customer’s situation; listening to and acting upon information provided by the customer with a view to developing an appropriate and mutually acceptable solution.

5. Firms should apply an appropriate level of forbearance where, if after having made contact with the customer, it is clear that this would be appropriate for their situation. Firms should ensure that the solution offered does not exacerbate the customer’s situation.

6. If a Firm is aware that a customer is, or suspects that they are, in financial difficulty but is able to uphold their borrowing commitments to the Firm, the customer should be given the opportunity to take action to turnaround the business.

7. Firms should guide the customer to appropriate advice which reflects their circumstances and level of borrowing. Where appropriate and available, the customer will be signposted to a third party offering free, impartial debt advice.

Financial difficulty

Business support units

Customer outcome: customers transferred to business support units will receive appropriate treatment and support and where practicable, will be returned to mainstream banking.

Firms will achieve this: with transparent processes and procedures, working openly and constructively with customers with a focus on returning the business to viability in a timely and cost-effective manner.

1. Firms should ensure that appropriate governance arrangements are in place to safeguard against conflicts of interest in relation to the functions of the business support unit and the mainstream bank.

2. Firms should have a criterion in place for the consideration of the referral of a customer to a business support unit and for the subsequent assessment of viability.

3. Firms should ensure that appropriate policies and procedures are in place to ensure that staff are trained and supported to deliver good turnaround practice.

4. Firms should provide clear communications to customers to enable them to understand why they have been transferred to a business support unit, the firm’s concerns and the proposed next steps.

5. Firms should keep the need for business support unit involvement under continuous review and customers should be aware of the processes the firm has in place for returning viable businesses to mainstream banking.

6. Firms should support a customer’s turnaround plan where the firm has assessed the business to be viable. Firms should ensure that where a turnaround plan is agreed with the customer, the terms of the support are documented.

7. If a firm is unable to support a turnaround plan, the customer should be notified of the reasons why and given a reasonable period of time to consider the options open to them.

8. Firms should ensure that customers are provided with clear information on the range and type of fees and charges which may be applicable, and when these will be applied.

9. Firms should ensure that fees and margins applied take into account the customer’s financial circumstances and their ability to pay. These should be discussed and agreed with the customer.

10. Firms should ensure that the rationale for pricing decisions is documented and validated. It should take into account the customer’s circumstances and the impact this may have on the scope for successful turnaround.

11. Where valuations are required, firms should ensure that the customer is provided with clear information regarding the purpose of the valuation and whether there are any costs associated with it.

Portfolio management

Customer outcome: when debts are sold, impacted business customers will be treated fairly and all communications regarding the sale, and what this means for the customer, will be transparent and provided in good time. Where the firm is aware that a business customers are suffering from mental health or critical illness, the customer’s debt will not be sold.

Firms will achieve this: with systems and controls to ensure that only eligible business customers are transferred to a third party and appropriate due diligence is undertaken on the Firm before a sale, which demonstrates that the customer will be treated fairly.

Unless otherwise stated, the following Standards apply to the sale of performing and non-performing debt. The following Standards apply to the sale of debt at the portfolio level.

1. Firms should follow a robust due diligence process when selecting third parties for debt sale or debt collection activities to ensure that customers will continue to be treated fairly, in line with the requirements of the Standards of Lending Practice and the relevant contractual terms.

2. Firms should ensure that where the decision is made to sell a customer’s debt and the contractual terms require the customer’s consent to do so, this is obtained prior to any sale taking place.

3. Where an agreement allows for a Firm to sell a customer’s debt without their consent, Firms should ensure that:

a. the customer is provided with reasonable notice that the Firm intends to sell their debt and provided with clear information as to what the sale means for the product(s) that they hold with the Firm and;

b. if the relationship with the customer will be serviced by the third party, full contact details for the purchaser are provided.

4. If an individual[1] has provided appropriate and relevant notification of an ongoing mental health or critical illness that affects the customer’s ability to repay their debts, or the Firm is aware the individual is terminally ill, the debt(s) should not be sold.

5. If a Firm sells non-performing debt, it should take appropriate and reasonable steps to ensure that the third party, to whom the customer’s debt has been sold, deals with the customer in a manner that is consistent with the relevant requirements of the Standards of Lending Practice and the relevant contractual terms.

6. Where a debt is sold and during the lifetime of the original agreement[2], a dispute arises between the customer and the third party which the parties are unable to resolve, Firms should ensure that they have processes in place to allow the customer access to the Firm’s complaints procedure.

 

 

 

[1] A person who, when taking into account information available to the Firm about the how the business is structured and operates, is able to exert significant control over the way in which it is run.

[2] Subject to industry practice on the retention of personal data under the Data Protection Act 1998.

Customers in vulnerable circumstances

Customer outcome: inclusive products and services take into account the broad range of business customers to which they may apply and contain appropriate flexibility to meet the needs of customers who may be, or are in, a vulnerable situation. Where customers are identified as, or the Firm has reason to believe that they may be, vulnerable, appropriate adjustments are made to ensure that their individual circumstances are accommodated to enable the customer, or their authorised third party, to manage their account(s).

Firms will achieve this: with systems and controls that are capable of assisting in the identification of customers who are, or may be, in a vulnerable situation, and having appropriate measures, training, referral points and skilled staff to deal appropriately with the customer once identified.

The following Standards have been drafted to support Firms in identifying and addressing situations where an individual within a business either is, or the Firm has reason to suspect that they may be, vulnerable. These Standards can be applied to a sole trader, partnership or to an individual within a limited company. The impact of the individual’s vulnerability on the business customer’s relationship with their Registered Firm will depend on a number of non-exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability. Firms will be at different stages of developing an approach to business customers and vulnerability and the applicability of the following standards will depend on the individual circumstances of the person.

  • Reference to an individual means a person who, when taking into account information available to the Firm about the how the business is structured and operates, is able to exert significant control over the way in which it is run.
  • Reference to vulnerability is in relation to the individual rather than the business itself, for example, a business in financial difficulty would not necessarily be considered to be vulnerable for the purposes of these Standards.

1. Firms should have a vulnerability strategy, which defines its approach to the identification and treatment of individuals considered to be vulnerable, through whichever channel the customer chooses to engage.

2. Firms should undertake monitoring and assurance work to ensure that the vulnerability policies, processes and controls are designed and operating effectively and delivering fair customer outcomes.

3. Firms should have policies and processes governing the identification and fair treatment of individuals in vulnerable circumstances. These should take into account: the channel, where the individual is within the customer journey and the varying nature and degrees of permanence of different vulnerabilities.

4. a. Firms should ensure that their employees and their agents are sufficiently trained to help them to identify vulnerability and deal with the individual in accordance with their policies and processes, with appropriate escalation points, where the circumstances require this.

b. When an individual is identified as potentially vulnerable, a Firm should ensure that its employees or its agents have appropriate referral and escalation points and are aware of    how to access them.

5. Where appropriate, Firms should develop triggers and management information to assist employees in the identification and subsequent monitoring of individuals who may be vulnerable.

6. Where a Firm is developing a new product, or reviewing an existing product, it should consider vulnerability as part of the design or review process, paying regard to target market, clarity, accessibility and the operation of the product.

7. Firms’ sales policies and processes should take account of the impact vulnerability may have on an individual’s ability to make an informed decision about a product, and provide relevant support during the application process.

Governance and oversight

Customer outcome: business customers will receive a fair outcome when taking out a credit product and throughout the whole customer lifecycle, wherever the interaction with the customer takes place.

Firms will achieve this: with processes, controls and governance arrangements that ensure that there is effective senior management oversight of the Firm’s achievement of the customer outcomes contained in the Standards of Lending Practice for business customers.

  1. Firms should have adequate governance, policies, processes, management information and controls to enable effective oversight of adherence to standards and delivery of fair customer outcomes.
  2. Firms should have an effective risk management framework appropriate to the size of the Firm to ensure that the Standards of Lending Practice are achieved.
  3. Firms should ensure that their employees and their agents are adequately trained to deliver the Standards of Lending Practice’s customer outcomes, and that any incentive schemes are driving the right behaviours to ensure fair customer outcomes.
  4. Firms should have systems in place to ensure that the Firms’ employees and agents are promoting products in a clear and transparent way.
  5. Firms should have systems in place to ensure that any failure to adhere to the Standards of Lending Practice are identified, and assessed for materiality and root cause. Where the materiality threshold is met, these are reported to the LSB and remediated in a timely manner.
  6. Firms should have processes in place to identify when changes to the Standards of Lending Practice are made and to ensure that these are effectively incorporated within policies, processes and systems.
  7. Firms should ensure that when systems or processes are changed, or products are introduced or changed, the impact on meeting the Standards of Lending Practice is adequately assessed.
  8. Firms should ensure that the product design stage takes into account internal and external risks which could impact upon a customer’s ability to maintain their repayments so that new products do not lead to unsustainable borrowing.
  9. Firms should undertake both post-launch and cyclical product reviews to ensure that their products are, and remain, fit for purpose.
  10. Further to the requirements of paragraph 1, portfolio management, firms should:
  11. on an annual basis, notify the LSB of any portfolio debt sales made to the firm’s panel of approved purchasers during the previous 12 months.
  12. following the onboarding of a new third party onto the firm’s panel of approved purchasers, notify the LSB of the name of the third party and provide confirmation that appropriate due diligence has been undertaken in line with paragraph 1, portfolio management.
  13. where the intention is to sell a portfolio of debt to a third party which is not on the firm’s panel of approved purchasers, the firm should provide advance notice to the LSB of the proposed debt sale and the name of the third party.
  14. Where part of the credit process/life cycle is outsourced, Firms should:
  15. undertake effective and robust due diligence in selecting a third party to ensure that it can meet the Standards of Lending Practice and deliver the required customer outcomes; and
  16. exercise effective ongoing oversight of the third party to ensure that it is meeting the Standards of Lending Practice and delivering the required customer outcomes.
  17. Firms should have a robust complaints management process in place to deal with Standards of Lending Practice-related complaints and to undertake root cause analysis [DISP].
  18. Firms should assign an appropriately skilled and senior individual(s) with clear accountability for overseeing that the Standards of Lending Practice are being adhered to and customer outcomes achieved, and for ensuring that remedial action is instigated where this is not happening.

 

Download the Standards

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The LSB’s Information for Practitioners

These documents have been produced by the LSB and provide non-exhaustive examples of the approach Registered Firms may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers. The Information for Practitioners is available for the following areas:

Product information

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on product sale.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

 

Customer outcome: all product information presented to business customers will be clear, fair and not misleading and enable the customer to understand the key features of the product, such as the interest rates, fees and charges that apply

Firms will achieve this: with systems and controls at product design, financial promotion and product review stages that assess product performance and ensure product information is clear, fair and not misleading

 

Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS and BBLS in reliance on the Government guarantee under each scheme.

The Government, as part of these initiatives, has drafted portions of the documentation that firms are required to provide when lending under these schemes. It has also set requirements relating to the disclosure of information relevant to the products and the associated documentation. The LSB considers these to be compliant with this section of the Standards.

 

1. Firms should ensure that all financial promotions, across all channels, are clear, fair and not misleading. Where relevant, this also includes material provided to comparison websites


The FCA’s Principles of Business (PRIN) require Firms to pay due regard to the interests of its customers and treat them fairly, to have regard to the information needs of its clients, and to communicate information to them in a way which is clear, fair and not misleading. The LSB’s view is that this could take the form of:

  • presenting information in plain language and wherever possible avoiding the use of technical or legal language;
  • the way the communication or financial promotion is being made e.g. email, text message, branch, web material, direct mail or letter;
  • the type and complexity of information that is being presented and the risks associated with the product, the actions the information might elicit from the customer, the channels by which the information is accessible and the passage of time, if any, since the information was last provided; and
  • the appropriate format and content of the communication based on its intended audience.

 

Where products are advertised on a comparison websites, Firms should ensure that the information provided to, and subsequently displayed on price comparison websites, is consistent with that which would be contained on the Firm’s own website. Information should be complete, accurate, and not misleading, with reference to the information businesses need to make an informed decision. This should include the price of the product and its main characteristics, with the risks, costs and benefits presented in a way that is clear and prominent along with an explanation of any promotional offers, its end date and the conditions on which the offer is made.

 

2. Firms should ensure that employees/agents are trained and knowledgeable about the range of products, across all channels, on offer to customers


This Standard refers to training in the context of an employee[1] of a Firm, and any third-party agents that may act on their behalf. Whilst this obligation does not extend to broker or intermediary firms, some Firms may wish to consider broadening this requirement to gain comfort that any product marketed and sold by a broker or intermediary is conducive to the attainment of these Standards and the delivery of fair customer outcomes. This may be considered through a Firm’s due diligence policy and process, and could be considered through the application of the governance and oversight Standards.

Firms should ensure that staff are trained to an appropriate level to enable them to have a comprehensive understanding of the products and services on offer, with the skills, knowledge and expertise needed to discharge the responsibilities of their role. Firms may benefit from defining and establishing a minimum benchmark for what they mean by a trained and knowledgeable employee in the context of their role requirements, to ensure there is a consistency in standards across the employee population. Firms may look to formalise their requirements through a training and competency framework, to inform both the recruitment and selection of employees and their ongoing performance management.

This could be supported by appropriate training covering the breadth of the Firm’s product and service offering, with a comprehensive understanding of its key features, and a Firm appreciation of the risks and benefits so this can be presented to the business customer in a fair and balanced way, to enable an informed borrowing decision. What the Firm may consider appropriate will differ based on the complexity of the product, the target audience and the business customer’s level of sophistication. Whilst the LSB recognises that most products will be sold on a non-advised basis, Firms should have appropriate controls in place to manage the risk of product bias by ensuring that employees are appropriately focused on providing information in a way that is clear, fair and comprehensible, and meets the needs of the business customer.

To support the implementation of training and the ongoing assessment of competence, Firms should ensure that there are appropriate controls in place to supervise employees. This may be achieved through an independent monitoring and quality assurance framework, assessing: adherence to policies and procedures, the extent to which training has been fully implemented, the level and depth of employee knowledge and its practical application to ensure that the right outcomes are being achieved, though this list is not intended to be prescriptive. Whilst the scope and type of assessment will differ based on role requirements, for sales staff, some Firms may achieve this through sales observations or customer file reviews. Whilst the method and type of assurance is for the Firm to decide, they should be guided by the need to ensure the fair and consistent attainment of the correct customer outcomes in line with the Standards of Lending Practice.

Firms may also wish to consider the level and depth of supervision to ensure that this is appropriate for the population of staff that they are assessing. In these instances, Firms may wish to consider introducing a risk based approach, to ensure a greater degree of supervision is applied to those situations where there is a higher risk of customer detriment, for example, where the Firm uses a third-party out-sourced provider[2], or where it has reason to believe that employees may require further support.  This may include those employees that are new to a role or returning to work after a prolonged period of absence. In some instances, an enhanced level of supervision can help to mitigate the potential for customer harm, by ensuring that any employees identified as higher risk are appropriately monitored until the Firm can satisfy itself that the level of knowledge and training is appropriate and that ongoing competence is maintained. Firms should have clear procedures setting out its approach to supervision, and the criteria for enhanced supervision, where the Firm considers it appropriate. Any areas of improvement or weakness identified through the assurance checks should be dealt with in a timely manner, with a clear plan of action. Firms should also consider remediation action where the outputs of the assessment highlight evidence of poor customer outcomes or an increased risk of customer detriment.

An employee’s training needs are not static and so consideration should be given to the need to ensure training needs are regularly evaluated and reviewed. This is to ensure that the training delivered is fit for purpose and takes account of any internal or external changes in the product or service offering, including any changes in regulation, legislation or standards. The overarching aim of this is to ensure that the information provided to the business customer is accurate and reflective of current practice and that staff are kept abreast of recent developments. This may also help to evaluate the effectiveness of the training to ensure it meets the Firm’s objectives and remains fit for purpose.

 

3. Firms should ensure that customers are provided with clear and understandable information which enables them to decide whether the product they are considering applying for meets their needs and is appropriate for the type of business they are engaged in


The key consideration for Firms is to ensure that customers are provided with appropriate information at the right time and in an appropriate medium to enable them to make an informed decision. The provision of clear information regarding eligibility criteria, documents or information required to undertake an application, key features and costs of the product will enable customers to make an initial decision as to whether the product on offer is suitable for the needs of the business. Customers will have varying degrees of sophistication and understanding of how different products work, and whether they are right for their situation, this may depend on factors such as their size and set up, the availability of a professional adviser and the quality and structure of the management team – firms should use the knowledge of their business customers to determine the information necessary for the customer to make an informed decision. The provision of clear information, written in plain English, wherever possible, avoiding the use of technical or legal language and displayed in a clear and comprehensible form will support customer’s understanding of the information being provided. Where possible, Firms should seek to avoid the risk of information asymmetries, where there is an imbalance in the information provided to the customer versus the information or knowledge held by the Firm. This is to ensure that the customer is empowered to make a decision, with a clear and informed understanding of a product, and how it relates to their business needs.

Firms should give appropriate consideration to the method and medium of presenting information across the different channels of entry. This will differ across each firm and their business model but may include: digital, telephony, branch and relationship managed propositions where this is available. Firms should ensure that the information provided is clear and consistent in the level and depth of information across all channels, to prevent the risk of information discrepancies, ensuring that information is presented in a clear and factual way, to allow the customer to weigh up the risks and benefits of a product or service, irrespective of the channel through which they choose to engage.

The use of fact sheets may support the Firm in delivering a consistent message to customers on the product or service on offer.

 

4. Firms should ensure that the customer’s consent is sought prior to sharing any business or personal details with a third party or an alternative source of finance. [Data protection legislation]


The requirements of the DPA are covered by the Information Commissioner’s Office which can be found on the ICO’s website: https://ico.org.uk/

 

5. Firms should ensure that clear information is provided as to how the product on offer works: its key features and the associated costs for example, charges, interest and any breakage or early repayment fees/costs


At this stage, the Standards are focused on ensuring that the customer is able to determine whether the product they are being offered could meet the needs and requirements of their business. The provision of clear information on the way the product works and the costs associated with it will enable the customer to better assess whether the business will be able to sustain the borrowing. This could be achieved through highlighting whether any breakage or early repayment costs will apply to their product through information provided on the Firm’s website or by providing the customer with relevant information during any initial early conversations.

The provision of this information will encourage customers to consider whether they understand what the breakage and early repayment fees are and how they may apply to their fixed rate loan product at a future point in time. If not, there is an opportunity for them to undertake further research, seek professional advice or ask for clarification from the Firm.

[1] Employed for the purpose of the Firm’s business.

[2] Where there is customer contact.

Product sale

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on product sale.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

 

Customer outcome: business customers will only be provided with a product that is deemed affordable and which meets the requirements of the business

Firms will achieve this: with systems and controls that ensure the sales process, training and incentives promote the right behaviours and direct their employees, or their agents, to deliver the right customer outcome

 

1. Firms should ensure that customers are provided with clear guidance on the information and documentation they will need to submit during the application process


Firms offer a variety of information on their websites regarding the application process for a business loan, credit card or overdraft. This is a useful starting point for the customer to explore the product options on offer and to understand whether any eligibility criteria apply for example, if a business current account is required, and what information they will need to provide to support their application.

The LSB recognises that Firms will have their own requirements as to the information and documentation they will request during the application process. The type and level of information required will be driven by the complexity of the borrowing, size and sophistication of the business itself. Firms may have eligibility criteria, for example, relating to the entity type and business sector and the LSB would expect this to be clear to the customer.

Consideration could be given as to how this information is presented to the different customer types, taking into account size and sophistication, for example for businesses who are towards the lower end of the scope of the Standards. This could include providing a rationale for the information requested or outlining how the Firm will take this into account during the application process. For example:

  • whether there are any other business interests, explaining that this information will help the Firm to understand what commitments the business or key members of the management team have, which enables the Firm to assess how much attention and focus the business will have.
  • whether or not security is available and if some form of appropriate security would be sought, such as guarantees, property or other assets that are easy to value and realise – an explanation of which may be appropriate to the customer’s situation.
  • the owner’s investment in the business, which would show the owner’s investment relative to the bank’s proposed investment.

 

2. Firms should inform the customer of the likely time it will take for a lending decision to be made. Following receipt of the required completed documentation, Firms should ensure that customers are kept informed of the progress of their application


The range of customers caught under the new Standards of Lending Practice has increased and within this group there will be varying degrees of sophistication across the different business models, in terms of maturity, size and their understanding of the lending process. Some may lack awareness of the additional requirements which are attached to business lending or may not have accounted for the fact that it can take time for the Firm to process their application. Ensuring that the customer is informed of the likely length of time it will take for a decision to be made at the outset will help to aid the customer’s understanding of the lending process, regardless of the size or sophistication of the firm.

Wherever possible, the LSB would encourage Firms to keep customers updated on the progress of their application, particularly where for example, security is required or the lending has a layer of complexity which will increase the time required to process the application. This Standard is not intended to be overly onerous on Firms, the focus is on ensuring that the customer is aware of how long it may take for them to receive a decision and ensuring they remain informed during the process.

There may be situations where it isn’t possible to provide a definitive timeframe. However, the LSB would expect that Firms are able to provide an indication of the timeframe within which a customer can expect to know whether their application has been successful or not. This can be flexed where required if the lending decision goes beyond the initial timeframe. In these circumstances, the LSB would expect that the customer is kept informed of progress and that Firms will be proactive rather than reactive, informing customers of any delays or promptly requesting any additional information which may be required to support the customer’s application. Firms are encouraged to be as open as they can as to the reason for the delay and any potential new dates which may apply.

 

3.  Where applicable, customers are informed that checks may be made at Credit Reference Agencies and that information may also be provided to Credit Reference Agencies during the life of the borrowing


When considering smaller business customers, some may lack understanding of how Credit Reference Agencies (CRAs) fit into the application process and that, by applying for business related lending, information is recorded on their credit file.  When a customer applies for a product covered under the Standards of Lending Practice, they should be told whether searches will be made at CRAs, whether a record of any search will be retained at the CRA and, if so, that this could impact on their ability to obtain finance elsewhere. The business customer should also be told if the details of the account, if opened, will be passed to CRAs and that the information will be accessed and used by others. This will include information about the running of the account such as the limit and balances as well as payment performance.

 

4. Before providing any form of credit, granting a limit or increasing the customer’s borrowing, Firms should assess, from the information available at the time, whether the customer will be able to repay it in a sustainable manner without incurring financial difficulty


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS and BBLS in reliance on the Government guarantee under each scheme. On 27 April 2020, changes to the criteria firms are required to apply when considering businesses for a loan under CBILS were announced.

Products offered under CBILS

The criteria for assessing affordability of a product under CBILS is  different to that set by the Standards. When considering an application for a CBILS product firms should ensure that processes for assessing whether the product is affordable for the business align with the requirements of the scheme. Firms should consider the range of information available to them, examples include: the performance of the business prior to the Covid-19 outbreak; a view of how the loan will be repaid in due course, relying on judgement in the absence of financial forecast information; and the general prospects for the sector in which the business operates once the effects of the pandemic have receded.

Firms are reminded that they should only request information relating to the performance of the business where the customer might reasonably be able to provide the requested information at speed. The LSB recognises that some business customers may wish to provide the firm with forward-looking financial and business plans. If a business customer chooses to do so, this information can be used to support the better assessment as to the appropriateness of lending under the Government’s schemes, the level of borrowing and duration required and the affordability of the financing applied for.

Products offered under BBLS

It is recognised that this product does not require firms to assess whether the product is affordable for the business, firms will therefore apply the terms of the scheme over the requirements set out in this section of the Standards.

The LSB considers participating firms’ compliance with the requirements of the Government’s schemes to be compliant with this provision of the Standards of Lending Practice. In line with the requirements of the wider Standards, the LSB would expect participating firms to continue to ensure that the customer is provided with clear information on how the product works and its key features (see also paragraph 7, Product sale).

 

Registered Firms should request the level and detail of information required to fully assess the customer’s ability to repay borrowing without it causing the customer financial difficulties. Taking into account the actual and/or anticipated turnover of the business, existing debt commitments and any known future changes which could be reasonably expected to have a significant financial impact on the customer, to ensure that the business can service any debt. This assessment will take into account whether any security is provided, although, the LSB would not expect a Firm to lend to a customer based on the level of security provided alone.

Registered Firms may also require additional information to satisfy themselves that the customer can meet their obligations as they fall due. The LSB acknowledges that Firms may have additional requirements in place, depending on the type and level of borrowing requested and any information the Firm already has about the customer, taking into account the size and sophistication of the customer. Firms may wish to consider the following factors:

  • why the business wants to borrow the money
  • the length of borrowing
  • the business plan and annual accounts
  • the business’s cash flow, profitability and existing financial commitments
  • any personal financial commitments which may affect the business
  • how the customer has handled their finances in the past
  • information from credit reference agencies and, with the customer’s permission, others, such as other lenders and the customer’s landlord (where relevant)
  • credit scoring
  • any security provided
  • any future changes which could be reasonably expected to have a significant financial impact on the customer
  • personal indebtedness indicators
  • total credit exposure
  • adverse information e.g. CCJ/bankruptcy.

 

5. If a Firm offers a product which includes an indicative quotation facility, it should provide the customer with clear information as to what this is, and that any quotation provided will be linked to the customer’s financial circumstances


From 2 February 2018, the CMA will require the larger banks to offer business customers the ability to obtain indicative price quotations and their eligibility for unsecured business loans and unsecured standard tariff business overdrafts, up to £25,000. The intention is that the same tool should be accessible to a minimum number of third party intermediary service providers by 2 May 2018.

Ahead of this implementation date, and for borrowing which will not be caught by these requirements, where a Firm offers an indicative quotation facility relating to a product captured under the Standards of Lending Practice, the LSB would expect the customer to be informed that the headline rate may not be available and any quotation will be linked to the business’ financial circumstances as known to the Firm and where relevant, CRAs, prior to the customer commencing a formal application.

The LSB would expect where a customer asks for an indication of the likely interest rate for a product, the Firm should either:

  • as industry best practice, provide an indicative quotation, in respect of which any credit search undertaken is not registered as a full application search at CRAs i.e. it is not used by lenders in their risk assessment; or
  • inform the customer that it does not offer an indicative quotation facility and ensure that the customer is aware that, if they proceed, an application search will be registered at the CRA(s).

 

6. Firms providing a credit card product should present information about the main features of a credit card in a summary box form, where appropriate


There will be some customers for whom the provision of the summary box information will not be appropriate; however for customers who are at the smaller end of the Standards scope and for those who fall under CONC and CCA oversight, due to the way the business is structured, this information should be provided in line with the Best Practice Guidelines (issued by The UK Card Association, now part of UK Finance).

The primary objective of the summary box is to provide the customer with consistent and succinct summary of the key features of the credit card they are considering and to enable to customers to compare different products more easily. This should be provided to the customer prior to their acceptance of the agreement.

Before a relevant customer enters into the contract for a credit card (and when they accept the product for the first time) they should be given information relating to the following:

  • an explanation of how interest is calculated and charged; for example, whether it is charged on the full statement balance or only on any balance remaining after the customer has made the monthly payment;
  • where relevant, with details of the interest and exchange rates to be applied or, if reference interest and exchange rates are to be used, the method for calculating the actual interest and the relevant date and index or base for determining such reference interest or exchange rates;
  • this information must be provided either in good time before the customer is bound by the contract, or where the contract is concluded at the payment service user’s request, using a means of distance communication, immediately after the conclusion of the contract;
  • details of how monthly payments are applied to any outstanding balance across transaction types including promotional offers;
  • an explanation of recurring transactions;
  • details of charges for the day-to-day running of the account, including any annual fee, dormancy fee, charge for exceeding credit limit, charge for delayed monthly payment, charges for overseas transactions, cash withdrawal fees for card usage at an ATM or over the counter, fees for any cash equivalent transactions, balance transfer fees, returned payment fees due to insufficient funds, and any other applicable fees;
  • the distinction between being the principal cardholder and an additional cardholder should be explained i.e., that the principal cardholder is responsible for all spending, including that by additional cardholders, and is responsible for repayments on the credit card;
  • the interest rates applicable to different types of transactions (e.g., purchases, balance transfers, credit card cheque transactions and cash transactions) and the ways in which customers will be told about changes in interest rates; and
  • sufficient details to enable customers to pay on time, including via automated payments. Registered Firms should also ensure that, where customers are offered the facility to pay by cheque by post, sufficient time is given to allow payments to be made in time, taking account of the postal delivery system and the length of the clearing cycle.

 

7. At the point of sale, firms should provide clear information to the customer regarding the key features of a product and any breakage or early repayment fees/costs associated with it. This information should be made available to the customer upon request, throughout the lifetime of the borrowing


This Standard follows on from paragraph 5 of Product Information and is intended to ensure that there is a consistent approach to the provision of information around the key features and costs associated with the use of the product. The intention is that the customer should be in a position to make an informed decision and have opportunities to review and ask questions should they need to do so, as they move through the application process.

Issues relating to lender’s explanations of break costs, customers’ awareness of their existence and the associated costs, are well documented. Historically, where disclosure of break costs have been made and detailed information provided, there has been evidence to suggest that some customers may not have understood what the term meant or how these costs would be applied to their loan.

The provision of clear information on the way the product works and the costs associated with it, will enable the customer to assess whether the business will be able to sustain the borrowing. This could include informing customers that, for fixed rate loans, if they decide to pay early or cancel the fixed interest rate, that they may have to pay breakage cost in addition to other fees such as early repayment fees. This information also raises early awareness of the costs, which the customer may not have been taken into account, and prompt them to consider what impact these could have, on the business at a future point in time. The customer should be able to request information on the costs associated with repaying their loan early throughout the life of the product.

 

8. Firms should inform the customer if any security, for example, a guarantee/debenture/indemnity, is required to support the borrowing or other liabilities and the reason why. The level of security required by the Firm should be appropriate to the amount borrowed


Customers may not always understand why they are required to provide security to support their borrowing and the LSB would encourage Firms, where security is required, to provide the customer with a clear explanation as to why this makes the proposition feasible. This could also include an explanation as to why the particular type of security is required relative to the customer’s circumstances. Firms should take into account the size and sophistication of the business when considering the level of explanation needed.

The LSB would not expect a Firm to require security which is excessive when considered in light of the level of the customer’s borrowing. However, if the only security the customer can offer is in excess of the figure being borrowed, this does not preclude the security from being taken. However, the LSB would expect Firms to explain to the customer what this means in terms of their situation and the implications for them if the business was unable to pay. The customer could also be encouraged to seek legal advice to ensure that they fully understand their obligations under the agreement.

Where the Firm requires security to support a business’s borrowing or other liabilities, it should confirm what is needed in writing. The LSB would expect that any documentation provided should be easy to understand and avoid technical language whenever possible. The customer should have the opportunity to discuss with the Firm anything about which they are unsure.

Where a guarantee is provided, the LSB would expect Firms to tell the guarantor the extent of their liability, including the addition of interest and charges after demand has been made. Where independent legal advice has been given, it may be assumed that the solicitor will have explained the nature of all monies and continuing security, if appropriate. Depending on the nature and structure of facilities, Firms may choose to explain these features to those customers who have declined independent legal advice (and should always do so when requested by any guarantor).

 

9. Firms should ensure that the customer is provided with clear information on the circumstances under which the security will be released. The security should not be relied upon beyond the life of the borrowing


This Standard follows on from paragraph 8 and the LSB would expect that where security is taken, the customer is informed that this will not be retained beyond the life of the borrowing without their consent. It should be made clear that the security will be released once the facility is repaid – unless contrary instructions are received from the customer.

 

10. Firms should confirm the conditions of any facility in writing and recommend that the customer seeks independent advice before accepting the facility


Independent advice can help the customer to make an informed decision about the agreement they are looking to enter into and enable them to better understand their obligations under it. The exact conditions will be dependent on the circumstances of the borrowing but the LSB would consider that the following is included as appropriate:

  • the amount and purpose of the facility;
  • whether the facility is for a particular period or whether it is repayable on demand;
  • details of repayments;
  • the interest rate and any other charges for the facility, and whether these are variable;
  • when the facility will normally be reviewed;
  • the existing or new security and guarantees, including any minimum values to be maintained;
  • what sort of circumstances will lead to an earlier review or require repayment;
  • the information the customer will need to give before they can use the facility; and
  • what action the Firm will take if repayments are not met.

The customer should be encouraged to obtain independent advice before accepting the facility to ensure that they understand their liabilities under the agreement.

 

11. Firms should ensure that customers are kept informed of the estimated timescales which may apply to the issuing of facility letters or for obtaining any security that may be required to support the borrowing


The LSB’s expectation is that customers are kept updated of the progress of their application so that they are better placed to understand when they will have formal notification of their borrowing and any conditions which may be attached to it. Customers may not have an understanding of the legal element which sits around the process of obtaining security and that this can take time to complete

The LSB recognises that the timescales will be dependent on the individual circumstances, level and complexity of the borrowing and that while an indication can be provided, the Firm may have to go beyond this. The Standard does not preclude Firms from flexing any timescales provided, but the intention is that the customer is aware of how their application is progressing and when they can expect this element of the process to be completed. This will allow them to better manage onward elements which may be required, such as obtaining legal advice in relation to the facility letter.

 

12. Before a customer accepts the facility, firms should agree with the customer as to what form of monitoring information they will require about the business’ performance and how often this will be required.


The nature of business lending means that the size and experience of the business customer can vary from highly qualified and experienced individuals running a large company to a sole trader who has recently set up in business or who maybe hasn’t required any additional funding up until now. Information such as management accounts and/or cashflow projections may be requested on a regular basis and will require time and potentially costs, to prepare if, for example, information is required from external sources such as accountants. Therefore, ensuring that the customer is aware of these requirements means they can factor this into their internal processes.

The type of monitoring information will depend on the form of the lending and Firms will have a view on what is appropriate in the circumstances, examples include:

  • a comparison of the forecasts with actual results;
  • progress on important aspects of the business plan, such as contract renewals;
  • revised cash-flow forecasts;
  • major capital spending proposals;
  • annual accounts and regular management accounts;
  • details of how much the customer owes creditors, and are owed by debtors, and for how long these have been due; and
  • evidence that the customer is meeting any special conditions agreed.

Firms will have their own monitoring requirements, in addition to, or instead of the above depending on the type of lending, complexity of the business and risk to the lender. Firms should ensure that the customer understands what is expected of them and if further down the track, additional information is required, which is on top of what has been agreed, the LSB would expect Firms to provide customers with a reasonable amount of time to provide this. Firms should confirm in writing what information is to be provided and by when.

 

13. If an individual or a business agrees to be a guarantor or to provide an indemnity, the Firm should make the individual/business aware of their obligations under the agreement and that they have the option to seek legal advice, should they wish to do so


Firms may accept a guarantee or other form of security provided by another person to support the business’ liabilities. It is important that guarantors or granters understand the full nature of their commitment and the potential implications of their decision, to do this Firms should ensure that a guarantor has the option to seek independent advice. The LSB recognises that some guarantors may not wish to do so, or in the example of a director providing a guarantee for their own business, that they understand what they are committing to. In these circumstances the LSB would encourage Firms to document that the customer has been provided with the opportunity to seek advice but has declined to do so.

The LSB would expect that guarantors are told that by giving the guarantee or other security they may become liable instead of, or as well as, the customer and told what their liability will be, including the addition of interest and charges after demand has been made. When independent legal advice has been given, it may be assumed that the solicitor will have explained the nature of all monies and continuing security if appropriate. Depending on the nature and structure of facilities, Firms may choose to explain these features to those customers who have declined independent legal advice (and should always do so when requested by any guarantor).

Firms may wish to go further than what is covered in this section and actually get a potential guarantor or granter who refuses to take legal advice to sign a declaration to that effect. In any case, the recommendation to take independent legal advice and the potential consequences of their decision should be stated clearly on all appropriate documents that the guarantor or granter is asked to sign.

 

14. Firms should not accept unlimited guarantees for an individual/business unless it is to support the customer’s liabilities under a merchant agreement; however other forms of unlimited third party security may be taken, if available


In order to ensure that the individual is able to identify the limit of their liabilities under any guarantee they have provided, Registered Firms should not take an unlimited guarantee from an individual other than to support a customer’s liabilities under a merchant agreement where a lender will offer unsecured advances of cash, based on future credit and debit card sales. In this context, unlimited guarantees are permitted.  ‘Unlimited’ applies to the capital amount of the loan and excludes interest, charges and arrears etc. An explanation of this should be covered in the guarantee/indemnity or other security documents that the guarantor is asked to sign.

Where other forms of unlimited third party security are available this can be taken, provided that the limit of the granter’s liability is explained in a side letter. This is to avoid the need to take fresh security, with the associated expense and inconvenience to customers, each time a facility changes.

In the case of limited companies, which are part of the same group structure, Firms may continue to take unlimited guarantees from the constituent companies in support of borrowing by other companies in the group.

 

 

 

 

Product sale

Declined applications

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on product sale, declined applications.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

Customer outcome: business customers whose applications are declined are provided with the right of appeal and are aware of the alternative sources of finance available

Firms will achieve this: with systems and controls that promote the right behaviours to ensure that their employees, or their agents, are able to treat declined business customers fairly and appropriately

 

1. If an application for a product is declined, the Firm should ensure that it understands the reason(s) behind it in order to be able to convey, where appropriate, this information to the customer. As a minimum, the customer should be provided with the primary reason in writing as to why they have been declined


This Standard is seeking to ensure that Firms have processes in place to enable them to better understand the reason why a customer’s application has been declined and that this information can in turn be used to facilitate a ‘better conversation’ with the customer. That is, one which enables the Firm to provide an explanation which is beyond a ‘computer says no’ scenario. The Firm is therefore able to offer more specific information to satisfy the customer’s enquiry as to why the Firm has been unable to lend to them. The expectation is not that Firms are required to disclose information regarding underwriting policies, scorecards, risk appetite etc, but there should be a sufficient understanding to enable the customer to be provided with an appropriate level of information which will satisfy their enquiry as to why they have been unsuccessful. Firms may wish to consider the size and sophistication of the business customer when deciding the appropriate level of information.

In line with Professor Griggs’ work on the lending appeals process, the LSB would encourage Firms to support declined customers, in as far as possible, to understand how their application could be improved with a view to making a new or revised application. This could include non-exhaustive examples such as: consideration as to  whether the level of information provided by the customer was appropriate, if the business plan could be developed or whether the customer could have demonstrated a greater understanding of how their business will operate within their chosen market place etc so that they are able to put forward the strongest case they can.

Where an application is declined on the basis of affordability, the Firm could consider whether the individual would benefit from a referral to, where offered and appropriate, free, independent debt advice for example, business debt line. The LSB acknowledges that not every decline will be on the basis of a lack of affordability but where the information available to a Firm suggests that the business may be showing financial stress, and appropriate for the circumstances, they may benefit from a referral.

 

2. If the application was declined due to information obtained from a Credit Reference Agency search, firms should either:
a.apply the requirements of s157 of the Consumer Credit Act for relevant customers; or
b.
provide the customer with the names of the Credit Reference Agencies used by the firm


Some business customers may lack understanding of how Credit Reference Agencies (CRAs) fit into the application process and how the process of applying for credit requires that information is recorded on their credit file. Firms may wish to direct the customer to any information produced by the firm or directed to relevant pages of the firm’s website which explain how credit referencing works.

 

3. Firms should inform the customer of their right of appeal and have fair and effective processes in place to review a decision to decline an application. These should, as a minimum, reflect the Lending Appeals process


The Lending Appeals process, previously headed up by Professor Russel Griggs, is well established and those firms which are captured within it will be subject to oversight by Professor Griggs and his team. Where a firm is not yet within the appeals process, the LSB would expect these Firms to offer customers a right of appeal and opportunity for the decision to decline to be reviewed, which aligns with the Lending Appeals process.

 

4. Firms may, where appropriate, signpost a declined customer to alternative source of finance or third party. The customer should be made aware that the signposting is not an indication that any subsequent application would be successful


Firms may have arrangements in place with third parties which enables them to provide a signpost to another lender or raise awareness about the financial solutions they may wish to consider.  The customer should be informed that the third party will undertake its own assessment and that what has been provided is a signpost to an organisation which may be able to help, subject to relevant affordability checks etc.

 

5. Firm who are designated banks under the Small and Medium Sized Business (Finance Platforms) Regulations 2015 should offer a customer declined for finance the opportunity for their details to be referred to government designated finance platforms


Firms to whom these regulations apply will already be aware of their obligations under Small and Medium Sized Business (Finance Platforms) Regulations 2015, which can be found at: http://www.legislation.gov.uk/uksi/2015/1946/pdfs/uksi_20151946_en.pdf

Product execution

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on product execution.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

 

Customer outcome: information provided to business customers will be clear in terms of presentation and in clarifying any action that the customer needs to take. Business customer requests will be dealt with in a timely, secure and accurate manner

Firms will achieve this: with systems, processes and controls that aim to provide an accurate view of the customer’s relationship with the firm and the relevant lending products they hold. This should be underpinned by appropriately skilled and knowledgeable staff

 

1. If a customer has been provided with product that has a promotional feature, the customer should be notified of its expiry date/withdrawal in a clear and timely manner and how this will impact, where relevant, upon the costs associated with using the product


A promotional feature may include: an introductory rate or feature of a credit card or loan product, such as a credit card which is ‘fee-free’ for the first year or a payment holiday at the outset of a loan.

Where a promotional feature is coming to an end, the customer should be notified of the expiry of this offer. For the purposes of credit card customers, the notification could be shown on the front of the customer’s statement or in a separate, prominent personal notification to the customer. If there will be a change to the interest rate on the customer’s credit card, they should be provided with an early warning of how this will impact upon the costs associated with using the card.

A timely reminder that the promotional rate is coming to end will prompt customers to consider whether they need to take some form of action or will act as a reminder to the business customer to consider how the end of the promotional feature will impact on the overall cost associated with the product.

When providing a credit card product to customers to whom CONC requirements apply, Firms should also refer to the work being undertaken by the FCA as part of its Credit Card Market Study.

 

2. Where a firm offers a fixed rate lending product, clear information should be provided to the customer on any breakage costs associated with the product and how this will be calculated. The customer should have access to this information during the period of the borrowing


This Standard is focused on ensuring the customer has the information they need to understand the financial implications associated with redeeming their loan early. Information provided to the customer during the sales process will have set out whether the product contains a breakage cost and what this means. Where a Firm offers a fixed rate lending product, it should ensure that the customer is provided with clear information setting out what a breakage cost is, how and when it will apply and how this will be calculated. During the life of the borrowing, the customer should be able to access the information required to enable them to understand how the cost will be calculated and what the cost will be.

Depending on the level of borrowing, Firms may be able to provide defined break costs. If this is not possible, Firms may wish to provide a worked example of how the fee is calculated to further aid customer’s understanding of this element of their product.

 

3. Firms should provide customers with written notice of any changes in interest rates or charges. This requirement does not apply where the increase related to a published rate, for example, base rate or other benchmark


This Standard is seeking to ensure that business customers are better prepared to take account of changes in interest rates or charges and that they have an opportunity to consider whether this will have an impact on the business’ ability to maintain its repayments. Advanced notification can enable customers to plan ahead and consider the impact a change on, for example, their variable rate loan may have on their financial situation.

Providing customers with this information can also help to identify any early indications of financial stress as it may prompt the customer to make contact with the Firm, should the business be concerned about the impact of a rate increase, or change to a charging structure may have on their ability to maintain their financial commitments. Firms may wish to consider how the provision of this information links into any monitoring work which is undertaken and, from the information the Firm has on the performance of the business, whether an increase will impact upon its ability to maintain its financial commitments. If so, Firms should engage with the customer with a view to understanding the nature of the issue for example, whether it is a short term cash flow situation or whether there is a longer term issue which will impact on their ability to maintain their commitments. Firms should encourage customers to engage with them and set out any support which may be available.

The requirement does not apply where the customer is provided with a variable rate which is linked to Bank of England base rate, LIBOR or any other benchmark. Where changes are to the customer’s advantage, the LSB would expect that, in the interests of transparency, customers are advised of the change but accept that Firms may well make immediate changes in this regard.

 

4. Where a customer’s borrowing is linked to an interest rate benchmark and this will be transitioned to an alternative rate, firms should ensure that customers are provided with timely notification of when this change will become effective


[awaiting update]

 

5. Firms should have processes in place to deal with unauthorised credit card transactions. If customer fraud is suspected, the burden of proof is on the firm to prove this is the case


When considering a customer’s claim that they have not authorised a transaction on their credit card account, the burden of proof lies with the Firm and not with the customer. It is recognised that for the purpose of the business credit card product, there will be a number of cardholders linked to one account. The LSB would expect the Firm to provide proof where it has reason to believe that the customer has provided authorisation.

Firms will have policies and processes in place regarding unauthorised credit card transactions for business customers caught under CONC/CCA.

Firms should consider a customer’s claim on the basis of the individual circumstances. The LSB would expect that unless the Firm can show that the customer has acted fraudulently, the customer’s liability for their credit card being misused should be limited as follows:

  • if someone else uses the card details without the customers/cardholder’s permission, and the card has not been lost or stolen, the customer will not have to pay anything;
  • if the card is used before the customer/cardholder has received it, the customer will not have to pay anything.
  • in the event that card details are used by someone else without the customer’s/cardholder’s permission, for a transaction where the customer/cardholder does not need to be present, the customer will not have to pay anything.
  • where a credit card transaction has not been authorised by the customer/cardholder, any interest or other charges that may have been applied as a result of the transaction should be refunded.

 

6. Firms will maintain the security of customer’ data but may share information about the day-to-day running of a customer’s account(s), including positive data, with credit reference agencies where the Firm has agreed to follow the principles of reciprocity


Firms can provide Credit Reference Agencies (CRAs) with default information about a customer’s debts if:

  • the customer has fallen behind with their payments
  • the amount owed is not being disputed by the customer (a customer dispute is relevant if it refers to the amount of money owed by the customer and is genuine, reasonable and unresolved) and
  • the customer has not made a proposal that satisfies the Firm for repaying the debt following the Firm’s formal demand.

The customer should be given further notice of the intention to disclose the information at least 28 days before the disclosure is made, for example, when a default notice or formal demand is given. At the same time, customers should be provided with an explanation about how default information registered against them may affect their ability to obtain credit in the future. This notice means that customers have 28 days to try to repay or come to some arrangement with the Firm before default information is passed to the CRA.

The requirement to share data does not apply in specialist customer segments, where sharing CRA data is not always appropriate. Firms should ensure that data is up-to-date, accurate and complete before it is passed to credit reference agencies and where discovered, any errors are addressed and corrected promptly.

 

7. Firms should ensure that where an individual provides a guarantee/indemnity or other security, they are able to request information regarding their current level of liability, as long as the customer gives their permission and confidentiality is not breached


This Standard applies to situations where an individual offers some form of security such as a personal guarantee or indemnity. The intention being, that the individual providing the guarantee or security is able to access information regarding their level of liability from the Firm so that they can assess the likelihood of being called upon to pay. If the individual requests confidential financial information (with the exception of the current level of liability), such as details of balances, copy statements, etc, we would expect that Firms seek the customer’s consent before providing this information. Firms should also tell the guarantor the extent of their liability, including the addition of interest and charges after demand has been made.

The customer should be made aware that if they want the Firm to accept a guarantee or other security from another individual that the Firm may ask for permission to give confidential information about the customer’s finances to the person providing the guarantee or other security, or to their legal adviser.

 

8. Firms should comply with the customer’s request to co-operate with their professional adviser(s) during the lifetime of the relationship. All communication with the customer/their adviser will be undertaken in a clear and open manner


This Standard is intended to ensure that a customer’s professional advisors – legal, financial or otherwise – are not prohibited from participating in discussions with the Firm. Having a third party present can support the customer during their engagement with their lender providing, for example, explanations, clarifying points of discussion etc. The LSB would expect Firms to fully co-operate with the customer’s adviser, at whichever stage of the relationship the customer is at.  The LSB recognises that there may be circumstances where the customer will not be present and that the Firm may need to ask for the customer’s consent to engage with the adviser.

 

9. Firms should ensure that any changes to the terms of the customer’s agreement are fair and transparent. The customer should be provided with clear information regarding the reason for the changes and provided with a reasonable amount of time to seek further clarification, or where appropriate, alternative sources of finance


Customers should be told how they will be notified of changes to terms and conditions when they take out their borrowing. The purpose of this Standard is to ensure that customers are treated fairly and are provided with clear information, which is communicated within an appropriate timeframe, to enable them to consider how any changes will impact upon their business.

The LSB recognises that amendments to the terms of the agreement may be required for a variety of reasons and in line with PRIN, the LSB would expect a Firm to have regard to the information needs of its customers, and communicate with them in a way which is clear, fair and not misleading.

The Standards apply to a wider range of customers than its predecessor, the Lending Code, did and therefore what is a reasonable amount of time will depend on the individual circumstances and may take into account a number of factors such as, the terms of the agreement, the sophistication of the customer and the amount and complexity of the borrowing.

Where a Firm wants to make changes to a customer’s agreement which has no fixed end date, for example, a credit card or bank account, and the customer can end the relationship without any charge, it should tell the customer when these changes will be made. If the customer decides to close their bank or credit card account, they should be provided with details of how to do this and any implications of doing so.

For customers caught under CONC/CCA, such notice must be given at least 30 days before the change takes effect. Further requirements in relation to this customer group is outlined within CONC/CCA, Firms may also wish to consult the Information for Practitioners on the Standards of Lending Practice for personal customers: https://www.lendingstandardsboard.org.uk/the-standards-for-personal-customers/

 

10. Where a change is made to the relationship management process which will impact on the customer, firms should provide the customer with advance notice, and the reason for the change. Where this will require action from the customer, they should be allowed sufficient time to complete this, taking into account the channel currently used


This Standard is intended capture wholesale change where the customer may be moving from a relationship managed environment to telephony based, or where a business has matured and/or undergone significant growth which warrants a relationship managed approach. It is not intending to capture changes due to a change in personnel, where there hasn’t been a change in the channel through which the customer’s account is managed.

As a minimum, the LSB would expect the customer to be provided with not less than two month’s notice in order to provide time to consider what other options, if any, they wish to pursue. Firms may wish to take into account information which is known about the customer prior to the change in approach, this could include non exhaustive examples such as:

  • whether the customer is experiencing financial stress
  • whether any applications are in train and if there would be a benefit to have these concluded prior to the move
  • where known, any significant changes to the overall control of the business which may warrant a longer lead in time to prevent additional impact on the business customer
  • whether the Firm knows, or has reason to suspect that the customer may be vulnerable.

 

This information could be used to more closely manage the transition or may prompt the Firm to consider whether the customer would benefit from additional support.

The move to a new channel may require changes in the type and regularity of information provided by the business customer to the Firm. The LSB would expect that where these changes place additional obligations on the customer, that any timeline associated with this is agreed with the customer and that they are provided with an explanation of why this is required.

 

11. Firms should comply with a customer’s request to have access to the basic information held by the Firm about their products/accounts. The request should be dealt with in a timely and efficient manner


This Standard is intended to capture the requirement for banks to respond to requests from their customers in an open and transparent manner, in relation to information it holds about the customer’s products. It is not intended that the customer is provided with access to sensitive information relating to, for example, risk appetite, internal monitoring or underwriting policies, but they should be provided with sufficient amount of information to answer their query in an open and transparent way.

This could include information regarding the application or operation of covenants, guarantees, security, or other forms of information which will help the customer to understand what their obligations and liabilities are. Other examples may include repayment history, information held on the performance of the business or other information required to enable them to effectively manage their account/products with the Firm. The LSB acknowledges that not all information held by Firms is suitable for disclosure but would encourage firms to consider any request from the customer in the spirit of this Standard.

 

12. Firms should ensure that requests for a Deed of Priority or Wavier are dealt with quickly and efficiently, in line with the industry protocol


The protocol sets out the requirements regarding a request for Deed of Priority or Waiver which reflects the industry’s commitment to making sure the process of responding to the request for a Deed of Priority or Waiver is handled as quickly and efficiently as possible, and to ensure a customer is given a response as quickly as possible as regards the agreement to proceed with the request or otherwise.

The protocol can be found at: https://www.bba.org.uk/wp-content/uploads/2014/03/BBA01-428374-v1-deeds_of_priority-final.pdf

 

Credit monitoring

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on credit monitoring.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

  

Customer outcome: business customers will be supported by pro-active and reactive measures designed to identify signs of financial stress[1]

Firms will achieve this: with systems and controls that are capable of identifying, across the relevant products held, where customers may be showing signs of financial stress at any point in the customer life-cycle, and pro-actively engaging with the customer to agree an appropriate solution

This section of the Standards of Lending Practice is seeking to ensure that customers who may be at risk of falling in financial difficulties are identified and supported at an earlier stage so that pre-emptive action can be taken.

 

1. Firms should ensure that customers understand what information will be required to allow the Firm to monitor the business’ performance and how and when this should be provided


The information required by Firms to monitor business performance may vary, depending on the size of the business, the level of borrowing provided to the customer and the Firm’s approach to customer segmentation. In practice, this means that some Firms may not request any information from businesses as part of the credit monitoring process, relying instead on internal account performance and external credit data, particularly, where the relationship is managed at arms-length, through a transactional only model.[2]

Where monitoring information is required, Registered Firms are encouraged to be transparent and clear about what information is required from the business customer, when this must be provided by, and how this will be used by the Firm. This information should be relayed to the customer at the very outset of the relationship so that they understand what is required of them through the duration of their banking relationship. The LSB would encourage Firms to guide customers to relevant information on their websites or to external sources, to support the customer in providing this information. This  may be more relevant to customers who are at the smaller end in terms of the scope of the Standards or for start-ups/very young businesses.

Where appropriate, Firms may consider the use of covenants to formalise the requests for monitoring information. The LSB considers this to be a business decision, however where covenants are used, the customer should understand their obligations under the agreement, particularly in respect of providing information and the frequency of the request, including, where applicable, an understanding of how the monitoring information will be used to monitor other financial covenants which may be required, and the consequences of non-adherence.

 

2. Firms should provide customers with the ability to opt-out of an unsolicited increase in their borrowing limit(s)


Enabling customers to opt-out of unsolicited increases in their borrowing can provide customers with a greater deal of control over their finances, which may be of benefit to smaller or new businesses or for those which are, or maybe, showing signs of financial stress where it may be more appropriate to explore the reasons behind this before deciding upon any further increase in borrowing limits.

Firms are encouraged to periodically review a business customer’s credit card limit to ensure that it remains appropriate for their situation and that they are not showing signs of financial distress. Where the decision is taken to reduce a customer’s limit, Firms should give consideration to the impact that any reduction will have on their overall ability to manage their finances. Where the decision is made to reduce the limit, the LSB would suggest that the customer is encouraged to contact the Firm if this reduction is going to cause them immediate or future difficulties. Where appropriate, these customers may also benefit from signposting to sources of free, impartial debt advice, (given sufficient notice).

 

3. Firms should ensure that a sufficient level of monitoring, underpinned by appropriate triggers and processes, of a customer’s borrowing is undertaken to help determine if the customer is exhibiting signs of financial stress. Where relevant, firms should engage with these customers in a sensitive and supportive manner


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS and BBLS in reliance on the Government guarantee under each scheme.

Firms offering products under CBILS and BBLS will have adapted or introduced new processes, as appropriate, to meet the requirement of the schemes. It is therefore recognised that firms may not have access to the same level of information as they would under their usual terms of lending and will have reduced visibility on the financial situation and previous performance of the business. Due to the automatic interest and principal holiday provided to borrowers under the terms of BBLS, the LSB would not expect firms to apply this requirement of the Standards to this product during this period.

Products offered under CBILS

Firms will have to rely on any information made available during the application process and internal MI to inform the level of monitoring that could be undertaken. If monitoring is undertaken and the customer exhibits signs of, or informs their firm that the business is in financial distress ahead of the first repayment falling due, the LSB would expect the firm to engage with the business in line with existing policies and processes.

Products offered under BBLS

The way this product is designed to operate, and in the absence of a relationship management model, means that firms will have very little/if any information about the business upon which to base monitoring activity, ahead of the customer’s first repayment date falling due. The LSB acknowledges that firms providing this product will be unable to meet this provision as drafted in the initial 12 months of the agreement and, as above, the monitoring requirements set out in the Standards are not considered applicable. This is because the information that customers are required to provide at the point of application under the BBLS is not enough to allow firms to undertake the sufficient levels of monitoring required under paragraph 3.

If, after a customer has accessed funding, a firm does identify a customer as showing signs of financial distress, the LSB would expect the firm to take reasonable steps to support the customer in line with the provisions set out in this section of the Standards and/or paragraphs 3 to 7 of the Standards on the treatment of customers in financial difficulty. This may be the case where a customer informs a firm that the business is showing signs of financial distress, or where a firm becomes aware of such signs through any systems and processes that they have in place (in line with the Standards) to enable them to identify and support business customers showing signs of financial stress.

Firms should ensure that any support offered is permitted under the guarantee agreement for the scheme and is in line with any relevant guidance or directions that may be issued by the Government from time to time.

 

 

For businesses that are relationship managed, the knowledge of the firm, coupled with the regularity and type of contact, lends itself to a more direct relationship with the customer where the opportunity to identify potential signs of financial stress are greater. Firms should ensure that these opportunities to engage with the business are fully optimised. This may be achieved through setting a business review date, providing the Firm with an opportunity to identify and query deviations to business performance, profile and strategy, based on a review of historic and current financial performance against projected performance, including any significant changes to the core management team.

Where a review process exists, Firms should ensure that their staff document the observations made through the review, and that where there is evidence of financial stress, further action is taken to support the business. Depending on the structure and remit of the relationship manager’s role and the availability of specialist teams, the support may be offered through the relationship manager or via escalation to a specialist team. Where there is a specialist team in place, Firms should ensure that the structure and remit of these teams, including the triggers for referral, are firmly understood by staff.

Where the relationship is managed through a transactional only model, Firms may not have access to regular business and financial information to identify whether a business is showing signs of financial stress, particularly where the regularity in customer contact is limited. Firms must explore the different types of information or data it does have access to, including any relevant information obtained about the customer at the product sale stage, supported by internal account performance data including business income and expenditure, and where available, the use of external credit information.

The Firm may also wish to use the product renewal process to assess the suitability of the product based on patterns of utilisation, business strategy, its ongoing needs and repayment history.

A Registered Firm’s approach to identifying and supporting customers at risk of financial difficulty may vary, depending on the Firm’s business model, its approach to customer segmentation, the distribution channel by which the customer is serviced and the nature and regularity of the interaction. It is important to recognise the diversity in Firm’s operating models, and the scope and breadth of the distribution channels and servicing models offered. We recognise that not all Firms will offer a digital, transactional only model, whilst others may opt to service their entire business customer base through a bespoke, relationship managed proposition. Firms should factor this into their decision making, when determining the most appropriate approach to pro-actively identifying and engaging with customers. Where the Firm offers more than one distribution channel, Firms should seek to stream-line their approach to ensure all businesses, irrespective of the size and type of facility, are identified and supported through whichever channel they engage.

Developing and defining meaningful behavioural and product triggers can help drive a predictive and pre-emptive approach to identifying customers at risk of financial difficulty. Whether the approach derives from internal account performance or external credit data, the triggers and the supporting parameters for identifying customers at risk, should be bespoke and built around the Firm’s core operating model. This could be supported by a pro-active contact strategy, which utilises and explores a range of contact methods and distribution media to ensure that customers are appropriately notified, that the contact is timely, and the customer is receptive to the offer of support.  We acknowledge that there may be challenges to engaging with customers, with some business customers more receptive to engaging in discussions around their situation, while others may be less likely to disclose the full extent of their situation, for fear that this information may have a negative or adverse impact on the view the Firm has on the business.  Whilst the type and method of contact is key here, Firms should consider how the message will be received by the customer, how the information will be used and what action they would like the customer to take. The tone of voice and construct of the message is critical to relaying the content of a message to encourage meaningful contact, build transparency and strengthen trust.

Whilst a pro-active strategy is useful in encouraging contact and engaging with businesses, some customers may choose to contact a Firm, where they self-identify that they require support.  The notification to a Firm may follow a change in circumstance, for example, the loss of a key contract impacting a business’s ability to maintain further repayments to the Firm, an increase in business expenditure or the depletion in business performance. Firms should ensure that they have appropriate mechanisms and support structures in place to fully support these customers, and that they are not turned away.

The LSB would encourage Firms to raise awareness of the type of support it can offer its customers who are, or may be, experiencing financial stress. The provision of information is critical to building trust, ensuring transparency whilst dispelling any concerns that the contact is focused on exacerbating the business’ financial situation. The LSB would encourage Firms to direct business customers to appropriate sources of information. This may include information on the Firm’s website, for example, through a dedicated section detailing its approach to supporting customers at risk of difficulty, with details of the support available and contact information, should the customer wish to engage further with the Firm. This could also be supported by web chat facilities should the customer wish to explore the availability of support. The provision of web chat facilities, offers the business an opportunity to contact the Firm discreetly, though where possible, the Firm should encourage the customer to engage in a fuller discussion around their circumstances. Depending on the structure and remit of the support available, the Firm may wish to direct the customer to a specialist team, with the knowledge and skills to offer the right level of support, at the right time.

Whilst the list below is not intended to be exhaustive, it sets out the types of triggers that Firms may look out for which may suggest that a customer is experiencing financial stress:

  • missed/delayed payments;
  • regularly overdrawn without agreement/exceeding the agreed overdraft limit;
  • large increases or decreases in turnover;
  • business is trading at a loss;
  • inadequate economic or financial structure;
  • insufficient cash flow to meet financial obligations;
  • inability to obtain further funding or refinancing;
  • persistent losses;
  • the business suddenly loses a key customer or employee;
  • a large part of the business is sold;
  • the customer does not keep to conditions set out in the loan agreement, without adequate rationale;
  • the customer does not supply agreed monitoring information on time; and
  • another creditor brings a winding-up petition or other legal action against the business.

Firms should exercise discretion as to whether the event would result in contact with the customer based on the parameters set by the Firm, and where relationship managed, their knowledge of the business customer.

Firms should also be aware of the link between credit monitoring and customer vulnerability – establish the similarities in approach and how these customers should be dealt with in a positive and sensitive manner.

 

4. Where appropriate, Firms should initiate a timely review of the customer’s re-financing needs and an assessment of what needs to be in place ahead of any term loan expiry to maximise the prospect of successful re-financing.


Where a lending agreement contains a refinancing facility provision, individual Firms will have their own processes in place as to how and when any review is undertaken, and the timings will vary from firm to firm.

 

5. Firms should ensure that relevant customer facing employees and relevant third parties are sufficiently trained and skilled to help them to identify and deal with those customers who may be showing signs of financial stress.


Firms should invest in staff training to ensure that customer facing employees and third parties have the appropriate skills and knowledge for their role to support the identification of triggers and to encourage fuller conversations with a business customer. This should be underpinned by a comprehensive training and competence framework, to ensure knowledge is maintained and to encourage consistency in the level and depth of training delivered.

Whilst section 4, above, refers to the development of system based triggers which may derive from a combination of account performance or external credit data, Firms should have mechanisms in place to identify instances where information is volunteered by a customer. Some customers may offer this information directly, others may approach the conversation with a degree of reticence, or in a much softer and less overt way, evidenced through the customer’s actions or conversation with the Firm. Training may be based on information volunteered by the customer during conversation such as ‘business expenditure has increased significantly,’ ‘we have noticed a decline in sales performance,’ which may or may not be supported by discrepancies in internal account performance. This should be supported by softer behavioural triggers which, whilst not obvious, may indicate that the business requires further support. Whilst we recognise that not every trigger may result in a customer being identified as being in financial stress, they are clues which should be probed and explored further to encourage a complete understanding of the customer’s situation, based on a ‘tell us once’ approach.

Firms should develop triggers to assist staff in the identification of business customers at risk of financial difficulty. This includes the soft skills required to probe for further information in a positive and sensitive manner if there are indications that the customer may benefit from additional support in managing their finances. This is reinforced by the fact that not all customers will be forthcoming with information because of the perceived consequence on the business, or for fear that the information may be shared more widely.

Relationship managers have a unique insight into how a business is operating and information provided by the customer regarding their business can be used to support conversations with customers who appear to be showing signs of financial stress or where account information or a change in the operating environment suggests that the business may be at risk of difficulties. However, there are challenges to engaging with customers on this topic and some may be unwilling to engage in discussions around their financial situation. Others may be more forthcoming with information but may, for example, be wary of disclosing the full extent of their situation as they lack an understanding of how the content of the conversation will be used by the Firm. Therefore, an ability to empathise and explore the customer’s concerns about disclosing information is an important part of the process, supported by an explanation of how the information will be used.

Case reviews involving reviewing recorded calls, where these are available, can provide an opportunity for relationship managers to assess how well they are doing. By listening to randomly selected calls and discussing how the call was handled, Firms can determine if there is anything that could have been done differently and whether the right customer outcome was achieved.  Additional training and support could be provided to address any specific needs on an individual basis, or more widely, in relation to process improvements.

A blended learning technique, using elements of theory and practical examples can help to ensure that staff have the opportunity to put their new skills into practice and can demonstrate their competence though various exercises and knowledge checks. Where specialist teams exist, the opportunity to shadow internal departments to see first-hand how those areas support customers can further embed understanding of pre-arrears and provide a valuable wider perspective whilst strengthening awareness of the specialist teams and their role and remit.

Firms could develop various aids and techniques for ensuring the knowledge is retained once training is complete.  This could include desk aids, interactive colleague learning platforms or using the intranet to assist in identifying appropriate actions, underpinned by the need to ensure the delivery of fair outcomes.

 

6. Firms should undertake monitoring and assurance work to ensure that their policies and processes are designed and are operating effectively in identifying and supporting customers who are showing signs of financial stress.


While Firms are at different stages in the development of strategies, designed to prevent customers falling into financial difficulty, consideration should also be given to its ongoing evaluation, to ensure that the strategy continues to operate in a manner that is conducive to the delivery of fair customer outcomes. This may be achieved through the:

 

  • ongoing review and assessment of the design and operational effectiveness of policies, processes and training, along with an assessment of the internal control framework;
  • use of case reviews to test the full customer journey, forming a view on the overall effectiveness of the Firm’s strategy, the response to a situation and the appropriateness of the solution offered. This approach could be used to focus in on a particular aspect of the journey and be scaled to ensure a sufficient number of cases are reviewed to form an opinion, whilst highlighting any opportunities for improvement;
  • the development of customer feedback mechanisms to explore the practical impact of the current structures in place.

 

Firms should consider the risks to customer outcomes associated with the prevention of customers falling into financial difficulty and this should be factored into a Firm’s assurance and oversight plans, across the three lines of defence.

[1] The customer has not yet defaulted but information available to the firm suggests that the business may be showing signs of financial difficulty.

[2] Where the business is not relationship managed (expand definition)

Treatment of customers in financial difficulty

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on financial difficulty.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

  

Customer outcome: business customers in financial difficulty, or in the early stages of the collections process, will receive appropriate support and fair treatment, in order to help them deal with their debt(s) in the most suitable way

Firms will achieve this: with systems and controls that are capable of identifying and, subsequently, supporting business customers in financial difficulty. Firms should be able to demonstrate that a sympathetic and positive approach has been applied when considering a customer’s financial situation

This section focuses on the treatment of businesses in financial difficulty and includes a dedicated section on business support units. The LSB recognises that not all firms have business support units in place and where they are, there isn’t one model which is applied consistently across registered firms. Customers may move in and out of financial difficulty/business support units during the course of their relationship with the firm. For ease of reference a separate set of Standards for business support units can be found below. However, firms will apply a consistent approach to the treatment of businesses in financial difficulty, regardless of where responsibility for the relationship with the customer sits within the firm.

 

1. Firms should have triggers and processes in place to help identify customers who may be in financial difficulty and should act promptly and efficiently to address the situation with the customer


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS and BBLS in reliance on the Government guarantee under each scheme.

For products offered under CBILS, firms will have access to a limited range of information, depending upon the type and level of information the customer was able to provide at the application stage and what, if anything, is known about the business. However, it is recognised that in the absence of a pre-existing relationship with the customer, the ability to identify financial difficulty may only arise at the point the customer misses a payment.

For products offered under BBLS, it is acknowledged that under the terms of BBLS, firms are not required to obtain any current or historic information on the performance of the business. Therefore, firms may be unaware as to whether or not the business is in financial difficulty during the initial 12 months of the agreement.

The scheme has been designed as a mass market product without a relationship management model which means that even where there is a pre-existing relationship with the business, firms will be unable, due to the way the scheme operates, to take this information into account at the point of lending. In addition, the application of an automatic interest and principal holiday means that firms will be further limited in the types of information which would normally feed into the triggers and processes already in place to identify signs of potential or actual financial difficulty. It is recognised that, based on the information that customers are required to provide to firms under the BBLS, firms, at the point of application and for the first 12 months of the agreement, will be unable to identify if a customer is in financial difficulty unless proactively contacted by the customer.

If, after a customer has accessed funding, a firm does identify a customer as showing signs of financial difficulty, the LSB would expect the firm to take reasonable steps to apply the provisions set out in paragraphs 3 to 7 of the Standards on the treatment of customers in financial difficulty. This may be the case where a customer informs a firm that the business is showing signs of financial difficulty, or where a firm becomes aware of such signs through any systems and processes that they have in place (in line with the Standards) to enable them to identify and support business customers in financial difficulty.

Firms should ensure that any support offered is permitted under the guarantee agreement for the scheme and is in line with any relevant guidance or directions that may be issued by the Government from time to time.

As set out in the BBLS guarantee agreement, the LSB would expect firms to apply the requirements of the Standards when carrying out recoveries activity where the debt collection is unregulated, unless directed otherwise by Government.

The LSB recognises that, when the Government issues new guidance or directions, firms may need to review or adapt their approach to supporting customers or to undertaking recoveries activities.

 

 

Firms will have access to a broad range of information on their business customers, depending on the size and type of business and how the relationship with the customer is managed. For those Firms which operate a relationship managed model, there may be opportunities for early identification of financial difficulties during any monitoring activity or engagement with the customer.

For smaller businesses, changes in personal circumstances such as a loss of a key employee, a breakdown of a relationship, bereavement, a serious accident or illness could also impact on the customer’s ability to effectively manage the business’ finances. Where the Firm is made aware of these changes, the LSB would expect the Firm to engage with the customer with a view to understanding whether the changes in circumstance are, or may be likely to, have an impact on the day to day running of their business.

A Firm should consider what information it has available to it that might indicate that a customer is at risk of, or may be, experiencing financial difficulties.  Such illustrative triggers may include:

  • loss of a significant source of income such as a key contract
  • a significant increase in financial commitments
  • frequent requests to change terms of the borrowing
  • failing to meet repayments or other commitments on time
  • regular requests for increased borrowing
  • frequently returning items on a current account
  • frequent incurrence of unarranged overdraft/late payment/over-limit fees
  • being informed that another lender or creditor requires immediate repayment
  • the customer goes overdrawn without agreement;
  • the customer goes over their agreed overdraft limit, especially more than once;
  • longer term cash flow shortages which do not reflect seasonal fluctuations
  • there are large increases or decreases in the business’s turnover
  • the business is trading at a loss
  • the business suddenly loses a key customer or employee
  • a large part of the business is sold
  • a facility is used for purposes other than those agreed with the Firm
  • the customer does not keep to conditions set out in the loan agreement
  • the customer does not supply agreed monitoring information on time; and
  • another creditor brings a winding-up petition or other legal action against the business.

 

2. Firms should have appropriate policies and procedures in place to identify and support vulnerable individuals where this impacts on the customer’s ability to pay


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS and BBLS in reliance on the Government guarantee under each scheme.

Given the requirements of CBILS, it is acknowledged that unless there is a pre-existing relationship with the business, firms will have limited access to information on both the business and the circumstances of the business owner.

As set out in the Standards, the impact of the individual’s vulnerability on the business customer’s relationship with their registered firm will depend on a number of non- exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability.

For lending under BBLS, it is recognised that unless this information is proactively provided by the customer, firms may be unable to identify such customers at the point of origination. However, if at any point during the course of the relationship with the customer, a firm becomes aware that a customer is, or may be, in a vulnerable situation the LSB would expect the firm to act in accordance with the relevant Standards.

 

 

This standard is seeking to support Firms in identifying and addressing situations where an individual within a business either is, or the Firm has reason to suspect that they may be, vulnerable. This can be applied to a sole trader, partnership or to an individual within a limited company. The impact of the individual’s vulnerability on the business customer’s relationship with their Firm will depend on a number of non-exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability. Firms will be at different stages of developing an approach to business customers and vulnerability and the applicability will depend on the individual circumstances of the person.

Being in financial difficulty can be a stressful situation for a customer who is not vulnerable, therefore when dealing with a business customer who has been identified as, or the Firm has reason to suspect that they may be, vulnerable there is a greater need to fully understand their circumstances in light of their business. Having the structures and processes which allow staff to investigate situations fully, and equipping them with the knowledge, confidence and skills to question and explore circumstances appropriately will enable them to identify the likely support needs of the customer.

Firms should ensure, that, when they become aware of a vulnerability, the impact is fully considered on the individual and where applicable, the business and its ability to meet and maintain ongoing financial commitments. Firms should remain alert to the fact, that, whatever the vulnerability, the way in which a person might handle or respond to a situation can vary, based on personal circumstance, and the size and structure of the business, relative to the individual’s day to day responsibilities and the nature and permanence of the situation.

The LSB would suggest that, wherever possible, Firms seek to establish a single customer view. It is acknowledged that for some, the ability to implement this across the organisation may be hampered by legacy systems particularly where there are multiple product holdings. Where possible, consideration should be given to manual workarounds to help Firms to ensure that multiple accounts can be linked so that correspondence and account activity is coordinated. For some business customers, the Money Advice Liaison Group’s (MALG) Debt and Mental Health Evidence Form (DMHEF) may be appropriate. This provides a standardised approach for third parties and creditors to share relevant information about the customer’s mental health condition from health and social care professionals. In line with current industry practice, Firms should consider the DMHEF if it is presented by the customer or, with the customer’s consent, their adviser or medical practitioner.

 

3. Customers identified as being in financial difficulty should be contacted and provided with clear information setting out the support available to them, the next steps and where relevant, with any action they are required to take. They should not be subject to harassment or undue pressure when discussing their financial situation


Where a customer is identified as being in financial difficulties they should be contacted and provided with clear information to enable them to engage constructively with the Firm. This contact should seek to enable the Firm to understand the customer’s situation through appropriate questioning, the outcome of which can be used to determine how to best manage the customer’s borrowing with the Firm. Where appropriate, there may also be a benefit to signposting relevant customers to free, impartial debt advice.

When a customer is identified as being in financial difficulty, Firms should take a view as to the appropriate level of intervention/support required, this will be dependent upon the individual customer’s circumstances and the information obtained. The conversation may identify that the business is expecting a change in income in the foreseeable future, for example the award of a significant contract or the payment of high value invoices which will have a positive impact upon the finances of the business.

The LSB would expect that customers are made aware of the next steps in the process, for example, the application of forebearance and how this could work or what the potential outcome of the situation could entail. Firms should provide this information in an appropriate form and in plain English, avoiding the use of any technical or legal language, where ever possible. Where customers are required to undertake any action as a result of the contact, that this is made clear to them with any agreed timescales or requests for additional information documented.

 

4. Firms should demonstrate an empathetic approach to the customer’s situation; listening to and acting upon information provided by the customer with a view to developing an appropriate and mutually acceptable solution


Where a Firm identifies that a business customer is in financial difficulty or the customer self-discloses that the business is struggling, the Firm should engage with the customer with a view to understanding the business’ overall situation and work with the customer to develop an appropriate solution.

This solution could take a number of forms; it could be for the customer to agree to cut down on non-essential expenditure, or a more formal arrangement following, for example, an independent review of the business. Such an arrangement might set out a detailed restructuring or repayment programme, including new facility agreements and what happens if the customer does not meet the agreement. If the plan includes an agreement to accept smaller loan repayments than stipulated in the original documentation, the Firm should tell the customer whether this is regarded as ‘falling behind with repayments’ and whether information will be passed to credit reference agencies.

Before agreeing an appropriate solution with the customer, the Firm should have sufficient information regarding the customer’s financial situation to enable it to assess whether any proposed plan is affordable for the business.  This can be achieved through appropriate questioning, as well as listening to and acting upon the information provided by the customer and consideration of any information the Firm has on the business itself. The LSB would expect that where a customer is unable to make repayments that are sufficient to meet a lender’s minimum requirements for a repayment plan, the customer is given clear information on the effect this will have on their position and the options open to them. The LSB acknowledges that it may not always be possible for a Firm to agree a solution which enables the business to continue its relationship with the Firm or that the most appropriate outcome is that the business enters winding up proceedings. In these circumstances, the LSB would expect Firms to provide a clear explanation as to why the business can no longer be supported and allow the customer the opportunity to consider their options or seek professional advice.

When developing a repayment solution with a customer who has been identified as vulnerable, but who is able to set-up or continue to maintain a plan, Firms may wish to give consideration to the financial impact that the vulnerability may have. Taking account of the cost of travel to hospital, medication, and the impact of any reduction in income will help to ensure a plan is reflective of the customer’s current situation. Identifying this expenditure will also help the Firm to assess whether any proposed repayment plan is affordable and sustainable. Where a vulnerable customer is unable to set up a plan, Firms should consider placing the account on hold and agreeing regular reviews with the customer to check in on their situation.

A Firm may suggest that an independent review of the customer’s business is undertaken in order to provide an independent view of the future prospects of the business. In these circumstances, the Firm should explain the reasons for the review, what it thinks should be done and how the review will take place, including who should carry out the review and whether there are any costs associated for the customer. If a customer’s business is reviewed, the LSB would expect the Firm to discuss with the customer (and where relevant, their advisers) the information provided before reaching any conclusions or taking any action.

 

5. Firms should apply an appropriate level of forbearance where, if after having made contact with the customer, it is clear that this would be appropriate for their situation. Firms should ensure that the solution offered does no exacerbate the customer’s situation


The type of forbearance applied will depend on the Firm’s assessment of the customer’s individual circumstances and what is appropriate for the business. For example, forbearance could take the form of: a term extension, application of breathing space, payment holiday, refinancing of an existing facility or other, as appropriate. Firms should ensure that the solution offered does not make the customer’s situation worse, for example, agreeing to restructure a loan which attracts a higher rate of interest than the customer’s current arrangement. While the restructuring itself may potentially resolve the situation in the short term, the cost of the revised agreement would mean that the overall borrowing may not be sustainable in the longer term.

The LSB would encourage Firms to consider reducing or stopping interest and charges when a business customer evidences that they are in financial difficulties. Such a reduction/suspension decision could be based upon an assessment which indicates that the customer is unable to make repayments sufficient to meet contractual terms. The LSB would consider it inappropriate for interest and charges to continue to be taken where the result would be that the repayment period for the customer becomes excessive. In forming a judgement on what might be excessive, a Firm should take into account the type of product and the individual circumstances of the business customer.

The LSB’s view is that concessions should not be arbitrarily withdrawn irrespective of a customer’s ability to pay or without any evidence of a change in the customer’s circumstances. Expiry of a repayment arrangement should not automatically lead to the withdrawal of concessions. However, this does not rule out regular reviews and if a customer’s position has improved then interest and charges can be reintroduced.

 

6. If a Firm is aware that a customer is, or suspects that they are, in financial difficulty but is able to uphold their borrowing commitments to the Firm, the customer should be given the opportunity to take action to turnaround the business


There may be circumstances where a customer meets one or more the triggers set out under section one above, but is able to maintain their borrowing commitments to the Firm. The LSB would expect that in these circumstances, the customer is given an opportunity to demonstrate that they can trade out of any short term difficulties they may be experiencing.  The decision to do so will be based upon consideration of the information the Firm has regarding the business but where the business is viable and is able to meet its financial obligations, the LSB would expect that it is able to continue to trade.

The decision to do so could be subject to regular monitoring and review of the circumstances which is sufficient to enable the Firm to understand the financial health of the business. Any additional reporting requirements should not be so onerous on the customer that it makes the turnaround plan unsustainable. The LSB would expect the customer and the Firm to agree any timelines which may apply.

 

7. Firms should guide the customer to appropriate advice which reflects their circumstances and level of borrowing. Where appropriate and available, the customer will be signposted to a third party offering free, impartial debt advice


Where a customer is signposted towards independent advice, this should take account of the size and sophistication of the business and should reflect the borrowers’ circumstances, that is the advice provided would be at a cost which is appropriate for the level of the customer’s borrowing. For example, a sole trader or sole director of a small company would not be sign posted towards a firm which is more appropriate for a larger, more corporate business where the costs would be disproportionate to the size and needs of the customer.

 

 

Portfolio management

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on portfolio management.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

  

Customer outcome: when debts are sold, impacted business customers will be treated fairly and all communications regarding the sale, and what this means for the customer, will be transparent and provided in good time. Where business customers are suffering from mental health or critical illness, the customer’s debt will not be sold.

Firms will achieve this: with systems and controls to ensure that only eligible business customers are transferred to a third party and appropriate due diligence is undertaken on the Firm before a sale, which demonstrates that the customer will be treated fairly.

Unless otherwise stated, the following Standards apply to the sale of performing and non-performing debt. The following Standards apply to the sale of debt at the portfolio level.

 

1. Firms should follow a robust due diligence process when selecting third parties for debt sale or debt collection activities to ensure that customers will continue to be treated fairly, in line with requirements of the Standards of Lending Practice and the relevant contractual terms


This standard is intended to ensure that where a customer’s debt is sold or passed to a debt collection agency, that the customer will continue to be treated in line with the standards that Firms apply under the Standards of Lending Practice. Customers therefore have comfort that while the debt is no longer being administered by the Firm, the protections offered by the standards will continue to be met.

The due diligence process for selecting third parties for debt sale or debt collection should be sufficiently robust to satisfy the Firm that the third party can meet the requirements of the Standards of Lending Practice. Whilst we do not specify the level of due diligence that should be undertaken, this should be comprehensive for the Firm to gain assurance that the protections offered by the Standards will continue to be met by the third-party, and should be proportionate to the risk associated with the materiality of the outsourced arrangement and the provider.

For the purposes of the Standards, areas assessed through a Firm’s due diligence may include the following:

  • an assessment of compliance against the Standards of Lending Practice for business customers relative to the activity undertaken by the third party;
  • an understanding of the business strategy, model and culture,
  • an assessment of governance and oversight arrangements in place including quality assurance activity, compliance and internal audit and the outputs of any recent reviews.
  • this may be supported by a review of policies and processes, training and incentive schemes, and the approach to dealing with vulnerable customers.

Firms may support this assessment with a review of third party compliance with contractual terms, relevant FCA regulation, data protection and, where applicable, adherence to relevant codes of practice that may apply to the customer’s borrowing. Whilst we do not prescribe the approach to due diligence, this should be sufficient for the Firm to assure itself that the Standards are being met and the right outcomes are being achieved through appropriate systems and controls to minimise the risk of customer detriment. In addition to this Firms may also wish to consider how it will ensure a smooth transition of customer accounts to a new outsourced provider, including what might happen when a vulnerable customer is identified or on service termination. Firms should also refer to the relevant paragraphs of Governance and Oversight for further guidance.

The LSB would expect that adherence to the Standards of Lending Practice forms part of all third party contracts and Firms should ensure that the outcomes for handling financial difficulty cases are applied by such agents, through due diligence and periodic audit and review. The due diligence should be reviewed where there is a change to the relationship, which the Firm considers to be material.

Firms should consider the benefit of receiving regular reports/updates from the outsourced provider to provide comfort that the outsourced provider is operating within the terms of the service agreement and that the Standards are being achieved. This may include: the identification of qualitative and quantitative performance targets; the evaluation of performance through service delivery reports or an independent review by its compliance or internal audit function, including any remedial action, and escalation processes for dealing with inadequate performance. The frequency of information exchange should be determined by the Firm, and should be proportionate to the risk presented by the outsourcer.

 

2. Firms should ensure that where the decision is made to sell a customer’s debt and the contractual terms require the customer’s consent to do so, this is obtained prior to any sale taking place


One of the key elements of the Standards is to ensure that customers are provided with appropriate information, at the right time to enable them to better understand what changes are required or are being undertaken to the way they interact with their lender. Where a customer’s contract and/or terms and conditions provide for the customer’s consent to the sale of their debt, this should be obtained prior to any sale taking place. The LSB is mindful of the work of the  Banking Futures project, further information can be found here: http://www.meteos.co.uk/resources/banking-small-businesses-forging-closer-ties-banks-real-economy/ and UK Finance’s recent update: https://www.ukfinance.org.uk/bankingfutures-working-hand-in-hand/

 

3. Where an agreement allows for a Firm to sell a customer’s debt without their consent, Firms should ensure that:

a. the customer is provided with reasonable notice that the Firm intends to sell their debt and provided with clear information as to what the sale means for the product(s) that they hold with the Firm and;

b. if the relationship with the customer will be serviced by the third party, full contact details for the purchaser are provided


The requirement here is for firms to ensure that customers are aware that their debt will be sold and understand what that means in terms of their relationship with their lender. The LSB’s expectation is that customers know what is happening and the guiding factor is to ensure a seamless and uninterrupted customer experience and a fair outcome.

Firms may wish to have regard to the audience and business type and form of borrowing when communicating with impacted customers. The customer should be provided with a contact point should they wish to discuss the matter further.

Where the relationship will be serviced by the third party, the customer should know in advance who the third party is and provided with contact details. This is to prevent customers from being contacted out of the blue.

 

4. If an individual[1] has provided appropriate and relevant notification of an ongoing mental health or critical illness that affects the customer’s ability to repay their debts, or the Firm is aware the individual is terminally ill, the debt(s) should not be sold


The LSB acknowledges that it may not always be possible for a Firm to know whether a customer is vulnerable but where the Firm is aware, the Standards of Lending Practice prohibit the sale of debt where there is evidence of an ongoing mental health problem or critical illness that affects the customer’s ability to repay their debt. Where vulnerability is identified by the Firm, which impacts upon the customer’s ability to repay their debt, the LSB would expect that these accounts are ring-fenced and not sold.

Vulnerability can occur at any time during a customer’s relationship with their lender, including post debt sale but pre-transfer. Where a Firm becomes aware that the customer is vulnerable (this refers to the individual who is able to able to exert significant influence over the way the business is run)[2] the debt should be ringfenced and excluded from the sale.

Responsibility for managing such accounts should be agreed between the creditor and the purchaser up front, though any decision should give due consideration to:

  • assessing each case on its merits, which may include having regard to the nature and longevity of the customer’s situation; and
  • the customer experience and risk to customer outcomes.

 

5. If a Firm sells non-performing debt, it should take appropriate and reasonable steps to ensure that the third party, to whom the customer’s debt has been sold, deals with the customer in a manner that is consistent with the relevant requirements of the Standards of Lending practice and the relevant contractual terms


Where the decision is made to sell non-performing debt, the LSB would expect Firms to ensure that the customer continues to be treated in line with the requirements of the Standards of Lending Practice for business customers.

Firms should be able to satisfy themselves that the third party to whom they have sold customers’ debts, continue to deal with such customers in a manner that is consistent with the relevant requirements of the Standards of Lending Practice and the contractual terms of the agreement between the Firm and the customer.

The results of these steps should be used to satisfy the Firm and the LSB, that all of the relevant requirements of the Standards of Lending Practice in respect of the debts sold are being adhered to.  If instances of non-compliance are identified, Firms should be able to evidence that appropriate action has been taken to remedy any breakdown of control or customer detriment.

 

6. Where a debt is sold and during the lifetime of the original agreement[3], a dispute arises between the customer and the third party which the parties are unable to resolve, Firms should ensure that they have processes in place to allow the customer access to the Firm’s complaints procedure.


The intention of this Standard is that customers are able to have recourse to their lender, if they are unable to resolve a dispute with the third party which purchased their debt. Firms should ensure that where a debt is sold, the customer has an access point into the Firm’s complaints process and should ensure that processes are in place to enable customers to do so.

[1] A person who, when taking into account information available to the firm about how the business is structured and operates, is able to exert influence over the way it is run.

[2] See also section on vulnerability.

[3] Subject to industry practice over the retention of personal data under data protection legislation.

Customer in vulnerable circumstances

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on vulnerability.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

  

Customer outcome: inclusive products and services take into account the broad range of business customers to which they may apply and contain appropriate flexibility to meet the needs of customers who may be, or are in, a vulnerable situation. Where customers are identified as, or the Firm has reason to believe that they may be, vulnerable, appropriate adjustments are made to ensure that their individual circumstances are accommodated to enable the customer, or their authorised third party, to manage their account(s)

Firms will achieve this: with systems and controls that are capable of assisting in the identification of customers who are, or may be, in a vulnerable situation, and having appropriate measures, training, referral points and skilled staff to deal appropriately with the customer once identified

The following Standards have been drafted to support firms in identifying and addressing situations where an individual within a business either is, or the firm has reason to suspect that they may be, vulnerable.

 

These Standards can be applied to a sole trader, partnership or to an individual within a limited company. The impact of the individual’s vulnerability on the business customer’s relationship with their registered firm will depend on a number of non-exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability. Firms will be at different stages of developing an approach to business customers and vulnerability and the applicability of the following standards will depend on the individual circumstances of the person.

 

  • Reference to an individual means a person who, when taking into account information available to the firm about the how the business is structured and operates, is able to exert significant control over the way in which it is run.
  • Reference to vulnerability is in relation to the individual rather than the business itself, for example, a business in financial difficulty would not necessarily be considered to be vulnerable for the purposes of these Standards.

 

Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS and BBLS in reliance on the Government guarantee under each scheme.

The Covid-19 pandemic has driven the need to develop products to facilitate fast and efficient lending to impacted businesses with responsibility for the design and application of the products sitting outside of firms’ control. The terms of lending for the schemes requires firms to make lending decisions outside of their normal processes and with access to a limited amount/no information on the performance of the business. Similarly, firms are unlikely to have information on the business owner’s personal circumstances which may impact on the running of the business. The LSB recognises that firms’ ability to apply particular elements of the Standards may be reduced. This is particularly relevant in relation to the application of the Standards on customers in vulnerable circumstances. As set out in the Standards, the impact of the individual’s vulnerability on the business customer’s relationship with their registered firm will depend on a number of non-exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability.

The LSB recognises that when lending under BBLS, firms will not have the ability  to identify an individual in vulnerable circumstances. Similarly, the LSB has taken into account that the design of the scheme as a digital proposition only is outside of firms’ control.

It is recognised that by participating in the schemes firms may not be able to apply in full effect all provisions within this section of the Standards. Certain aspects of the products are determined by the Government, and as such firms will have a limited role in the design and review process. Given this, the LSB accepts that firms cannot reasonably be expected to give full consideration to the design or review of products offered under CBILS and BBLS.

 

1. Firms should have a vulnerability strategy, which defines its approach to the identification and treatment of individuals considered to be vulnerable, through whichever channel the customer chooses the engage


The treatment of customers in vulnerable circumstances, at all stages of the product lifecycle, is critical – starting with the culture and business model of a firm, the design and targeting of a product or service and its promotion and sale, through to the ongoing product and account servicing relationship with the customer, taking account of any change in circumstance, including any debt collection or debt sale activity. The LSB recognises that inclusive financial services are, in general, good for all consumers and that a consistent approach to vulnerability across the Firm is critical to ensuring the delivery of fair outcomes.

The FCA defines a vulnerable customer as, ‘someone who due to their personal circumstance is especially susceptible to detriment, particularly where a firm is not acting with appropriate levels of care.’ The definition acknowledges the strong interplay between the individual circumstance, situation and the actions and processes of firms, with the expectation that firms establish policies, processes and controls which ensure the fair treatment of customers in vulnerable circumstances, at every stage of the customer journey. It is widely accepted that vulnerability is not a static state limited to a certain group of people and that anyone can encounter a situation that might make them more susceptible to detriment, particularly where this affects a person’s ability to make or communicate an informed decision, or maintain existing financial commitments. This experience is no different for an individual consuming products and services in a business capacity or ultimately the business, where the individual is integral to its successful running. In our view, whether engaging as a personal customer or a business, firms should seek to support all customers to ensure they are given the helping hand they need to cope with a difficult circumstance, through whichever channel they choose to engage.

Factors such as mental and physical health, caring responsibilities and life changing events can put anyone in a vulnerable situation. This is supported by an understanding that whatever the vulnerability, the impact, or the way in which a person might handle or respond to a situation can vary.

The LSB acknowledges that not all businesses have the same needs, resources and capabilities, with some more sophisticated than others, this can vary based on factors such as borrower type and size. Practically this means that the impact of a change in circumstance for one director or partner in a business can vary depending on the size and structure of the business, their day to day management responsibilities (in particular, their position in the context of the business’ core operations), the impact that the vulnerability may have on the business’ operation, its workforce its income and cash flow and the overall availability of resource.

Firms must ensure, that when they become aware of a vulnerability, the impact on the individual is fully considered,  and where applicable, the impact this has  on the day to day running of a business, and the ability to meet and maintain ongoing financial commitments. Firms should remain alert to the fact, that, whatever the vulnerability, the way in which a person might handle or respond to a situation can vary, based on personal circumstance, and the size and structure of the business, relative to the individual’s day to day responsibilities and the nature and permanence of the situation.

 

2. Firms should undertake monitoring and assurance work to ensure that the vulnerability policies, processes and controls are designed and operating effectively and delivering fair outcomes


As firms document and develop their vulnerability strategies, consideration should also be given to their ongoing evaluation, to ensure that they continue to operate in a manner that is conducive to the delivery of fair outcomes. This may be achieved through the: ongoing review and assessment of the design and operational effectiveness of policies, processes and training, along with an assessment of the internal control framework, including the quality of first line quality assurance checks; testing the full customer journey, through using case reviews to form a view on the overall effectiveness of the firm’s strategy, response to a situation and appropriateness of the solution offered and the development of customer feedback mechanisms to explore the practical impact of the current structures in place.

 

3. Firms should have policies and processes governing the identification and fair treatment of individuals in vulnerable circumstances. These should take into account the channel, where the individual is within the customer journey and the varying nature and degrees of permanence of different vulnerabilities


Vulnerability can manifest itself in a number of different ways, such as an inability to work for a period of time, a reduced understanding of alternative products, or an inability to make informed financing decisions, where the capacity to evaluate products and services is impaired. Businesses are people led and run, and are therefore they are critical to a business ongoing success, and it is in this context that an individual’s vulnerable circumstance and the impact that it may have on a business, should be simultaneously explored and understood.

Whilst the Standards reference vulnerability in the context of an individual, and not a business, the impact that a business in difficulty may have on an individual involved in the day to day running and management of a business, should not be overlooked. This could include: loss of a key contract or a customer, poor business performance, or loss of key staff. Firms should be able to identify customers who are, or it suspects are in a vulnerable situation, irrespective of whether this derives from an individual circumstance or the business.

When considering the impact vulnerability can have on a business, Firms should fully explore the impact of the personal vulnerability on the individual, this should be considered along with their role and their importance in the context of the day to day management of the business and the degree to which the individual is able to exert significant control over the way in which it is run. For the purposes of this assessment, consideration should be given to:

 

  • The customer’s state of mind: how does the vulnerability impact their ability to understand or make informed financing decisions in relation to new applications for finance or reviewing the suitability of existing products held. Consideration should also be given to the extent to which the vulnerability might compromise the individual’s ability to make informed business decisions and how this might impact the business’ financial obligations with the Firm. Particularly where the situation limits the individual’s ability to continue meeting its key strategic and operational objectives.
  • The customer’s finances: focusing on their ability to manage existing commitments, and the impact the situation may have on current and future business income and expenditure, and the business’ ability to maintain contractual and financial repayments.

These should be reviewed in the context of the individual and their role and significance in relation to the business and the legal structure of the business and its level of sophistication. This should be underpinned by a firm understanding of the type of vulnerability, the degree of impact and its permanence and presentation.

 

4. a.Firms should ensure that their employees and their agents are sufficiently trained to help them to identify vulnerability and deal with the individual in accordance with their policies and processes, with appropriate escalation points, where the circumstances require this

b.When an individual is identified as potentially vulnerable, a Firm should ensure that its employees or its agents have appropriate referral and escalation points and are aware of how to access them


Staff training is integral to embedding a Firm’s vulnerability strategy, to ensure policies and procedures are implemented and drive a consistent approach to the identification of customers in vulnerable circumstances, and the support and guidance that is offered. Firms should consider the appropriate mechanism and approach to delivering training in the most effective way to ensure that the key messages from the training are firmly rooted and can be evidenced in practice.

The fair treatment of customers should be at the forefront and conscience of everyone’s minds, and the training should be conducive to achieving this.  This may be achieved in some instances through a dedicated induction programme, with a specific module on vulnerability, supported by real-life examples of business related customer encounters, covering a broad range of vulnerabilities. The training should highlight the support that is available to business customers, with an understanding of how the Firm would expect staff to respond to these situations, with reference to policy and procedural guidance.

Training could take the form of a bespoke online based training module on vulnerability, using scenarios to increase understanding of the different types of vulnerability and the corresponding needs of customers to ensure that vulnerability remains an active consideration in the execution of everyone’s role and at all stages of the customer journey. This could be supported by role specific training to help bring the concept of vulnerability to life, using practical examples and the different types of situations staff may come across in the execution of their day to day role.

Firms could develop triggers to assist staff in the identification of business customers who may be vulnerable. This could be underpinned by targeted and role specific staff training to bring the concept of vulnerability to life, illustrated through the use of practical examples and the types of situations staff may come across. Training should be based on information volunteered by the customer during conversations such as, references to life or work events which appear to have had a significant impact on the customer’s ability to cope and softer behavioural triggers, which, whilst not obvious, may indicate that the customer requires further support. This includes: signs of agitation, little to no communication despite previous regularity in contact, tone of voice, questions which indicate the customer does not understand what is being explained and placing reliance on a third party for support, where there are no existing mandates or authorities in place. Whilst we recognise that not every trigger may result in a customer being identified as vulnerable, they are clues which should be probed and explored further to encourage a complete understanding of the customer’s situation, based on a ‘tell us once’ approach.

Whilst training on the different types of vulnerability is key, the importance of softer skills such as the ability to listen, empathise and question is integral to a well-functioning vulnerability strategy. This is reinforced by the fact that not all customers will be forthcoming with information, particularly at the point of borrowing, as there is a fear that this may adversely impact the customer’s ability to apply for finance, or for fear that this information may be shared more widely, with a perceived consequence on the individual or on the reputation of the business. The answer is by no means definitive and should be considered on a case by case basis, but listening and questioning skills are critical in determining the impact of personal vulnerabilities on the individual, and their business to ensure the right level support is offered, at the right time.

Firms should seek to build structures and processes to allow staff to investigate situations fully, and equip them with the knowledge, confidence and skills to question and explore circumstances appropriately, with a view to identifying impact and likely support needs. However, a successful approach to identifying triggers also hinges on the frequency and quality of interaction with the business, the level of trust and the Firm’s knowledge of them, and the regularity and depth of monitoring undertaken by the Firm.

For businesses that are relationship managed, the model provides a sound basis to identify customers in vulnerable circumstances. The hallmarks of an effective relationship are built on trust and customer knowledge, which enable the regular exchange of information between the business and the relationship manager. The frequency of information exchange and the type of interaction can vary based on factors such as the size of the business and a Firm’s own criteria and method of customer segmentation, but at a minimum this is likely to take place on annual basis. This means that in most cases, the relationship manager is well placed to identify a change in circumstance and question or pre-empt the impact a change may have on the business in the normal course of the relationship, without exacerbating the situation or causing the business any alarm.

Most businesses will have an annual review date which is fixed from the date of sanction. This usually provides the relationship manager with an opportunity to identify changes to the business profile from a financial and non-financial perspective, and will typically focus on assessing historic financial performance against current performance; whilst assessing product utilisation against expected use. Relationship managers may also have responsibility for pro-actively managing arrears within their portfolio, where there are indications of a declining financial position. Triggers or indicators may include: persistent losses, missed or delayed payments, excesses and over-limits. Firms could use this opportunity to understand whether any changes may be attributed to a vulnerable situation.

Whilst there are clear benefits in training all staff to identify, manage and deal with vulnerability, some Firms may wish to explore the availability of a dedicated specialist team, with greater levels of training, knowledge and the flexibility to make decisions. The Standards do not require Firms to establish a specialist team to deal with vulnerability, but where there are specialist teams in place, firms should ensure appropriate mechanisms exist to refer the customer to appropriate support. We consider this decision to be a commercial one; but the outcome should be that customers have easy access to support. As Firms develop their approach, there is merit in evaluating the benefits of both approaches to ensure that there are fair and efficient structures in place, designed to suit the Firm’s business model (taking account of resourcing, capacity and driven by the need to achieve a consistent customer experience), to manage those customers identified as requiring further support. In all cases, staff should be encouraged to exercise discretion, thinking practically about the implications of their actions, being guided by their determination to resolve a situation, and deliver a fair outcome. This could then be reflected in the firm’s recruitment strategy and balanced by appropriate targets and measurement systems, which support the fair treatment of business customers in vulnerable circumstances.

Depending on the frequency and type of interaction and the distribution channels by which the business is serviced, the opportunities to identify vulnerability early on may be limited, particularly where the customer does not have regular contact or where they are not forthcoming with this information. Statistics show that more and more customers are transacting digitally, limiting opportunities for firms to engage in face to face or telephone contact. This generally sits at odds with most Firms’ strategies for identifying and dealing with vulnerability, which place a reliance on face to face or telephone contact with their front-line teams. Whilst there are clear challenges to identifying vulnerability digitally, the benefits of maintaining a digital platform mean that in most instances Firms have access to an array of transactional information on customers, which, with the correct data analytic tools, can help decipher trends and flag up anomalies and drive a pro-active contact strategy. Firms should ensure a consistent approach to identifying and managing vulnerability, irrespective of the channel through which the business customer chooses to engage.

In the case of a business current account, these anomalies may relate to a significant change in transactional activity, excessive use of an overdraft facility which sits outside the business’ expected usage which may indicate that there has been a change in circumstance, or where internal and external data sources show potential signs of financial stress, where the underlying cause may be attributed to vulnerability.

Whilst early identification of vulnerability is key to managing a detrimental impact on a business, Firms may encounter some situations where the impact of an individual vulnerability has already had a financial bearing on the business. In these circumstances, declining business performance, evident through a review of financial accounts or missed repayments may be a useful indicator of a change in situation, where further probing is required. Irrespective of the indicator, getting to the root cause of the decline in business performance is key here and if there is any additional support or guidance that the Firm can provide this should be forthcoming.

Other indicators may include:

  • Regular increased borrowing requests coupled with a sense of urgency which may indicate that the business is in distress, or an indication that the business is poorly managed;
  • Regularly exceeding credit card/overdraft limits;
  • Large increases or decreases in the business’s turnover;
  • The business is trading at a loss;
  • The business suddenly loses a key customer or employee
  • The customer does not keep to the conditions set out in the loan agreement and is in breach of covenant;
  • Following regular submission of financial information, the customer suddenly stops providing information; or
  • A winding up petition or other legal action is taken against the customer.

 

The shift in employment dynamics is undoubtedly a positive one, reflecting a peak in entrepreneurial drive as people choose to set up their own business, but for others, it is the outcome of the social and economic environment in which we live, where factors such as high unemployment and increased redundancies offer no other viable alternative. Whilst many will go on to run successful businesses, for some, factors such as limited financial capability, can make them more susceptible to detriment particularly where this impacts their ability to make informed business decisions. In some cases, it may be a combination of a number of factors, exacerbated by limited financial capability and the lack of business and strategic knowledge, stemming from the absence of expert or professional advice for business specific information and support. These factors may make it difficult to decide on business financing needs, resulting, in some instances, in poor and costly choice of product. Firms should seek to simplify product information to aid comparison, to enable the customer to make an informed borrowing decision – could firms be doing more to help create a level playing field?

Firms should also ensure there is a read-across for business customers, by sharing areas of best practice, based on lessons learnt in the personal space, to drive firm-wide improvements and deliver consistencies in the treatment of both personal and business customers – offering a firm-led strategic response to vulnerability.

 

5. Where appropriate, Firms should develop triggers and management information to assist employees in the identification and subsequent monitoring of individuals who may be vulnerable


Developing triggers can support front line staff in identifying signs of potential vulnerability. This could be underpinned by targeted training which involves educating staff on potential vulnerability triggers and customer impact. Customers or third parties may volunteer information, whether consciously or not, when interacting with a Firm and these opportunities should not be lost.

Each customer is different as is their ability to cope, therefore it isn’t possible to list all of the examples of information which the customer may provide or which could have a detrimental effect upon the customer. However, such examples could include life events such as the breakdown of a relationship or bereavement which may affect their ability to meet their housing costs/other commitments or even the ability just to cope with the day to day living.

Training on identifying and exploring information volunteered by the customer during conversations could take account of the more overt, situation such as: being in receipt of a disability allowance, being off work for a period of time, or a drop in income. The customer may also use phrases such as: ‘I cannot cope’, ‘I’m having difficulties managing at the moment’, ‘I’m struggling to get back on my feet’.

There are also softer behavioural triggers, which, whilst not obvious, may indicate that the customer requires further support. These include: signs of agitation, tone of voice, questions or answers which indicate the customer does not understand what is being explained or placing reliance on a third party for support, where there are no existing mandates or authorities in place.  Whilst the LSB recognises that not every trigger may result in a customer being identified as vulnerable, they are indicators that could be probed and explored further to encourage a complete understanding of the customer’s situation. The information should be recorded, with the customer’s consent, to facilitate a ‘tell us once’ approach, where appropriate.

Not all customers will be forthcoming with information, particularly during early interactions, as there may be a fear that this could adversely impact the customer’s ability to apply for credit, or the perception that the information may be construed negatively when setting up a repayment plan at the collections stage. Alternatively, customers may simply believe that the Firm does not need to know such personal information about them and lack understanding of how any information they provide will be used. Therefore, the importance of softer skills such as the ability to listen, empathise and question in a sensitive and patient manner is critical to a successful vulnerability strategy.

Customers should be provided with a clear explanation of how any sensitive information they wish to disclose might be used and the circumstances in which it might be shared across the Firm, for example that it will be used to ensure that products and services offered to the customer take account of their circumstance and are appropriate for their needs.

 

6. Where a Firm is developing a new product, or reviewing an existing product, it should consider vulnerability as part of the design or review process, paying regard to target market, clarity, accessibility and the operation of the product


Firms are encouraged to ensure that vulnerability is integral to their processes and is not approached as a ‘tick box exercise’ and that this can be evidenced through the product design, development and launch processes/stages. Firms should ensure that product limitations and risks are drawn out clearly to assist a customer’s understanding of a product. This could be accompanied by adequate staff training for customer facing channels and consideration of all content distributed via marketing channels, to assist customers in making a balanced and informed decision on a product, having regard to their contractual obligations. Where products are being reviewed, the LSB would encourage Firms to assess how the product is performing in terms of accounting for vulnerability and whether any adjustments are required.

 

7. Firms’ sales policies and processes should take account of the impact vulnerability may have on an individual’s ability to make an informed decision about a product, and provide relevant support during the application process


Firms should have mechanisms in place to support customers identified as vulnerable, however, there is a challenge in ensuring that the customer is given sufficient information to help make a balanced and informed decision. Vulnerability can take many forms, and the needs of customers may also vary, which can make it extremely difficult for staff to manage, particularly where sales policies and processes do not account for vulnerability at the point of sale.

The stress associated with being in a vulnerable situation may have an adverse effect on a person’s emotional state and cognitive ability. This may include general feelings of anxiety, the feeling of being unable to cope, being too upset to talk, finding it difficult to concentrate and assimilate information to help make and communicate an informed decision. Firms could provide further training and guidance to staff which may include:

  • Educating staff on the types of support the Firm can offer in cases where vulnerability is identified at acquisition; this may include: giving customers the time to reflect on the information they have received, encouraging the customer to bring an adviser or other third party to a face to face meeting, or defining referral points for a specialist team to engage with the customer;
  • In cases where the Firm has concerns over product suitability, and depending on the type of business and the way this relationship is managed by the firm, the customer insists they want that product, having escalation points for those decisions to be considered in greater detail including, for example, considering further avenues of support. Where there remain concerns over the customer’s ability to understand, make or communicate an informed decision following the offer of further support, a decision not to lend may, in the circumstances, be considered an appropriate outcome.
  • Strengthening quality assurance frameworks to ensure staff are assessed on the quality of their sales, on a non-advised basis, reflecting this requirement in staff objectives and targets;
  • Increasing use of mystery shops and feeding the outputs of this into strengthening existing processes.

Governance and oversight

Covid-19 update

 

This document has been produced by the LSB and sets out the relevant updates to the Governance and oversight Information for Practitioners in relation to the Covid-19 pandemic.

The Information for Practitioners provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on governance and oversight.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

  

Customer outcome: business customers will receive a fair outcome when taking out a credit product and throughout the whole customer lifecycle, wherever the interaction with the customer takes place

Firms will achieve this: with processes, controls and governance arrangements that ensure that there is effective senior management oversight of the Firm’s achievement of the customer outcomes contained in the Standards of Lending Practice for business customers

 

8. Firms should ensure that the product design stage takes into account internal and external risks which could impact upon a customer’s ability to maintain their repayments so that new products do not lead to unsustainable borrowing.


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic.

It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS and BBLS in reliance on the Government guarantee under each scheme.

It is recognised that by participating in the Government schemes firms may not be able to apply in full effect all provisions within this section of the Standards as certain aspects of the products are determined by the Government, and as such firms have a limited or no role in the design of products.

Given this firms cannot reasonably be expected to apply the provisions of paragraph 8. to the design of products offered under CBILS and BBLS as the parameters of the products are set out by the Government.

 

9. Firms should undertake both post-launch and cyclical product reviews to ensure that their products are, and remain, fit for purpose.


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS and BBLS in reliance on the Government guarantee under each scheme.

It is recognised that by participating in the Government schemes firms may not be able to apply in full effect all provisions within the Standards as certain aspects of the products are determined by the Government.

Given this firms are not able to determine design or the duration of the availability of the product, they will not reasonably be expected to undertake products reviews in a normal way. However, the LSB would encourage firms to take account of the schemes within the product review process.

Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic

The LSB recognises that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under Government established Coronavirus Business Interruption Loans Scheme (CBILS) By participating in the Government schemes firms may not be able to apply in full effect all provisions within the Standards as certain aspects of the products have been determined by Government. On 4 May, the LSB issued the following guidance note to firms. This update is a temporary measure relating to the Covid-19 pandemic and is designed to support firms in delivering products to business customers under the Government schemes. The update will be reviewed as appropriate. It does not apply to any other products offered by firms.

Updates to Standards of Lending Practice – asset finance – May 2020

The Standards for business customers – Asset Finance

The Standards of Lending Practice are voluntary and set the benchmark for good lending practice in the UK, outlining the way registered firms are expected to deal with their customers throughout the entire product life cycle.

The protections of the Standards of Lending Practice for business customers – Asset Finance apply to businesses/organisations, which at the point of lending:

  •  have an annual turnover of up to £6.5 million in its last financial year (exclusive of VAT and other turnover related taxes), and;
  • which does not have a complex ownership structure (for example, businesses with overseas, multiple, or layered ownership structures).

The Standards of Lending Practice for business customers – Asset Finance cover eight main areas:

  • Product information
  • Product sale
  • Declined applications
  • Product execution
  • Credit risk management
  • Financial difficulty
  • Portfolio management
  • Vulnerability

A separate section covers governance and oversight, setting out the framework firms should have in place to ensure that the Standards are implemented and operate effectively.

What products do they cover?

This set of Standards apply to asset finance, namely Hire Purchase and leasing products. Contract hire (motor retail at the point of sale/within dealership) is not currently in scope.

Click here to get your copy of the Standards of Lending Practice for business customers – Asset Finance.

Introduction

Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products, including asset finance products, under the Government established Coronavirus Business Interruption Loan Scheme (CBILS) in reliance on the Government guarantee under the scheme.

The LSB is clear that in order for firms to meet their obligations under the scheme, there is a need to facilitate fast and efficient lending decisions. The LSB would, therefore, consider participating firms’ compliance with the requirements of the Government scheme to be compliant with the relevant provisions of the Standards of Lending Practice. This applies, in particular, to paragraph 4 of product sale.

The LSB also recognises that by participating in the Government scheme firms may not be able to apply in full effect all provisions within the Standards as certain aspects of the products have been determined by Government, and as such firms will have a limited role in the design and review of these products. The relevant sections of the Standards – asset finance being: product information, credit risk management, vulnerability, financial difficulty and paragraph 8 of the provisions on governance and oversight.

This update is a temporary measure relating to the Covid-19 pandemic and is designed to support firms in delivering products to business customers under CBILS. The update will be reviewed as appropriate. It does not apply to any other products offered by firms.

 

The Standards of Lending Practice for business customers, sets good practice in relation to lending to business customers, across the lifecycle from the product design phase to the initial offering of the product through to dealing with customers who find themselves in financial difficulty.

The Principles for Lending outline the overarching areas of focus for Registered Firms and underpinning these are the more detailed Standards of Lending Practice which are broken down into the following topics

  • Product information
  • Product sale
  • Declined applications
  • Product execution
  • Credit risk management
  • Financial difficulty
  • Portfolio management
  • Vulnerability

There is also a separate section on Governance and Oversight, which sets out the framework Registered Firms should have in place to ensure that the Standards are implemented and operate effectively.

Products covered under the Standards of Lending Practice

The Standards of Lending Practice for business customers apply to products offered for business lending purposes as previously covered under the Lending Code: overdraft, loan, credit card and chargecard products. They do not apply to trade loans or invoice financing. This set of Standards apply to asset finance, namely Hire Purchase and leasing products. Contract hire (motor retail at the point of sale/within dealership) is not currently in scope.

The Standards represent a move away from its predecessor, the Lending Code, which was focused more on compliance with provisions than customer outcomes. The Standards acknowledge that there may be several ways to achieve the right customer outcome and that the best solution in a specific situation may differ depending on the customer’s individual circumstances. This approach avoids Firms having to rigidly follow a set of rules which may not always be appropriate and to allow for flexibility. The LSB’s oversight regime recognises this and focuses on how Firms are demonstrating that they are meeting the outcomes.

Each section contains both a ‘customer outcome’ and an overall statement of how a Firm will achieve this; both are supported by a more detailed set of standards to enable Firms to demonstrate how they achieve the desired outcome.

Application

The protections of the Standards of Lending Practice apply to businesses/organisations, which at the point of lending:

  • have an annual turnover of no more than £6.5 million in its last financial year (exclusive of VAT and other turnover related taxes), and;
  • which does not have a complex ownership structure (for example, businesses with overseas, multiple, or layered ownership structures).

Where a customer is referred to a third party because the Firm has declined a customer’s application, the extent of a Firm’s liability for ensuring the customer receives the protections provided by the Standards is limited to the point at which the customer is transferred/handed off to the third party.

The Standards as applied to hire purchase and leasing agreements offered to business customers, recognise the role that intermediaries play in this particular area of the market, whilst ensuring that the Standards provide consistent protections to small business customers, regardless of product. There are variations in the approach taken to drafting this set of Standards to take account of the initial engagement between small business customers and Registered Firms. The Standards also take into account the FLA’s Business Finance Code and its non-binding guidance for intermediaries and the National Association of Commercial Finance Brokers’ code of practice.

The Standards recognise that intermediaries play an integral role in the asset finance market and that intermediaries may act between finance providers and customers, the equipment supplier and the customer and in some circumstances, may manage the entire relationship, with Registered Firms providing only the finance. The LSB recognises that the Standards of Lending Practice cannot bind intermediaries but expects
its Registered Firms to take reasonable steps to ensure that any intermediaries are aligned to, and act in accordance with, the requirements of the Standards of Lending Practice so that customers receive a consistent level of protection, regardless of the channel through which they engage with the Firm. The LSB would also expect that Firms undertake an appropriate level of due diligence before transacting with third parties.

Alignment with statutory regulation

Registered Firms offering products to sole traders or partnerships may be regulated by the Financial Conduct Authority (FCA) for this type of customer and, depending on the type and value of the borrowing will be required to adhere to the Consumer Credit Sourcebook (CONC). For completeness, the Standards of Lending Practice may include where relevant, references to other legislation or statutory rules such as the Data Protection Act 1998 (DPA), General Data Protection Regulations (GDPR) (2018) or Consumer Rights Act (2015) which supersedes the Sale of Goods Act (1979). The Governance and Oversight section acknowledges that the FCA’s Senior Management Arrangements, Systems and Controls (SYSC) requires Firms to have adequate governance arrangements in place.

The intention is that the Standards of Lending Practice for business customers provide an overview of the entire lending process but adherence to any legislative or statutory requirement referenced is outside of the LSB’s oversight regime. In the event that legislation or statutory rules which replicate or conflict with the wording of the Standards comes into force, the relevant legislation or statutory rules will supersede its content.

Terminology

Any references in the Standards of Lending Practice to customer or customers applies to a business or businesses from the point at which it enters into discussions with a Registered Firm regarding a relevant lending product. Reference to borrowing means a hire purchase or leasing product.

In line with the FLA’s definition, reference to intermediaries includes: credit brokers, equipment suppliers and dealers.

Statement of Lender and Borrower Responsibilities

A separate one-page customer facing document has been developed to sit alongside the Standards of Lending Practice and is available on Registered Firms’ websites, customers may wish to read the Standards alongside this document.

Principles for lending

Application

Below are the overarching principles that Registered Firms which lend, provide finance, and/or undertake associated debt collection activities, to business customers should use to govern their relationship with them.

The Principles for Lending and Standards of Lending Practice apply to:

  • Overdraft, loan (excluding trade loans), credit card, chargecard, hire purchase and leasing (excluding contract hire) products.
  • Registered Firms and any third parties that retail and service the lending products listed above on behalf of a Registered Firm.

Registered Firms will ensure that their business customers:

a. Are told about the products the Firm has to offer and provided with clear information to enable them to choose a product that meets their needs.

b. Are provided with information about how to apply for the different products a Firm offers; what the application process entails and any other requirements a Firm may have.

c. Are aware of the high level basis on which the Firm will make its decision to lend to them. If the customer’s application is declined the primary reason for this will be provided.

d. Are aware that they have the right to appeal a Firm’s decision to decline their application and, where appropriate, have the option to be referred to alternative sources of finance.

e. Will be provided with clear and understandable documentation which sets out their obligations under their agreement with the Firm.

f. Are aware of the options open to them if they anticipate, or a Firm becomes aware, that they will have or are experiencing difficulty in repaying their borrowing.

g. Will know what happens when they have repaid their borrowing or no longer require it.

Product information

Customer outcome: all product information presented to business customers will be clear, fair and not misleading and enable the customer to understand the key features of the product, such as the interest rates, fees and charges that apply.

Firms will achieve this: with systems and controls at product design, financial promotion and product review stages that assess product performance and ensure product information is clear, fair and not misleading.

1. All financial promotions, across all channels, should be clear, fair and not misleading. This includes material provided to comparison websites and intermediaries.

2. Firms should ensure that products are designed/developed in a manner that ensures fair customer outcomes and that all risks associated with the product are fully understood and managed appropriately.

3. Firms should undertake regular product reviews at regular intervals to ensure that their products are, and remain, fit for purpose based on product performance.

4. Firms should ensure that product reviews take into account internal and external risks which ensure that any changes do not lead to unfair outcomes for customers.

5. Customer facing employees should be trained and knowledgeable about the range of products, across all channels, on offer to customers.

6. Where a Firm works with intermediary partners, the Firm should ensure that the intermediary is competent and knowledgeable about the range of products, across all channels, on offer to customers.

7. Where relevant, customers should be made aware of the relationship between the Firm and any intermediary and whether the arrangement includes any payments or commissions.

8. Customers will be provided with clear and understandable information which enables them to decide whether the product is appropriate and meets the needs of the business.

9. The customer’s consent should be sought prior to sharing any business or personal details with a third party or an alternative source of finance. [DPA] [GDPR]

10. Customers should be provided with clear information as to how the product on offer work, its key features and the associated costs.

Product sale

Customer outcome: business customers will only be provided with an appropriate and affordable product which meets the requirements of the business.

Firms will achieve this: with systems and controls that ensure the sales process, training and incentives promote the right behaviours and direct their employees, or their agents, to deliver the right customer outcome.

1. The customer should be provided with clear guidance on the information and documentation they will need to submit during the application process.

2. The customer should be informed of the likely time it will take for a lending decision to be made. Following receipt of the required completed documentation, Firms should ensure that customers are kept informed of the progress of their application.

3. The customer should be made aware that when they apply for a product, checks may be made at Credit Reference Agencies and that information may also be provided to Credit Reference Agencies during the life of the relationship

4. Before providing an asset finance product, an assessment should be made, from the information available at the time, as to whether the customer will be able to maintain their payments or rentals in a sustainable manner without encountering financial difficulty.

5. Where a quotation facility is offered, the customer should be made aware that any quotation is based on information known about the customer at the point in time, how long it is valid for and that it may be subject to change.

6. At the point of sale, the customer should be provided with clear information regarding the key features of the product, what options are available to them at the end of their primary agreement and what action, if any, they will need to take.

7. The customer should be provided with clear information to enable them to understand the total cost of the product. This information should be made available to the customer upon request, throughout the lifetime of the relationship.

8. Where the agreement allows for early termination, the customer should be provided with clear information regarding the costs associated with this.

9. The customer should know what will happen to the asset at the end of their agreement and what action, if any, they need to take.

10. The customer should be informed if any additional security is required to support the borrowing and the reason why. The level of security required should be appropriate to the amount borrowed.

11. Where additional security is taken, beyond the asset itself, this should not be retained beyond the life of the agreement without the customer’s consent.

12. The conditions of the facility should be confirmed in writing and the customer should be allowed time to seek independent advice, if they wish to do so.

13. The customer should be kept informed of the estimated timescales which may apply to the issuing of the agreement or for obtaining any additional security that may be required to support the borrowing.

14. Before a customer accepts the agreement, the customer should be told what form of monitoring information, if any, they will be required to provide about the business’ performance and how often this will be required.

15. If an individual or a business agrees to provide an additional security, they should be made aware of their obligations under the agreement and that they have the option to seek legal advice, should they wish to do so.

Product Sale

Declined applications

Customer outcome: business customers whose applications are declined are provided with the right of appeal and are aware of the alternative sources of finance available.

Firms will achieve this: with systems and controls that promote the right behaviours to ensure that their employees, or their agents, are able to treat declined business customers fairly and appropriately.

1. If an application for a product is declined, the Firm should ensure that it understands the reason(s) behind it in order to be able to convey, where appropriate, this information to the customer or intermediary. As a minimum, the Firm should provide the primary reason for the decline in writing.

2. Where the Firm is able to identify that the application was declined due to information obtained from a Credit Reference Agency search, the customer should be directed to obtain a copy of the information held about them from the relevant Credit Reference Agencies, prior to making any further applications.

3. Firms should inform the customer of their right of appeal and have fair and effective processes in place to review a decision to decline an application. These should, as a minimum, reflect the Lending Appeals process.

4. Where appropriate, the customer may be signposted to alternative sources of finance or third party. The customer should be made aware that the signposting is not an indication that any subsequent application would be successful.

5. Firms who are designated banks under the Small and Medium Sized Business (Finance Platforms) Regulations 2015 should offer a customer declined for finance the opportunity for their details to be referred to government designated finance platform.

Product execution

Customer outcome: information provided to business customers will be clear in terms of presentation and in clarifying any action that the customer needs to take. Business customer requests will be dealt with in a timely, secure and accurate manner.

Firms will achieve this: with systems, processes and controls that aim to provide an accurate view of the customer’s relationship with the Firm and the relevant lending products they hold. This should be underpinned by appropriately skilled and knowledgeable staff.

1. Customers will be provided with written notice of any change in interest rates (where relevant), fees or charges which affect the cost of their product. This requirement does not apply where the increase relates to a published rate, for example, base rate or other benchmark.

2. Firms will maintain the security of customers’ data but may share information about the day-to-day running of a customer’s account(s), including positive data, with credit reference agencies where the Firm has agreed to follow the principles of reciprocity.

3. Where individual provides a guarantee/indemnity or other security, they should be able to request information regarding their current level of liability, as long as the customer gives their permission and confidentiality is not breached.

4. Firms should comply with a customer’s request to co-operate with their professional adviser(s) during the lifetime of the relationship. All communication with the customer/their adviser will be undertaken in a clear and open manner.

5. Any changes to the terms of the customer’s agreement should be fair and transparent. The customer should be provided with clear information regarding the reason for the changes and provided with a reasonable amount of time to seek further clarification, or where appropriate, alternative sources of finance.

6. Where a customer is relationship managed and a change is made to this process which will impact on the customer, they will be provided with advance notice, and the reason for the change. Where this will require action from the customer, they should be allowed sufficient time to complete this, taking into account the channel currently used.

7. Firms should comply with a customer’s request to have access to the basic information held by the Firm about their products/accounts. The request should be dealt with in a timely and efficient manner.

8. In line with the industry protocol, requests for a Deed of Priority or Waiver should be dealt with quickly and efficiently.

9. Ahead of the expiry of their primary agreement, the customer should be aware of what will happen to the asset and what action, if any, they need to take.

Credit risk management

Customer outcome: business customers will be supported by pro-active and reactive measures designed to identify signs of financial stress.

Firms will achieve this: with systems and controls that are capable of identifying, across the relevant products held, where customers may be showing signs of financial stress and pro-actively engaging with the customer to agree an appropriate solution.

1. The customer should be told what information, if any, will be required to allow the Firm to monitor the business’ performance and how and when this should be provided.

2. As appropriate, a sufficient level of monitoring of a customer’s borrowing should be undertaken to help determine if the customer is exhibiting signs of financial stress. Where relevant, appropriate support should be offered.

3. Firms should have appropriate triggers and processes in place to help identify customers who are showing signs of financial stress and should engage with these customers in a supportive and open manner.

4. Firms should ensure that relevant customer facing employees are sufficiently trained and skilled to help them to identify and deal with those customers who may be showing signs of financial stress.

5. Where a customer is identified by an intermediary as showing signs of financial stress, a referral process should be in place which enables the Firm to deal with the customer in line with its policies and processes.

6. Firms should undertake monitoring and assurance work to ensure that their policies and processes are designed and are operating effectively in identifying and supporting customers who are showing signs of financial stress.

Financial difficulty

Customer outcome: business customers in financial difficulty, or in the early stages of the collections process, will receive appropriate support and fair treatment, in order to help them deal with their debt(s) in the most suitable way.

Firms will achieve this: with systems and controls that are capable of identifying and, subsequently, supporting business customers in financial difficulty. Firms should be able to demonstrate that a sympathetic and positive approach has been applied when considering a customer’s financial situation.

1. Firms should have triggers and processes in place to help identify customers who may be in financial difficulty and should act promptly and efficiently to address the situation with the customer.

2. Firms should have appropriate policies and procedures in place to identify and support vulnerable individuals within a business where this impacts on the customer’s ability to pay.

3. Customers identified as being in financial difficulty should be contacted and provided with clear information setting out the support available to them, the next steps and where relevant, with any action they are required to take. They should not be subject to harassment or undue pressure when discussing their financial situation.

4. Firms should demonstrate an empathetic approach to the customer’s situation; listening to and acting upon information provided by the customer with a view to developing an appropriate solution.

5. If, after exploring all the options open to the customer, it is clear that recovery of the asset is required, the Firm should ensure that the customer is provided with clear information as to what this entails.

6. Firms should seek to ensure that any recovery agents acting on their behalf demonstrate appropriate levels of conduct and deal with the customer in a professional and open manner.

7. Firms should apply an appropriate level of forbearance where, if after having made contact with the customer, it is clear that this would be appropriate for their situation.

8. If a Firm is aware that a customer is, or suspects that they are, in financial difficulty but is able to maintain their borrowing commitments to the Firm, the customer should be given the opportunity to take action to turnaround the business.

9. Firms should work with and support a customer’s turnaround plan where the Firm believes that it has a good chance of succeeding.

10. If a Firm is unable to support a turnaround plan, the customer should be notified of the reasons why and given a reasonable period of time to consider the options open to them.

11. Firms should guide the customer to appropriate advice which reflects their circumstances and level of borrowing. Where appropriate and available, the customer will be signposted to a third party offering free, impartial debt advice.

Portfolio management

Unless otherwise stated, the following Standards apply to the sale of performing and non-performing debt, where responsibility for the day to day customer relationship transfers to the third party.

Customer outcome: when debts are sold, impacted business customers will be treated fairly and all communications regarding the sale, and what this means for the customer, will be transparent and provided in good time.

Firms will achieve this: with systems and controls to ensure that only eligible business customers are transferred to a third party and appropriate due diligence is undertaken on the Firm before a sale, which demonstrates that the customer will be treated fairly.

1. Firms should follow a robust due diligence process when selecting third parties for debt sale or debt collection activities to ensure that customers will continue to be treated fairly, in line with the requirements of the Standards of Lending Practice and the relevant contractual terms.

2. Firms should ensure that where the decision is made to sell a customer’s debt and the contractual terms require the customer’s consent to do so, this is obtained prior to any sale taking place.

3. Where an agreement allows for a Firm to sell a customer’s debt without their consent, Firms should ensure that:
a. the customer is provided with reasonable notice that the Firm intends to sell their debt and provided with clear information as to what the sale means for the product(s) that they hold with the Firm and;
b. if the relationship with the customer will be serviced by the third party, full contact details for the purchaser are provided.

4. If an individual has provided appropriate and relevant notification of an ongoing mental health or critical illness that affects the customer’s ability to repay their debts, or the Firm is aware the individual is terminally ill, the Firm should consider whether it is appropriate to sell the debt(s).

5. If a Firm sells non-performing debt, it should take appropriate and reasonable steps to ensure that the third party, to whom the customer’s debt has been sold, deals with the customer in a manner that is consistent with the relevant requirements of the Standards of Lending Practice and the relevant contractual terms.

6. Where a debt is sold and during the lifetime of the original agreement, a dispute arises between the customer and the third party which the parties are unable to resolve, Firms should ensure that they have processes in place to allow the customer access to the Firm’s complaints procedure.

Vulnerability

The following Standards have been drafted to support Firms in identifying and addressing situations where an individual within a business either is, or the Firm has reason to suspect that they may be, vulnerable.

  • Reference to vulnerability is in relation to the individual rather than the business itself, for example, a business in financial difficulty would not necessarily be considered to be vulnerable for the purposes of these Standards; and
  • Reference to an individual means a person who, when taking into account information available to the Firm about the how the business is structured and operates, is able to exert significant control over the way in which it is run.

These Standards can be applied to a sole trader, partnership or to an individual within a limited company. The impact of the individual’s vulnerability on the business customer’s relationship with their Registered Firm will depend on a number of non-exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability. Firms will be at different stages of developing an approach to business customers and vulnerability and the applicability of the following standards will depend on the individual circumstances of the person.

Customer outcome: inclusive products and services take into account the broad range of business customers to which they may apply and contain appropriate flexibility to meet the needs of customers who may be, or are in, a vulnerable situation. Where customers are identified as, or the Firm has reason to believe that they may be, vulnerable, appropriate adjustments are made to ensure that their individual circumstances are accommodated to enable the customer, or their authorised third party, to manage their account(s).

Firms will achieve this: with systems and controls that are capable of assisting in the identification of customers who are, or may be, in a vulnerable situation, and having appropriate measures, training, referral points and skilled staff to deal appropriately with the customer once identified.

1. Firms should have a vulnerability strategy, which defines its approach to the identification and treatment of individuals considered to be vulnerable, through whichever channel the customer chooses to engage.

2. Firms should undertake appropriate monitoring and assurance work to ensure that the vulnerability policies, processes and controls are designed and operating effectively and delivering fair customer outcomes.

3. Firms should have policies and processes governing the identification and fair treatment of individuals in vulnerable circumstances. These should take into account: the channel, where the individual is within the customer journey and the varying nature and degrees of permanence of different vulnerabilities.

4. Firms should seek to ensure that where an intermediary identifies an individual as potentially vulnerable, this information is passed to the Firm, with the customer’s consent, and it is taken into account during interactions with the individual.

5. a. Firms should ensure that their employees are sufficiently trained to help them to identify vulnerability and deal with the individual in accordance with their policies and processes, with appropriate escalation points, where the circumstances require this.
b. When an individual is identified as potentially vulnerable, a Firm should ensure that its employees have appropriate referral and escalation points and are aware of how to access them.

6. Where appropriate, Firms should develop triggers and management information to assist employees in the identification and subsequent monitoring of individuals who may be vulnerable.

7. Where a Firm is developing a new product, or reviewing an existing product, it should consider vulnerability as part of the design or review process, paying regard to target market, clarity, accessibility and the operation of the product.

8. Firms’ sales policies and processes should take account of the impact vulnerability may have on an individual’s ability to make an informed decision about a product and provide relevant support during the application process.

Governance and oversight

Customer outcome: business customers will receive a fair outcome when taking out a credit product and throughout the whole customer lifecycle, wherever the interaction with the customer takes place.

Firms will achieve this: with processes, controls and governance arrangements that ensure that there is effective senior management oversight of the Firm’s achievement of the customer outcomes contained in the Standards of Lending Practice for business customers.

1. Firms should have adequate governance, policies, processes, management information and controls to enable effective oversight of adherence to standards and delivery of fair customer outcomes.

2. Firms should have an effective risk management framework appropriate to the size of the Firm to ensure that the Standards of Lending Practice are achieved.

3. Firms should ensure that their employees are adequately trained to deliver the Standards of Lending Practice’s customer outcomes, and that any incentive schemes are driving the right behaviours to ensure fair customer outcomes.

4. Firms should have systems in place to ensure that the Firms’ employees and agents are promoting products in a clear and transparent way.

5. Firms should have systems in place to ensure that any failure to adhere to the Standards of Lending Practice are identified and assessed for materiality and root cause. Where the materiality threshold is met, these are reported to the LSB and remediated in a timely manner.

6. Firms should have processes in place to identify when changes to the Standards of Lending Practice are made and to ensure that these are effectively incorporated within policies, processes and systems.

7. Firms should ensure that when systems or processes are changed, or products are introduced or changed, the impact on meeting the Standards of Lending Practice is adequately assessed.

8. Firms should ensure that the product design stage takes into account internal and external risks which could impact upon a customer’s ability to maintain their repayments so that new products do not lead to unsustainable borrowing.

9. Where part of the credit process/life cycle is undertaken by a third party, Firms should:
a. undertake effective and robust due diligence to ensure that the third party or intermediary can meet the requirements of the Standards of Lending Practice and deliver the required customer outcomes; and
b. exercise effective ongoing oversight of the third party or intermediary to ensure that it is meeting the Standards of Lending Practice and delivering the required customer outcomes.

10. Firms should have a robust complaints management process in place to deal with Standards of Lending Practice-related complaints and to undertake root cause analysis [DISP].

11. Firms should assign an appropriately skilled and senior individual(s) with clear accountability for overseeing that the Standards of Lending Practice are being adhered to and customer outcomes achieved, and for ensuring that remedial action is instigated where this is not happening.

Download the Standards

Click here to get your copy of the Standards of Lending Practice for business customers.

The LSB’s Information for Practitioners – Asset finance

These documents have been produced by the LSB and provide non-exhaustive examples of the approach Registered Firms may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers -asset finance. The Information for Practitioners is available for the following areas:

 

Product information

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on product information.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

Customer outcome: all product information presented to business customers will be clear, fair and not misleading and enable the customer to understand the key features of the product, such as the interest rates, fees and charges that apply.

Firms will achieve this: with systems and controls at product design, financial promotion and product review stages that assess product performance and ensure product information is clear, fair and not misleading.

 

Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

 HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products, including asset finance products, under CBILS in reliance on the Government guarantee under the scheme.

The Government has drafted portions of the documentation that firms are required to provide when lending under CBILS. It has also set requirements relating to the disclosure of information relevant to the products and the associated documentation. The LSB considers these to be compliant with this section of the Standards.

 

1. Firms should ensure that all financial promotions, across all channels, are clear, fair and not misleading. This includes material provided to comparison websites


The FCA’s Principles of Business (PRIN) require Firms to pay due regard to the interests of its customers and treat them fairly, to have regard to the information needs of its clients, and to communicate information to them in a way which is clear, fair and not misleading. The LSB’s view is that this could take the form of:

  • presenting information in plain language and wherever possible avoiding the use of technical or legal language;
  • the way the communication or financial promotion is being made e.g. email, text message, branch, web material, direct mail or letter;
  • the type and complexity of information that is being presented and the risks associated with the product, the actions the information might elicit from the customer, the channels by which the information is accessible and the passage of time, if any, since the information was last provided; and
  • the appropriate format and content of the communication based on its intended audience.

Firms should ensure that any information provided to, and subsequently displayed on, price comparison websites is consistent with that which would be contained on the Firm’s own website. Information should be complete, accurate, and not misleading, with reference to the information small businesses need to make an informed decision. This should include the price of the product and its main characteristics, with the risks, costs and benefits presented in a way that is clear and prominent along with an explanation of any promotional offers, its end date and the conditions on which the offer is made.

 

2. Firms should ensure that products are designed/developed in a manner that ensures fair customer outcomes and that all risks associated with the product are fully understood and managed appropriately.


This Standard seeks to ensure that products designed and offered by Firms are fair and transparent, meet the needs of its target market, and deliver fair customer outcomes. When developing a product Firms should have mechanisms in place to identify the target market, taking into account the customer’s characteristics, needs and objectives. This may be informed by customer data or research, and where available, information on outcomes from similar products. This information should be factored into product design, including but not limited to, the complexity of the product features, marketing material, distribution channels, the medium by which the product is sold[1] and where applicable, the use of intermediaries to ensure the product reaches its target market and delivers fair outcomes. In line with section 9 of the Standards of Lending Practice, Firms should, where practicable, consider the needs of a customer in a vulnerable situation, or those customers that may be at a greater risk of detriment. Firms should ensure that all risk and issues associated with providing the product to customers are identified, evaluated and managed appropriately, at an early stage within the process and that appropriate controls are in place to minimise the risk of unfair outcomes. Firms may achieve this through a documented risk assessment, which should be kept under regular review, with mechanisms in place to ensure the controls remain effective.

Suitable governance arrangements should be in place to ensure oversight and challenge through the product design and review process. Firms may achieve this through dedicated forums, with sufficient seniority and accountability, which demonstrates that the customer is at the forefront of their decision making.

 

3. Firms should undertake regular product reviews at regular intervals to ensure that their products are, and remain, fit for purpose based on product performance.


Regular product reviews are vital in ensuring a product remains fit for purpose, meets the customer’s needs and delivers fair customer outcomes. The LSB expects that product performance is reviewed regularly. The frequency and depth of the product review should provide the Firm with a sufficient degree of comfort that the product is distributed and accessed appropriately, performing as expected and continues to deliver the right outcome. The periodicity of reviews should be informed by the risks associated with the product, for example, a product deemed a higher risk to customer outcomes may be subject to more regular review. Where available, the review should be supported by an assessment of available data and management information.  Data may derive from a number of sources, and whilst this list is non exhaustive, it may include: sales data and application decline rates, data from customer dashboards and other product performance data which the Firm may consider relevant.  Firms may also seek more qualitative data sources, including the outputs from customer satisfaction surveys and complaints, or discussions with sales and distribution teams who may be able to offer insight into the product which may not be evident through a review of quantitative data alone.

This could include reviewing accounts which operate within the terms of the product compared with those that have breached, and any identifiable trends such as accounts falling into arrears at an early stage. Wider economic factors may also be taken into consideration, for example changes in regulation within specific markets, potential Bank of England base rate changes or inflation rates. These should be assessed for the impact they may have on the ability of customers to maintain repayments towards the product.

Where the product is not performing as expected, Firms should seek to understand root cause, with a view to implementing and monitoring appropriate actions to improve product performance.

 

4. Firms should ensure that product reviews take into account internal and external risks which ensure that any changes do not lead to unfair outcomes for customers.


Active product management is key to ensuring that a product continues to deliver fair outcomes for customers through its lifecycle.

Internal and external risk factors such as wider environmental influences can have the potential to impact on a product for example, the product may no longer operate as expected, or there is a greater propensity to impact customer outcomes. These risks may emerge from the product itself during a review, or from other similar products where the Firm has found that there is an increased likelihood that an issue may be more systemic. Irrespective of source, Firms should ensure that they have mechanisms in place to ensure that these risks are identified, assessed and managed appropriately so that the product does not lead to unfair outcomes or unsustainable borrowing. Any associated actions are documented, escalated where appropriate and followed through, with clear oversight of risks and actions.

 

5. Customer facing employees should be trained and knowledgeable about the range of products, across all channels, on offer to customers.


This Standard refers to training in the context of an employee[2] of a Firm, and any third-party agents that may act on their behalf. Whilst this obligation does not extend to broker or intermediary firms, some Firms may wish to consider broadening this requirement to gain comfort that any product marketed and sold by a broker or intermediary is conducive to the attainment of these Standards and the delivery of fair customer outcomes. This may be considered through a Firm’s due diligence policy and process and could be considered through the application of the governance and oversight Standards.

Firms should ensure that staff are trained to an appropriate level to enable them to have a comprehensive understanding of the products and services on offer, with the skills, knowledge and expertise needed to discharge the responsibilities of their role. Firms may benefit from defining and establishing a minimum benchmark for what they mean by a trained and knowledgeable employee in the context of their role requirements, to ensure there is a consistency in standards across the employee population. Firms may look to formalise their requirements through a training and competency framework, to inform both the recruitment and selection of employees and their ongoing performance management.

This could be supported by appropriate training covering the breadth of the Firm’s product and service offering, with a comprehensive understanding of its key features, and its risks and benefits so this can be presented to the business customer in a fair and balanced way to enable an informed borrowing decision. What the Firm may consider appropriate will differ based on the complexity of the product, the target audience and the business customer’s level of sophistication. Whilst the LSB recognises that most products will be sold on a non-advised basis, Firms should have appropriate controls in place to manage the risk of product bias by ensuring that employees are appropriately focused on providing information in a way that is clear, fair and comprehensible, and meets the needs of the business customer.

To support the implementation of training and the ongoing assessment of competence, Firms should ensure that there are appropriate controls in place to supervise employees. This may be achieved through an independent monitoring and quality assurance framework, assessing: adherence to policies and procedures, the extent to which training has been fully implemented, the level and depth of employee knowledge and its practical application to ensure that the right outcomes are being achieved, though this list is not intended to be prescriptive. Whilst the scope and type of assessment will differ based on role requirements, for sales staff, some Firms may achieve this through sales observations or customer file reviews. Whilst the method and type of assurance is for the Firm to decide, they should be guided by the need to ensure the fair and consistent attainment of the correct customer outcomes in line with the Standards of Lending Practice.

Firms may also wish to consider the level and depth of supervision to ensure that this is appropriate for the population of staff that they are assessing. In these instances, Firms may wish to consider introducing a risk based approach, to ensure a greater degree of supervision is applied to those situations where there is a higher risk of customer detriment, for example, where the Firm uses a third-party out-sourced provider[3], or where it has reason to believe that employees may require further support.  This may include those employees that are new to role or returning to work after a prolonged period of absence. In some instances, an enhanced level of supervision can help to mitigate the potential for customer harm, by ensuring that any employees identified as higher risk are appropriately monitored until the Firm can satisfy itself that the level of knowledge and training is appropriate and that ongoing competence is maintained. Firms should have clear procedures setting out its approach to supervision, and the criteria for enhanced supervision, where the Firm considers it appropriate. Any areas of improvement or weakness identified through the assurance checks should be dealt with in a timely manner, with a clear plan of action. Firms should also consider remediation action where the outputs of the assessment highlight evidence of poor customer outcomes or an increased risk of customer detriment.

An employee’s training needs are not static and so consideration should be given to the need to ensure training needs are regularly evaluated and reviewed. This is to ensure that the training delivered is fit for purpose and takes account of any  changes to the product or service offering, including any external developments  in regulation, legislation or standards. The overarching aim of this is to ensure that the information provided to the business customer is accurate and reflective of current practice and that staff are kept abreast of recent developments. This may also help to evaluate the effectiveness of the training to ensure it meets the Firm’s objectives and remains fit for purpose.

 

6. Where a Firm works with intermediary partners, the Firm should ensure that the intermediary is competent and knowledgeable about the range of products, across all channels, on offer to customers.


The Standard seeks to ensure that customers receive the same level of transparency and clarity of information from an intermediary as they would from the Firm directly. Firms should seek to ensure that there are synergies between the information the Firm provides to an intermediary and the information the customer receives. Firms should satisfy themselves that intermediaries are provided with information and training to an appropriate level to enable them to have a comprehensive understanding of the products and services on offer, including  key features,  and an appreciation of the risks and benefits so this can be present to the customer in a fair and balanced way to enable an informed product decision.

Firms may wish to consider broadening the requirements of Standard 5, (Customer facing employees should be trained and knowledgeable about the range of products, across all channels, on offer to customers) to their intermediaries to gain comfort that any product marketed and sold by a broker or intermediary is conducive to the attainment of these Standards and the delivery of fair customer outcomes.  Firms should also have appropriate controls in place to manage the risk of product bias by ensuring intermediaries share the focus on providing information in a way that is clear, fair and comprehensible, and meets the needs of the customer.

 

7. Where relevant, customers should be made aware of the relationship between the Firm and any intermediary and whether the arrangement includes any payments or commissions.


Transparency with regards to the relationship between a Firm and intermediary, including payments or commissions, is important in ensuring that the customer is given all the relevant information they need to make an informed choice when taking out a product. The customer should have full knowledge of who they will be dealing with when it comes to their product, who is providing their product and whether their repayments contribute to an intermediary’s commission – this is particularly important as this means not all of the customers monthly payment is used to repay their asset, and customers should be aware of this.

Firms are encouraged to be as clear as possible when making customers aware of relevant relationships to ensure business customers of varying degrees of sophistication can understand how the relationships work and what effect this has on them as the customer.

 

8. Customers will be provided with clear and understandable information which enables them to decide whether the product is appropriate and meets the needs of the business.


This Standard is seeking to ensure that customers are provided with appropriate information at the right time and in an appropriate medium to enable them to make an informed decision. The provision of clear information regarding eligibility criteria, documents or information required to undertake an application, key features and costs of the product will enable customers to make an initial decision as to whether the product on offer is suitable for the needs of the business. Customers will have varying degrees of sophistication and understanding of how different products work, and whether they are right for their business. The provision of clear information, written in plain English, wherever possible, avoiding the use of technical or legal language and displayed in a clear and comprehensible form will support customer’s understanding of the information being provided. Where possible, Firms should seek to avoid the risk of information asymmetries, where there is an imbalance in the information provided to the customer versus the information or knowledge held by the Firm. This is to ensure that the customer is empowered to make a decision, with a clear and informed understanding of a product, and how it relates to their business needs.

Firms should give appropriate consideration to the method and medium of presenting information across the different channels of entry. This will differ across each firm and their business model but may include: digital, telephony, branch and relationship managed propositions where this is available. The LSB acknowledges that not all Firms will operate a direct model for the sale of asset finance products, with some managing sales through the use of intermediaries. Where Firms operate an intermediary model, mechanisms should be in place to ensure that there are synergies in the information provided to customers, as if the Firm is engaging with the customer directly Firms should ensure that where possible, the information provided is clear and consistent across all channels, to prevent the risk of information discrepancies, to allow the customer to weigh up the risks and benefits of a product or service, irrespective of the channel through which they choose to engage.

The use of fact or information sheets may support the Firm, and their intermediaries in delivering a consistent message to customers on the product or service on offer.

 

9. The customer’s consent should be sought prior to sharing any business or personal details with a third party or an alternative source of finance. [Data protection legislation]


Information on compliance with data protection legislation can be found on the Information Commissioner’s Office’s website: https://ico.org.uk/

 

10. Customers should be provided with clear information as to how the product on offer work, its key features and the associated costs.


At this stage, the Standards are focused on ensuring that the customer is able to determine whether the product they are being offered could meet the needs and requirements of their business. The provision of clear information on the way the product works and the costs associated with it will enable the customer to better assess whether the business will be able to sustain the borrowing. This could be achieved through highlighting whether any early termination or early repayment costs will apply to their product, including information on what might happen at the end of a lease, through material provided on the Firm’s website or by providing the customer with relevant information during any initial early conversations.

The provision of this information will encourage customers to consider whether they understand what the early termination and early repayment fees are. If not, there is an opportunity for them to undertake further research, seek profession

[1] Advised or non-advised

[2] Employed for the purpose of the Firm’s business.

[3] Where there is customer contact.

Product sale

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on product sale.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

 

Customer outcome: business customers will only be provided with an appropriate and affordable product which meets the requirements of the business.

Firms will achieve this: with systems and controls that ensure the sales process, training and incentives promote the right behaviours and direct their employees, or their agents, to deliver the right customer outcome.

 

1. The customer should be provided with clear guidance on the information and documentation they will need to submit during the application process.


Firms offer a variety of information on their websites regarding the application process for an asset finance product. This is a useful starting point for the customer to explore the product options on offer and to understand whether any eligibility criteria apply for example and what information they will need to provide to support their application.

The LSB recognises that Firms will have their own requirements as to the information and documentation they will request during the application process. The type and level of information required will be driven by the complexity of the borrowing, size and sophistication of the business itself. Firms may have eligibility criteria, for example, relating to trading history, asset class and/or  business sector and the LSB would expect this to be clear to the customer.

Consideration could be given as to how this information is presented to the different customer types, for example for businesses who are towards the lower end of the £6.5m scope of the Standards. This could include providing a rationale for the information requested or outlining how the Firm will take this into account during the application process. For example:

  • whether there are any other business interests, explaining that this information will help the Firm to understand what commitments the business or key members of the management team have, which enables the Firm to assess how much attention and focus the business will have.
  • whether or not security is available and if some form of appropriate security would be sought, such as guarantees, property or other assets that are easy to value and realise – an explanation of which may be appropriate to the customer’s situation.
  • the owner’s investment in the business, which would show the owner’s investment relative to the bank’s proposed investment.

 

2. The customer should be informed of the likely time it will take for a lending decision to be made. Following receipt of the required completed documentation, Firms should ensure that customers are kept informed of the progress of their application.


The range of customers caught under the new Standards of Lending Practice has increased and within this group there will be varying degrees of sophistication across the different business models, in terms of maturity, size and their understanding of the lending process. Some may lack awareness of the additional requirements which are attached to business lending or may not have accounted for the fact that it can take time for the Firm to process their application. Ensuring that the customer is informed of the likely length of time it will take for a decision to be made at the outset will help to aid the customer’s understanding of the lending process.

Wherever possible, the LSB would encourage Firms to keep customers updated on the progress of their application, particularly where for example, security is required or the lending has a layer of complexity which will increase the time required to process the application. This Standard is not intended to be overly onerous on Firms, the focus is on ensuring that the customer is aware of how long it may take for them to receive a decision and ensuring they remain informed during the process.

There may be situations where it is not possible to provide a definitive timeframe. However, the LSB would expect that Firms are able to provide an indication of the timeframe within which a customer can expect to know whether their application has been successful or not. This can be flexed where required if the lending decision goes beyond the initial timeframe. In these circumstances, the LSB would expect that the customer is kept informed of progress and that Firms will be proactive rather than reactive, informing customers of any delays or promptly requesting any additional information which may be required to support the customer’s application. Firms are encouraged to be as open as they can as to the reason for the delay and any potential new dates which may apply.

 

3. The customer should be made aware that when they apply for a product, checks may be made at Credit Reference Agencies and that information may also be provided to Credit Reference Agencies during the life of the relationship.


Some business customers may lack understanding of how Credit Reference Agencies (CRAs) fit into the application process and that, by applying for business related lending, information is recorded on their credit file.  When a customer applies for a product covered under the Standards of Lending Practice, they should be told whether searches will be made at CRAs, whether a record of any search will be retained at the CRA and, if so, that this could impact on their ability to obtain finance elsewhere. The business customer should also be told if the details of the account, if opened, will be passed to CRAs and that the information will be accessed and used by others. This will include information about the running of the account such as the limit and balances as well as payment performance.

 

4. Before providing an asset finance product, an assessment should be made, from the information available at the time, as to whether the customer will be able to maintain their payments or rentals in a sustainable manner without encountering financial difficulty.


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products, including asset finance products, under CBILS in reliance on the Government guarantee under the scheme. On 27 April 2020, changes to the criteria firms are required to apply when considering businesses for a loan under CBILS were announced.

The criteria for assessing affordability of a product under CBILS is different to that set by the Standards. When considering an application for a CBILS product firms should ensure that processes for assessing whether the product is affordable for the business align with the requirements of the scheme. Firms should consider the range of information available to them, examples include: the performance of the business prior to the Covid-19 outbreak; a view of how the customer will be able to maintain their payments or rentals in due course, relying on judgement in the absence of financial forecast information; and the general prospects for the sector in which the business operates once the effects of the pandemic have receded.

Firms are reminded that they should only request information relating to the performance of the business where the customer might reasonably be able to provide the requested information at speed. The LSB recognises that some business customers may wish to provide the firm with forward-looking financial and business plans. If a business customer chooses to do so, this information can be used to support the better assessment as to the appropriateness of lending under the Government’s schemes, the level of borrowing and duration required and the affordability of the financing applied for.

The LSB considers participating firms’ compliance with the requirements of CBILS to be compliant with this provision of the Standards of Lending Practice. In line with the requirements of the wider Standards, the LSB would expect participating firms to continue to ensure that the customer is provided with clear information on how the product works and its key features (see also paragraph 7, Product sale).

 

Registered Firms should request the level and detail of information required to fully assess the customer’s ability to repay borrowing without it causing the customer financial difficulties. Taking into account the actual and/or anticipated turnover of the business, existing debt commitments and any known future changes which could be reasonably expected to have a significant financial impact on the customer, to ensure that the business can service any debt. This assessment will take into account whether any security is provided, although, the LSB would not expect a Firm to lend to a customer based on the level of security provided alone.

Registered Firms may also require additional information to satisfy themselves that the customer can meet their obligations as they fall due. The LSB acknowledges that Firms may have additional requirements in place, depending on the type and level of borrowing requested and any information the Firm already has about the customer. Firms may wish to consider the following factors:

  • why the business requires the asset
  • the industry within which the business operates
  • the length of the agreement
  • the business plan and annual accounts
  • the business’s cash flow, profitability and existing financial commitments
  • any personal financial commitments which may affect the business
  • how the customer has handled their finances in the past
  • information from credit reference agencies and, with the customer’s permission, others, such as other lenders and the customer’s landlord (where relevant)
  • credit scoring
  • any security provided
  • any future changes which could be reasonably expected to have a significant financial impact on the customer
  • personal indebtedness indicators
  • total credit exposure
  • adverse information e.g. CCJ/bankruptcy.

 

5. Where a quotation facility is offered, the customer should be made aware that any quotation is based on information known about the customer at the point in time, how long it is valid for and that it may be subject to change.


From 2 February 2018, the CMA will require the larger banks to offer business customers the ability to obtain indicative price quotations and their eligibility for unsecured business loans and unsecured standard tariff business overdrafts, up to £25,000. The intention is that the same tool should be accessible to a minimum number of third party intermediary service providers by 2 May 2018.

Ahead of this implementation date, and for borrowing which will not be caught by these requirements, where a Firm offers an indicative quotation facility relating to a product captured under the Standards of Lending Practice, the LSB would expect the customer to be informed that the headline rate may not be available and any quotation will be linked to the business’ financial circumstances as known to the Firm and where relevant, CRAs, prior to the customer commencing a formal application.

The LSB would expect where a customer asks for an indication of the likely interest rate for a product, the Firm should either:

  • as industry best practice, provide an indicative quotation, in respect of which any credit search undertaken is not registered as a full application search at CRAs i.e. it is not used by lenders in their risk assessment; or
  • inform the customer that it does not offer an indicative quotation facility and ensure that the customer is aware that, if they proceed, an application search will be registered at the CRA(s).

 

6. At the point of sale, the customer should be provided with clear information regarding the key features of the product, what options are available to them at the end of their primary agreement and what action, if any, they will need to take.


This Standard follows on from paragraph 10 of Product Information and is intended to ensure that there is a consistent approach to the provision of information around the key features of the product. The intention is that the customer should be in a position to make an informed decision and have opportunities to review and ask questions, should they need to do so, as they move through the application process.

The provision of clear information on the way the product works will enable the customer to assess whether the business will be able to sustain the agreement and ensure the customer fully understands the features of the product and how the agreement will run. Firms should provide clear information on the options available to the customer at the end of their primary agreement for example, extending the agreement into a secondary term, purchasing the asset at the end of the agreement for a nominal sum, or selling the asset to a third party, enabling a customer to plan ahead.

 

7. The customer should be provided with clear information to enable them to understand the total cost of the product. This information should be made available to the customer upon request, throughout the lifetime of the relationship.


The requirements of this Standard extend to any information provided to the customer by a third party such as an intermediary or broker.

The LSB expects Firms to ensure that the customer is fully informed of the cost of the agreement and are able to determine whether the product is suitable for their business. The provision of clear information as to the total cost of the product enables the customer to assess whether the business will be able to maintain their contractual repayments through the life of the agreement.

The customer should be given an opportunity to seek further clarification and, seek professional advice. It also prompts the customer to consider what immediate impact these costs may have on the business.

 

8. Where the agreement allows for early termination, the customer should be provided with clear information regarding the costs associated with this.


The requirements of this Standard extend to any information provided to the customer by a third party such as an intermediary or broker.

This Standard seeks to ensure that where the customer’s agreement permits early termination, and the customer opts for this, they are clear on the total cost of the likely exit fees for terminating the agreement early and what this might mean for the customer. Firms should ensure that this information enables the customer make an informed decision about the suitability of asset finance product, taking into account the potential costs associated with it.

 

9. The customer should know what will happen to the asset at the end of their agreement and what action, if any, they need to take.


The requirements of this Standard extend to any information provided to the customer by a third party such as an intermediary or broker.

The LSB expects Firms to have controls in place to ensure customers are provided with sufficient information on what will happen to the asset at the end of their agreement and what might this might mean for the customer in the context of their business. Information should be communicated at an early stage, prior to the customer entering into the agreement to ensure the customer has a comprehensive understanding of their contractual obligations including any actions they are obligated to take, and the implications this may have on the business.

 

10. The customer should be informed if any additional security is required to support the borrowing and the reason why. The level of security required should be appropriate to the amount borrowed.


The requirements of this Standard extend to any information provided to the customer by a third party such as an intermediary or broker.

Customers may not always understand why they are required to provide security to support their borrowing and the LSB would encourage Firms, where security is required, to provide the customer with a clear explanation as to why this makes the proposition feasible. This could also include an explanation as to why the particular type of security is required relative to the customer’s circumstances.

The LSB would not expect a Firm to require security which is excessive when considered in light of the level of the customer’s borrowing. However, if the only security the customer can offer is in excess of the figure being borrowed, this does not preclude the security from being taken. However, the LSB would expect Firms to explain to the customer what this means in terms of their situation and the implications for them if the business was unable to pay. The customer could also be encouraged to seek legal advice to ensure that they fully understand their obligations under the agreement.

Where the Firm requires security to support a business’s borrowing or other liabilities, it should confirm what is needed in writing. The LSB would expect that any documentation provided should be easy to understand and avoid technical language whenever possible. The customer should have the opportunity to discuss with the Firm anything about which they are unsure.

Where a guarantee is provided, the LSB would expect Firms to tell the guarantor the extent of their liability, including the addition of interest and charges after demand has been made. Where independent legal advice has been given, it may be assumed that the solicitor will have explained the nature of all monies and continuing security, if appropriate. Depending on the nature and structure of facilities, Firms may choose to explain these features to those customers who have declined independent legal advice (and should always do so when requested by any guarantor).

 

11. Where additional security is taken, beyond the asset itself, this should not be retained beyond the life of the agreement without the customer’s consent.


This Standard follows on from the requirements of Standard 10,  where security is taken, the customer is informed that this will not be retained beyond the life of the finance agreement without their consent. It should be made clear that the security will be released once the facility is repaid – unless contrary instructions are received from the customer, intermediary or authorised third party.

 

12. The conditions of the facility should be confirmed in writing and the customer should be allowed time to seek independent advice, if they wish to do so.


Independent advice can help the customer to make an informed decision about the agreement they are looking to enter into and enable them to better understand their obligations under it. The exact conditions will be dependent on the circumstances of the borrowing but the LSB would consider that the following is included as appropriate:

  • the amount and purpose of the facility;
  • whether the facility is for a particular period or whether it is repayable on demand;
  • details of repayments;
  • the interest rate and any other charges for the facility, and whether these are variable;
  • where relevant, when the agreement will normally be reviewed;
  • the existing or new security and guarantees, including any minimum values to be maintained;
  • what sort of circumstances will lead to an earlier review or require repayment;
  • what happens at the end of the agreement; including where relevant the prospect of a secondary term, or return of asset;
  • the information the customer will need to give before they can use the facility; and
  • what action the Firm will take if repayments are not met.

The customer should be encouraged to obtain independent advice before accepting the facility to ensure that they understand their liabilities under the agreement.

 

13. The customer should be kept informed of the estimated timescales which may apply to the issuing of the agreement or for obtaining any additional security that may be required to support the borrowing.


The LSB’s expectation is that customers are kept updated of the progress of their application so that they are better placed to understand when they will have formal notification of their borrowing and any conditions which may be attached to it. Customers may not have an understanding of the legal element which sits around the process of obtaining security and that this can take time to complete.

The LSB recognises that the timescales will be dependent on the individual circumstances, level and complexity of the borrowing and that while an indication can be provided, the Firm may have to go beyond this. The Standard does not preclude Firms from flexing any timescales provided, but the intention is that the customer is aware of how their application is progressing and when they can expect this element of the process to be completed. This will allow them to better manage onward elements which may be required, such as obtaining legal advice in relation to the facility letter.

 

14. Before a customer accepts the agreement, the customer should be told what form of monitoring information, if any, they will be required to provide about the business’ performance and how often this will be required.


The nature of business lending means that the size and experience of the business customer can vary from highly qualified and experienced individuals running a large company to a sole trader who has recently set up in business or who maybe hasn’t required any additional funding up until now. Information such as management accounts and/or cashflow projections may be requested on a regular basis and will require time and potentially costs, to prepare if, for example, information is required from external sources such as accountants. Therefore, ensuring that the customer is aware of these requirements means they can factor this into their internal processes.

The type of monitoring information will depend on size and form of  finance and Firms will have a view on what is appropriate in the circumstances, examples include:

  • a comparison of the forecasts with actual results;
  • progress on important aspects of the business plan, such as contract renewals;
  • revised cash-flow forecasts;
  • major capital spending proposals;
  • annual accounts and regular management accounts;
  • details of how much the customer owes creditors, and are owed by debtors, and for how long these have been due; and
  • evidence that the customer is meeting any special conditions agreed.

Firms will have their own monitoring requirements, in addition to, or instead of the above depending on the type of lending, complexity of the business and risk to the lender. Firms should ensure that the customer understands what is expected of them and if further down the track, additional information is required, which is on top of what has been agreed, the LSB would expect Firms to provide customers with a reasonable amount of time to provide this. Firms should confirm in writing what information is to be provided and by when.

 

15. If an individual or a business agrees to provide an additional security, they should be made aware of their obligations under the agreement and that they have the option to seek legal advice, should they wish to do so.


Firms may accept a guarantee or other form of security provided by another person to support the business’ liabilities. It is important that guarantors or granters understand the full nature of their commitment and the potential implications of their decision, to do this Firms should ensure that a guarantor has the option to seek independent advice. The LSB recognises that some guarantors may not wish to do so, or in the example of a director providing a guarantee for their own business, that they understand what they are committing to. In these circumstances the LSB would encourage Firms to document that the customer has been provided with the opportunity to seek advice but has declined to do so.

The LSB would expect that guarantors are told that by giving the guarantee or other security they may become liable instead of, or as well as, the customer and told what their liability will be, including the addition of interest and charges after demand has been made. When independent legal advice has been given, it may be assumed that the solicitor will have explained the nature of all monies and continuing security if appropriate. Depending on the nature and structure of facilities, Firms may choose to explain these features to those customers who have declined independent legal advice (and should always do so when requested by any guarantor).

Firms may wish to go further than what is covered in this section and actually get a potential guarantor or granter who refuses to take legal advice to sign a declaration to that effect. In any case, the recommendation to take independent legal advice and the potential consequences of their decision should be stated clearly on all appropriate documents that the guarantor or granter is asked to sign.

 

Product sale

Declined applications

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on product sale, declined applications.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

Customer outcome: business customers whose applications are declined are provided with the right of appeal and are aware of the alternative sources of finance available.

Firms will achieve this: with systems and controls that promote the right behaviours to ensure that their employees, or their agents, are able to treat declined business customers fairly and appropriately.

 

1. If an application for a product is declined, the Firm should ensure that it understands the reason(s) behind it in order to be able to convey, where appropriate, this information to the customer or intermediary. As a minimum, the Firm should provide the primary reason for the decline in writing.


This Standard is seeking to ensure that Firms have processes in place to enable them to better understand the reason why a customer’s application has been declined and that this information can in turn be used to facilitate a ‘better conversation’ with the customer. That is, one which enables the Firm to provide an explanation which is beyond a ‘computer says no’ scenario. The Firm is therefore able to offer more specific information to satisfy the customer’s enquiry as to why the Firm has been unable to offer an asset finance product. The expectation is not that Firms are required to disclose information regarding underwriting policies, scorecards, risk appetite etc, but there should be a sufficient understanding to enable the customer to be provided with an appropriate level of information which will satisfy their enquiry as to why they have been unsuccessful. Where possible, the Firm should communicate their decision, and any associated rationale in a durable medium, allowing the customer to make an informed decision around next steps.

In line with Professor Griggs’ work on the lending appeals process, the LSB would encourage Firms to support declined customers, in as far as possible, to understand how their application could be improved with a view to making a new or revised application. If the customer has applied through an intermediary, where possible, this information should be communicated to the customer’s representative.

Where an application is declined on the basis of affordability, the Firm could consider whether the individual would benefit from a referral to, where offered and appropriate, free, independent debt advice for example, business debt line. The LSB acknowledges that not every decline will be on the basis of a lack of affordability but where the information available to a Firm suggests that the business may be showing financial stress, and appropriate for the circumstances, they may benefit from a referral.

 

2. Where the Firm is able to identify that the application was declined due to information obtained from a Credit Reference Agency search, the customer should be directed to obtain a copy of the information held about them from the relevant Credit Reference Agencies, prior to making any further applications.


Some business customers may lack understanding of how Credit Reference Agencies (CRAs) fit into the application process and how the process of applying for credit requires that information is recorded on their credit file.  If a business customer’s application is declined, they should be advised of the main reasons why their application has been unsuccessful, and where this relates to a information obtained from a CRA, the customer should be told which CRA(s) the Firm uses and how to get a copy of the information the relevant CRA(s) hold about them. The customer should be provided with any information produced by the Firm or directed to relevant pages of the Firm’s website which explain how credit referencing works.

 

3. Firms should inform the customer of their right of appeal and have fair and effective processes in place to review a decision to decline an application. These should, as a minimum, reflect the Lending Appeals process.


The Lending Appeals process, headed up by Professor Russel Griggs, is well established and those Firms which are captured within it will be subject to oversight by Professor Griggs and his team. Where a Firm is not yet within the appeals process, the LSB would expect these Firms to offer customers a right of appeal and opportunity for the decision to decline to be reviewed, which aligns with the Lending Appeals process.

 

4. Where appropriate, the customer may be signposted to alternative sources of finance or third party. The customer should be made aware that the signposting is not an indication that any subsequent application would be successful.


Firms may have arrangements in place with third parties which enables them to provide a signpost to another asset finance provider or raise awareness about the financial solutions they may wish to consider.  The customer should be informed that the third party will undertake its own assessment and that what has been provided is a signpost to an organisation which may be able to help, subject to relevant affordability checks etc.

 

5. Firm who are designated banks under the Small and Medium Sized Business (Finance Platforms) Regulations 2015 should offer a customer declined for finance the opportunity for their details to be referred to government designated finance platform.


Firms to whom these regulations apply will already be aware of their obligations under Small and Medium Sized Business (Finance Platforms) Regulations 2015, which can be found at: http://www.legislation.gov.uk/uksi/2015/1946/pdfs/uksi_20151946_en.pdf

Product execution

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on product execution.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

  

Customer outcome: information provided to business customers will be clear in terms of presentation and in clarifying any action that the customer needs to take. Business customer requests will be dealt with in a timely, secure and accurate manner.

Firms will achieve this: with systems, processes and controls that aim to provide an accurate view of the customer’s relationship with the Firm and the relevant lending products they hold. This should be underpinned by appropriately skilled and knowledgeable staff.

 

1. Customers will be provided with written notice of any change in interest rates (where relevant), fees or charges which affect the cost of their product. This requirement does not apply where the increase relates to a published rate, for example, base rate or other benchmark.


This Standard is seeking to ensure that business customers are better prepared to take account of changes in interest rates or charges and that they have an opportunity to consider whether this will have an impact on the business’ ability to maintain its repayments, where relevant. Advanced notification can enable customers to plan ahead and consider the impact a change on their agreement may have on their financial situation.

Providing customers with this information can also help to identify any early indications of financial stress as it may prompt the customer to make contact with the Firm, should the business be concerned about the impact of a rate increase, or change to a charging structure may have on their ability to maintain their financial commitments. Firms may wish to consider how the provision of this information links into any monitoring work which is undertaken and, from the information the Firm has on the performance of the business, whether an increase will impact upon its ability to maintain its financial commitments. If so, Firms should engage with the customer with a view to understanding the nature of the issue for example, whether it is a short term cash flow situation or whether there is a longer term issue which will impact on their ability to maintain their commitments. Firms should encourage customers to engage with them and set out any support which may be available.

The requirement does not apply where the customer is provided with a variable rate which is linked to the Bank of England base rate, LIBOR or any other benchmark. Where changes are to the customer’s advantage, the LSB would expect that, in the interests of transparency, customers are advised of the change but accept that Firms may well make immediate changes in this regard.

 

2. Firms will maintain the security of customers’ data but may share information about the day-to-day running of a customer’s account(s), including positive data, with credit reference agencies where the Firm has agreed to follow the principles of reciprocity.


Firms can provide Credit Reference Agencies (CRAs) with default information about a customer’s debts if:

  • the customer has fallen behind with their payments
  • the amount owed is not being disputed by the customer (a customer dispute is relevant if it refers to the amount of money owed by the customer and is genuine, reasonable and unresolved) and
  • the customer has not made a proposal that satisfies the Firm for repaying the debt following the Firm’s formal demand.

The customer should be given further notice of the intention to disclose the information at least 28 days before the disclosure is made, for example, when a default notice or formal demand is given. At the same time, customers should be provided with an explanation about how default information registered against them may affect their ability to obtain credit in the future. This notice means that customers have 28 days to try to repay or come to some arrangement with the Firm before default information is passed to the CRA.

The requirement to share data does not apply in specialist customer segments, where sharing CRA data is not always appropriate. Firms should ensure that data is up-to-date, accurate and complete before it is passed to credit reference agencies and where discovered, any errors are addressed and corrected promptly.

 

3. Where individual provides a guarantee/indemnity or other security, they should be able to request information regarding their current level of liability, as long as the customer gives their permission and confidentiality is not breached.


This Standard applies to situations where an individual offers some form of security such as a personal guarantee or indemnity. The intention being, that the individual providing the guarantee or security is able to access information regarding their level of liability from the Firm so that they can assess the likelihood of being called upon to pay. If the individual requests confidential financial information (with the exception of the current level of liability), such as details of balances, copy statements, etc, we would expect that Firms seek the customer’s consent before providing this information. Firms should also tell the guarantor the extent of their liability, including the addition of interest and charges after demand has been made.

The customer should be made aware that if they want the Firm to accept a guarantee or other security from another individual that the Firm may ask for permission to give confidential information about the customer’s finances to the person providing the guarantee or other security, or to their legal adviser.

 

4. Firms should comply with a customer’s request to co-operate with their professional adviser(s) during the lifetime of the relationship. All communication with the customer/their adviser will be undertaken in a clear and open manner.


This Standard is intended to ensure that a customer’s professional advisors – legal, financial or otherwise – are not prohibited from participating in discussions with the Firm. Having a third party present can support the customer during their engagement with their lender providing, for example, explanations, clarifying points of discussion etc. The LSB would expect Firms to fully co-operate with the customer’s adviser, at whichever stage of the relationship the customer is at.  The LSB recognises that there may be circumstances where the customer will not be present and that the Firm may need to ask for the customer’s consent to engage with the adviser.

 

5. Any changes to the terms of the customer’s agreement should be fair and transparent. The customer should be provided with clear information regarding the reason for the changes and provided with a reasonable amount of time to seek further clarification, or where appropriate, alternative sources of finance.


Customers should be told how they will be notified of changes to terms and conditions when they take out their borrowing. The purpose of this Standard is to ensure that customers are treated fairly and are provided with clear information, which is communicated within an appropriate timeframe, to enable them to consider how any changes will impact upon their business.

The LSB recognises that amendments to the terms of the agreement may be required for a variety of reasons and in line with PRIN, the LSB would expect a Firm to have regard to the information needs of its customers, and communicate with them in a way which is clear, fair and not misleading.

A reasonable amount of time will depend on the individual circumstances and may take into account a number of factors such as, the terms of the agreement, the sophistication of the customer and the amount and complexity of the borrowing.

 

6. Where a customer is relationship managed and a change is made to this process which will impact on the customer, they will be provided with advance notice, and the reason for the change. Where this will require action from the customer, they should be allowed sufficient time to complete this, taking into account the channel currently used.


This Standard is intended to capture wholesale change where the customer may be moving from a relationship managed environment to telephony based, or where a business has matured and/or undergone significant growth which warrants a relationship managed approach. It is not intending to capture changes due to a change in personnel, where there hasn’t been a change in the channel through which the customer’s account is managed.

As a minimum, the LSB would expect the customer to be provided with not less than two month’s notice in order to provide time to consider what other options, if any, they wish to pursue. Firms may wish to take into account information which is known about the customer prior to the change in approach, this could include non exhaustive examples such as:

  • whether the customer is experiencing financial stress
  • whether any applications are in train and if there would be a benefit to have these concluded prior to the move
  • where known, any significant changes to the overall control of the business which may warrant a longer lead in time to prevent additional impact on the business customer
  • whether the Firm knows, or has reason to suspect, that the customer may be vulnerable.

 

This information could be used to more closely manage the transition or may prompt the Firm to consider whether the customer would benefit from additional support.

The move to a new channel may require changes in the type and regularity of information provided by the business customer to the Firm. The LSB would expect that where these changes place additional obligations on the customer, that any timeline associated with this is agreed with the customer and that they are provided with an explanation of why this is required.

 

7. Firms should comply with a customer’s request to have access to the basic information held by the Firm about their products/accounts. The request should be dealt with in a timely and efficient manner.


This Standard is intended to capture the requirement for banks to respond to requests from their customers in an open and transparent manner, in relation to information it holds about the customer’s products. It is not intended that the customer is provided with access to sensitive information relating to, for example, risk appetite, internal monitoring or underwriting policies, but they should be provided with sufficient amount of information to answer their query in an open and transparent way.

This could include information regarding the application or operation of covenants, guarantees, security, or other forms of information which will help the customer to understand what their obligations and liabilities are. Other examples may include repayment history, information held on the performance of the business or other information required to enable them to effectively manage their account/products with the Firm. The LSB acknowledges that not all information held by Firms is suitable for disclosure but would encourage firms to consider any request from the customer in the spirit of this Standard.

 

8. In line with the industry protocol, requests for a Deed of Priority or Waiver should be dealt with quickly and efficiently.


The protocol sets out the requirements regarding a request for Deed of Priority or Waiver which reflects the industry’s commitment to making sure the process of responding to the request for a Deed of Priority or Waiver is handled as quickly and efficiently as possible, and to ensure a customer is given a response as quickly as possible as regards the agreement to proceed with the request or otherwise.

 

9. Ahead of the expiry of their primary agreement, the customer should be aware of what will happen to the asset and what action, if any, they need to take.


Firms should ensure that the customer is notified of the steps it may take at the end of the primary agreement. This information should be communicated in a clear and timely manner, to allow the customer to make an informed business decision. The timing of this notification, should allow the customer a reasonable opportunity to weigh up their options and seek alternative arrangements, should they wish to do so.

Where the customer has the option to extend their agreement into a secondary period for a rental amount or the agreement allow for a purchase or sale of an asset Firms should ensure that the customer has time to make and communicate this decision based on the needs of the business.

 

 

Credit risk management

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on credit monitoring.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

 

Customer outcome: business customers will be supported by pro-active and reactive measures designed to identify signs of financial stress.

Firms will achieve this: with systems and controls that are capable of identifying, across the relevant products held, where customers may be showing signs of financial stress and pro-actively engaging with the customer to agree an appropriate solution.[1]

This section of the Standards of Lending Practice is seeking to ensure that customers who may be at risk of falling in financial difficulties are identified and supported at an earlier stage so that pre-emptive action can be taken.

 

1. The customer should be told what information, if any, will be required to allow the Firm to monitor the business’ performance and how and when this should be provided.


The information required by Firms to monitor business performance may vary, depending on the size of the business, the level of borrowing provided to the customer and the Firm’s approach to customer segmentation. In practice, this means that some Firms may not request any information from businesses as part of the credit monitoring process, relying instead on internal account performance and external credit data, particularly, where the relationship is managed at arms-length, through a transactional only model.[2]  Whilst the LSB acknowledges that the transactional nature of asset finance products may limit the ability to pro-actively identify customers at risk of financial difficulty, Firms should ensure that there are mechanisms in place to provide timely support to customers, for example building early warning triggers which prompt the Firm to contact the customer, such as a missed payment or by encouraging customers to approach the Firm for early assistance.

Where monitoring information is requested, Registered Firms are encouraged to be transparent and clear about what information is required from the business customer, when this must be provided by, and how this will be used by the Firm. This information should be relayed to the customer at the very outset of the relationship so that they understand what is required of them through the duration of their relationship. The LSB would encourage Firms to guide customers to relevant information on their websites or to external sources, to support the customer in providing this information. This  may be more relevant to customers who are at the smaller end in terms of the scope of the Standards or for start-ups/very young businesses.

Where appropriate, Firms may consider the use of covenants to formalise the requests for monitoring information. The LSB considers this to be a business decision, however where covenants are used, the customer should understand their obligations under the agreement, particularly in respect of providing information and the frequency of the request, including, where applicable, an understanding of how the monitoring information will be used to monitor other financial covenants which may be required, and the consequences of non-adherence.

 

2. As appropriate, a sufficient level of monitoring of a customer’s borrowing should be undertaken to help determine if the customer is exhibiting signs of financial stress. Where relevant, appropriate support should be offered.


For businesses that are relationship managed, the knowledge of the firm, coupled with the regularity and type of contact, lends itself to a more direct relationship with the customer where the opportunity to identify potential signs of financial stress are greater. Firms should ensure that these opportunities to engage with the business are fully optimised. This may be achieved through setting a business review date, providing the Firm with an opportunity to identify and query deviations to business performance, profile and strategy, based on a review of historic and current financial performance against projected performance, including any significant changes to the core management team.

Where a review process exists, Firms should ensure that their staff document the observations made through the review, and that where there is evidence of financial stress, further action is taken to support the business. Depending on the structure and remit of the relationship manager’s role and the availability of specialist teams, the support may be offered through the relationship manager or via escalation to a specialist team. Where there is a specialist team in place, Firms should ensure that the structure and remit of these teams, including the triggers for referral, are firmly understood by staff.

Where the relationship is managed through a transactional only model, Firms may not have access to regular business and financial information to identify whether a business is showing signs of financial stress, particularly where the regularity in customer contact is limited. Firms must explore the different types of information or data it does have access to, including any relevant information obtained at the product sale stage, supported by internal account performance data including business income and expenditure, the use of early warning triggers, and where available, the use of external credit information.

The Firm may also wish to use the product renewal process to assess the suitability of the product based on patterns of utilisation, business strategy, its ongoing needs and repayment history.

 

3. Firms should have appropriate triggers and processes in place to help identify customers who are showing signs of financial stress and should engage with these customers in a supportive and open manner.


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products, including asset finance products, under CBILS in reliance on the Government guarantee under the scheme.

Firms offering products under CBILS will have adapted or introduced new processes, as appropriate, to meet the requirement of the schemes. It is therefore recognised that firms may not have access to the same level of information as they would under their usual terms and will have reduced visibility on the financial situation and previous performance of the business.

Firms will have to rely on any information made available during the application process and internal MI to inform what triggers and processes could be in place to help identify customers who are showing signs of financial stress. If monitoring processes are in place and the customer exhibits signs of, or informs their firm that the business is in, financial distress ahead of the first repayment falling due, the LSB would expect the firm to engage with the business in line with existing policies and processes.

 

A Registered Firm’s approach to identifying and supporting customers at risk of financial difficulty may vary, depending on the Firm’s business model, its approach to customer segmentation, the distribution channel by which the customer is serviced and the nature and regularity of the interaction. It is important to recognise the diversity in Firm’s operating models, and the scope and breadth of the distribution channels and servicing models offered. We recognise that not all Firms will offer a digital, transactional only model, others may opt to service their entire business customer base through a bespoke, relationship managed proposition and there may be some customers that are managed through a third party such as a broker or an intermediary. Firms should factor this into their decision making, when determining the most appropriate approach to pro-actively identifying and engaging with customers. Where the Firm offers more than one distribution channel, Firms should seek to stream-line their approach to ensure all businesses, irrespective of the size and type of facility, are identified and supported through whichever channel they engage.

Developing and defining meaningful behavioural and product triggers can help drive a predictive and pre-emptive approach to identifying customers at risk of financial difficulty. Whether the approach derives from internal account performance or external credit data, the triggers and the supporting parameters for identifying customers at risk, should be bespoke and built around the Firm’s core operating model. This could be supported by a pro-active contact strategy, which utilises and explores a range of contact methods and distribution media to ensure that customers are appropriately notified, that the contact is timely, and the customer is receptive to the offer of support. We acknowledge that there may be challenges to engaging with customers, with some business customers more receptive to engaging in discussions around their situation, while others may be less likely to disclose the full extent of their situation, for fear that this information may have a negative or adverse impact on the view the Firm has on the business.  Whilst the type and method of contact is key here, Firms should consider how the message will be received by the customer, how the information will be used and what action they would like the customer to take. The tone of voice and construct of the message is critical to relaying the content of a message to encourage meaningful contact, build transparency and strengthen trust.

Whilst a pro-active strategy is useful in encouraging contact and engaging with businesses, some customers may choose to contact a Firm, where they self-identify that they require support.  The notification to a Firm may follow a change in circumstance, for example, the loss of a key contract impacting a business’s ability to maintain further repayments to the Firm, an increase in business expenditure or the depletion in business performance. Firms should ensure that they have appropriate mechanisms and support structures in place to fully support these customers, and that they are not turned away.

The LSB would encourage Firms to raise awareness of the type of support it can offer its customers who are, or may be, experiencing financial stress. The provision of information is critical to building trust, ensuring transparency whilst dispelling any concerns that the contact is focused on exacerbating the business’ financial situation. The LSB would encourage Firms to direct business customers to appropriate sources of information. This may include information on the Firm’s website, for example, through a dedicated section detailing its approach to supporting customers at risk of difficulty, with details of the support available and contact information, should the customer wish to engage further with the Firm. This could also be supported by web chat facilities should the customer wish to explore the availability of support. The provision of web chat facilities, offers the business an opportunity to contact the Firm discreetly, though where possible, the Firm should encourage the customer to engage in a fuller discussion around their circumstances. Depending on the structure and remit of the support available, the Firm may wish to direct the customer to a specialist team, with the knowledge and skills to offer the right level of support, at the right time.

Whilst the list below is not intended to be exhaustive, it sets out the types of triggers that Firms or their intermediaries may look out for which may suggest that a customer is experiencing financial stress:

  • missed/delayed payments;
  • regularly overdrawn without agreement;
  • large increases or decreases in turnover;
  • business is trading at a loss;
  • inadequate economic or financial structure;
  • insufficient cash flow to meet financial obligations;
  • inability to obtain further funding or refinancing;
  • persistent losses;
  • the business suddenly loses a key customer or employee;
  • a large part of the business is sold;
  • the customer does not keep to conditions set out in the loan agreement, without adequate rationale;
  • the customer does not supply agreed monitoring information on time; and
  • another creditor brings a winding-up petition or other legal action against the business.

Firms should exercise discretion as to whether the event would result in contact with the customer based on the parameters set by the Firm, and where relationship managed, their knowledge of the business customer.

Firms should also be aware of the link between credit monitoring and customer vulnerability – establish the similarities in approach and how these customers should be dealt with in a positive and sensitive manner.

 

4. Firms should ensure that relevant customer facing employees are sufficiently trained and skilled to help them to identify and deal with those customers who may be showing signs of financial stress.


Firms should invest in staff training to ensure that customer facing employees and where appropriate, third parties have the appropriate skills and knowledge for their role to support the identification of triggers and to encourage fuller conversations with a business customer. This should be underpinned by a comprehensive training and competence framework, to ensure knowledge is maintained and to encourage consistency in the level and depth of training delivered.

Whilst section 4, above, refers to the development of system based triggers which may derive from a combination of account performance or external credit data, Firms should have mechanisms in place to identify instances where information is volunteered by a customer. Some customers may offer this information directly, others may approach the conversation with a degree of reticence, or in a much softer and less overt way, evidenced through the customer’s actions or conversation with the Firm. Training may be based on information volunteered by the customer during conversation such as ‘business expenditure has increased significantly,’ ‘we have noticed a decline in sales performance,’ which may or may not be supported by discrepancies in internal account performance. This should be supported by softer behavioural triggers which, whilst not obvious, may indicate that the business requires further support. Whilst we recognise that not every trigger may result in a customer being identified as being in financial stress, they are clues which should be probed and explored further to encourage a complete understanding of the customer’s situation, based on a ‘tell us once’ approach.

Firms should develop triggers to assist staff in the identification of business customers at risk of financial difficulty. This includes the soft skills required to probe for further information in a positive and sensitive manner if there are indications that the customer may benefit from additional support in managing their finances. This is reinforced by the fact that not all customers will be forthcoming with information because of the perceived consequence on the business, or for fear that the information may be shared more widely.

Relationship managers have a unique insight into how a business is operating and information provided by the customer regarding their business can be used to support conversations with customers who appear to be showing signs of financial stress or where account information or a change in the operating environment suggests that the business may be at risk of difficulties. However, there are challenges to engaging with customers on this topic and some may be unwilling to engage in discussions around their financial situation. Others may be more forthcoming with information but may, for example, be wary of disclosing the full extent of their situation as they lack an understanding of how the content of the conversation will be used by the Firm. Therefore, an ability to empathise and explore the customer’s concerns about disclosing information is an important part of the process, supported by an explanation of how the information will be used.

Case reviews involving reviewing recorded calls, where these are available, can provide an opportunity for relationship managers to assess how well they are doing. By listening to randomly selected calls and discussing how the call was handled, Firms can determine if there is anything that could have been done differently and whether the right customer outcome was achieved.  Additional training and support could be provided to address any specific needs on an individual basis, or more widely, in relation to process improvements.

A blended learning technique, using elements of theory and practical examples can help to ensure that staff have the opportunity to put their new skills into practice and can demonstrate their competence though various exercises and knowledge checks. Where specialist teams exist, the opportunity to shadow internal departments to see first-hand how those areas support customers can further embed understanding of pre-arrears and provide a valuable wider perspective whilst strengthening awareness of the specialist teams and their role and remit.

Firms could develop various aids and techniques for ensuring the knowledge is retained once training is complete.  This could include desk aids, interactive colleague learning platforms or using the intranet to assist in identifying appropriate actions, underpinned by the need to ensure the delivery of fair outcomes.

 

5. Where a customer is identified by an intermediary as showing signs of financial stress, a referral process should be in place which enables the Firm to deal with the customer in line with its policies and processes.


This Standard seeks to ensure that where a customer relationship is managed through an appointed intermediary, there are clear processes in place for the intermediary to notify and refer customers showing signs of financial difficulty to the Firm.  This is to ensure that the Firm is able to support the customer at an early stage, in line with their policies and procedures, through the application of tailored solutions.

As this referral means the firm and customer may not have had a direct relationship, Firms should make use of all information and data available to them to create a view of the customers finances.

 

6. Firms should undertake monitoring and assurance work to ensure that their policies and processes are designed and are operating effectively in identifying and supporting customers who are showing signs of financial stress.


While Firms are at different stages in the development of strategies, designed to prevent customers falling into financial difficulty, consideration should also be given to its ongoing evaluation, to ensure that the strategy continues to operate in a manner that is conducive to the delivery of fair customer outcomes. This may be achieved through the:

  • ongoing review and assessment of the design and operational effectiveness of policies, processes and training, along with an assessment of the internal control framework;
  • use of case reviews to test the full customer journey, forming a view on the overall effectiveness of the Firm’s strategy, the response to a situation and the appropriateness of the solution offered. This approach could be used to focus in on a particular aspect of the journey and be scaled to ensure a sufficient number of cases are reviewed to form an opinion, whilst highlighting any opportunities for improvement;
  • the development of customer feedback mechanisms to explore the practical impact of the current structures in place.

Firms should consider the risks to customer outcomes associated with the prevention of customers falling into financial difficulty and this should be factored into a Firm’s assurance and oversight plans, across the three lines of defence.

 

[1] The customer has not yet defaulted but information available to the Firm suggests that the business may be showing signs of being in financial difficulty.

[2] Where the business is not relationship managed (expand definition)

Financial difficulty

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on financial difficulty.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

 

Customer outcome: business customers in financial difficulty, or in the early stages of the collections process, will receive appropriate support and fair treatment, in order to help them deal with their debt(s) in the most suitable way.

Firms will achieve this: with systems and controls that are capable of identifying and, subsequently, supporting business customers in financial difficulty. Firms should be able to demonstrate that a sympathetic and positive approach has been applied when considering a customer’s financial situation.

 

1. Firms should have triggers and processes in place to help identify customers who may be in financial difficulty and should act promptly and efficiently to address the situation with the customer.


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products, including asset finance products, under CBILS in reliance on the Government guarantee under the scheme.

For products offered under CBILS, firms will have access to a limited range of information, depending upon the type and level of information the customer was able to provide at the application stage and what, if anything, is known about the business. However, it is recognised that in the absence of a pre-existing relationship with the customer, the ability to identify financial difficulty may only arise at the point the customer misses a payment.

At that point, the LSB would expect firms to apply the requirements of the Standards when carrying out recoveries activity, unless directed otherwise by Government.

 

Firms will have access to a broad range of information on their business customers, depending on the size and type of business and how the relationship with the customer is managed. For those Firms which operate a relationship managed model, there may be opportunities for early identification of financial difficulties during any monitoring activity or engagement with the customer.

For smaller businesses, changes in personal circumstances such as a loss of a key employee, a breakdown of a relationship, bereavement, a serious accident or illness could also impact on the customer’s ability to effectively manage the business’ finances. Where the Firm is made aware of these changes, the LSB would expect the Firm to engage with the customer with a view to understanding whether the changes in circumstance are, or may be likely to, have an impact on the day to day running of their business.

A Firm should consider what information it has available to it that might indicate that a customer is at risk of, or may be, experiencing financial difficulties.  Such illustrative triggers may include, but are not limited to:

  • loss of a significant source of income such as a key contract
  • a significant increase in financial commitments
  • frequent requests to change terms of their borrowing
  • failing to meet repayments or other commitments on time
  • regular requests for increased borrowing
  • frequently returning items on a current account
  • frequent incurrence of unarranged overdraft/late payment/over-limit fees
  • being informed that another lender or creditor requires immediate repayment
  • the customer goes overdrawn without agreement;
  • the customer goes over their agreed overdraft limit, especially more than once;
  • longer term cash flow shortages which do not reflect seasonal fluctuations
  • there are large increases or decreases in the business’s turnover
  • the business is trading at a loss
  • the business suddenly loses a key customer or employee
  • a large part of the business is sold
  • a facility is used for purposes other than those agreed with the Firm
  • the customer does not keep to conditions set out in their agreement
  • the customer does not supply any agreed monitoring information on time; and
  • another creditor brings a winding-up petition or other legal action against the business.

 

2. Firms should have appropriate policies and procedures in place to identify and support vulnerable individuals within a business where this impacts on the customer’s ability to pay.


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loan Scheme (CBILS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products under CBILS in reliance on the Government guarantee under scheme.

Given the requirements of CBILS, it is acknowledged that unless there is a pre-existing relationship with the business, firms will have limited access to information on both the business and the circumstances of the business owner.

As set out in the Standards, the impact of the individual’s vulnerability on the business customer’s relationship with their registered firm will depend on a number of non- exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability.

Where a firm becomes aware during the course of the relationship with the customer, the LSB would expect the firm to treat the customer in line with existing policies and procedures.

 

This standard is seeking to support Firms in identifying and addressing situations where an individual within a business either is, or the Firm has reason to suspect that they may be, vulnerable. This can be applied to a sole trader, partnership or to an individual within a limited company.  The LSB recognises that the causes of a vulnerable situation can be multiple and complex. For the purpose of the Standards, a business in difficulty is not, in and of itself, deemed vulnerable, however in practice, a vulnerable situation is not always clear cut. Vulnerability may not derive from personal circumstance alone but from a number of sources, including the business itself, or external environmental and economic factors. The impact of the vulnerability on the business customer’s relationship with their Firm may depend on a number of non-exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability. Firms will be at different stages of developing an approach to business customers and vulnerability and the applicability will depend on the individual circumstances of the person. For further information Firms should refer to Section 10 – Vulnerability.

Being in financial difficulty can be a stressful situation for a customer who is not vulnerable, therefore when dealing with a business customer who has been identified as, or the Firm has reason to suspect that they may be, vulnerable there is a greater need to fully understand their circumstances in light of their business. Having the structures and processes which allow staff to investigate situations fully, and equipping them with the knowledge, confidence and skills to question and explore circumstances appropriately will enable them to identify the likely support needs of the customer.

Firms should ensure that when they become aware of a vulnerability, the impact is fully considered on the individual and where applicable, the business and its ability to meet and maintain ongoing financial commitments. Firms should remain alert to the fact, that, whatever the vulnerability, the way in which a person might handle or respond to a situation can vary, based on personal circumstance, and the size and structure of the business, relative to the individual’s day to day responsibilities and the nature and permanence of the situation.

The LSB would suggest that, wherever possible, Firms seek to establish a single customer view. It is acknowledged that for some, the ability to implement this across the organisation may be hampered by legacy systems particularly where there are multiple product holdings. Where possible, consideration should be given to manual workarounds to help Firms to ensure that multiple accounts can be linked so that correspondence and account activity is coordinated. For some business customers, the Money Advice Liaison Group’s (MALG) Debt and Mental Health Evidence Form (DMHEF) may be appropriate. This provides a standardised approach for third parties and creditors to share relevant information about the customer’s mental health condition from health and social care professionals. In line with current industry practice, Firms should consider the DMHEF if it is presented by the customer or, with the customer’s consent, their adviser or medical practitioner.

 

3. Customers identified as being in financial difficulty should be contacted and provided with clear information setting out the support available to them, the next steps and where relevant, with any action they are required to take. They should not be subject to harassment or undue pressure when discussing their financial situation.


Where a customer is identified as being in financial difficulties, by an intermediary or a Firm they should be contacted and provided with clear information to enable them to engage constructively with the Firm. This contact should seek to enable the Firm to understand the customer’s situation through appropriate questioning, the outcome of which can be used to determine how to best manage the customer’s borrowing with the Firm. Where appropriate, there may also be a benefit to signposting relevant customers to free, impartial debt advice. Firms should ensure that all customers are treated fairly and in line with their policies and procedures.

When a customer is identified as being in financial difficulty, Firms should take a view as to the appropriate level of intervention/support required, this will be dependent upon the individual customer’s circumstances and the information obtained. The conversation may identify that the business is expecting a change in income in the foreseeable future, for example the award of a significant contract or the payment of high value invoices which will have a positive impact upon the finances of the business.

The LSB would expect that customers are made aware of the next steps in the process, for example, the application of forbearance and how this could work or what the potential outcome of the situation could entail. Firms should provide this information in an appropriate form and in plain English, avoiding the use of any technical or legal language, where ever possible. Where customers are required to undertake any action as a result of the contact, that this is made clear to them with any agreed timescales or requests for additional information documented.

 

4. Firms should demonstrate an empathetic approach to the customer’s situation; listening to and acting upon information provided by the customer with a view to developing an appropriate solution.


Where a Firm identifies that a business customer is in financial difficulty or the customer self-discloses that the business is struggling, the Firm should engage with the customer with a view to understanding the business’ overall situation and work with the customer to develop an appropriate solution.

This solution could take a number of forms; it could be for the customer to agree to cut down on non-essential expenditure, or a more formal arrangement following, for example, an independent review of the business. Such an arrangement might set out a detailed restructuring or repayment programme, including new agreements and what happens if the customer does not meet the agreement. If the plan includes an agreement to accept smaller repayments than stipulated in the original documentation, the Firm should tell the customer whether this is regarded as ‘falling behind with repayments’ and whether information will be passed to credit reference agencies.

Before agreeing an appropriate solution with the customer, the Firm should have sufficient information regarding the customer’s financial situation to enable it to assess whether any proposed plan is affordable for the business.  This can be achieved through appropriate questioning, as well as listening to and acting upon the information provided by the customer and consideration of any information the Firm has on the business itself. The LSB would expect that where a customer is unable to make repayments that are sufficient to meet a lender’s minimum requirements for a repayment plan, the customer is given clear information on the effect this will have on their position and the options open to them. The LSB acknowledges that it may not always be possible for a Firm to agree a solution which enables the business to continue its relationship with the Firm or that the most appropriate outcome is that the business enters winding up proceedings. In these circumstances, the LSB would expect Firms to provide a clear explanation as to why the business can no longer be supported and allow the customer the opportunity to consider their options or seek professional advice.

When developing a repayment solution with a customer who has been identified as vulnerable, but who is able to set-up or continue to maintain reduced repayments through a plan, Firms may wish to give consideration to the financial impact that the vulnerability may have. Taking account of the cost of travel to hospital, medication, and the impact of any reduction in income will help to ensure a plan is reflective of the customer’s current situation. Identifying this expenditure will also help the Firm to assess whether any proposed repayment plan is affordable and sustainable. Where a vulnerable customer is unable to set up a plan, Firms should consider placing the account on hold and agreeing regular reviews with the customer to check in on their situation.

A Firm may suggest that an independent review of the customer’s business is undertaken to provide a view of the future prospects of the business. In these circumstances, the Firm should explain the reasons for the review, what it thinks should be done and how the review will take place, including who should carry out the review and whether there are any costs associated for the customer. If a customer’s business is reviewed, the LSB would expect the Firm to discuss with the customer (and where relevant, their advisers) the information provided before reaching any conclusions or taking any action.

 

5. If, after exploring all the options open to the customer, it is clear that recovery of the asset is required, the Firm should ensure that the customer is provided with clear information as to what this entails.

Where a Firm has exhausted all other options, the Firm may seek to recover the asset. Where this may be the case, Firms should ensure the customer is made aware of this as soon as possible to give them enough time to prepare; the removal of an asset could have a significant impact on the business, and where practical, the Firm should seek to provide reasonable notice.

This Standard aims to ensure that customers are provided with appropriate information in a clear and comprehensible manner to enable them to understand what actions are being taken by the firm. As much detail should be passed onto the customer about why the asset is being recovered, including the method and timescales for doing so and the implications this has on their agreement and any further action the customer might need to take.

The LSB would expect firms to maintain an empathetic approach to the customers situation, and, where appropriate, direct the customer to professional advice.

 

6. Firms should seek to ensure that any recovery agents acting on their behalf demonstrate appropriate levels of conduct and deal with the customer in a professional and open manner.

The LSB acknowledges that asset recovery may not always run smoothly, Firms should satisfy themselves that recovery agents will conduct themselves in a professional and open manner and the customer will continue to be treated fairly throughout the process.

Firms should ensure that in line with the requirements of Standard 9, Governance and Oversight, they undertake effective and robust due diligence in selecting a third party to ensure that it can meet the Standards and deliver the required outcomes. This should be supported by oversight of the third party from which the Firm should be able to derive a sufficient degree of comfort that fair outcomes are being achieved. The LSB expects that customers identified as being in vulnerable circumstances are appropriately supported in line with the Standards of Lending Practice – Vulnerability. Firms should ensure that there are appropriate mechanisms in place to identify and deal with any known or suspected breaches of the Standard. This may be achieved through a documented contract, with minimum service level agreements and regular relationship meetings.

 

7. Firms should apply an appropriate level of forbearance where, if after having made contact with the customer, it is clear that this would be appropriate for their situation.


The type of forbearance applied will depend on the Firm’s assessment of the customer’s individual circumstances and what is appropriate for the business. For example, forbearance could take the form of: a term extension, application of breathing space, payment holiday, refinancing of an existing facility or other, as appropriate. Firms should ensure that the solution offered does not make the customer’s situation worse. While the restructuring itself may potentially resolve the situation in the short term, the cost of the revised agreement would mean that the overall borrowing may not be sustainable in the longer term.

The LSB would encourage Firms to consider reducing or stopping interest and charges when a business customer evidences that they are in financial difficulties. Such a reduction/suspension decision could be based upon an assessment which indicates that the customer is unable to make repayments sufficient to meet contractual terms. The LSB would consider it inappropriate for interest and charges to continue to be taken where the result would be that the repayment period for the customer becomes excessive. In forming a judgement on what might be excessive, a Firm should take into account the type of product and the individual circumstances of the business customer.

The LSB’s view is that concessions should not be arbitrarily withdrawn irrespective of a customer’s ability to pay or without any evidence of a change in the customer’s circumstances. Expiry of a repayment arrangement should not automatically lead to the withdrawal of concessions. However, this does not rule out regular reviews and if a customer’s position has improved then interest and charges can be reintroduced.

 

8. If a Firm is aware that a customer is, or suspects that they are, in financial difficulty but is able to maintain their borrowing commitments to the Firm, the customer should be given the opportunity to take action to turnaround the business.


There may be circumstances where a customer meets one or more the triggers set out under section one above, but is able to maintain their borrowing commitments to the Firm. The LSB would expect that in these circumstances, the customer is given an opportunity to demonstrate that they can trade out of any short term difficulties they may be experiencing.  The decision to do so will be based upon consideration of the information the Firm has regarding the business but where the business is viable and is able to meet its financial obligations, the LSB would expect that it is able to continue to trade.

The decision to do so could be subject to regular monitoring and review of the circumstances which is sufficient to enable the Firm to understand the financial health of the business. Any additional reporting requirements should not be so onerous on the customer that it makes the turnaround plan unsustainable. The LSB would expect the customer and the Firm to agree any timelines which may apply.

 

9. Firms should work with and support a customer’s turnaround plan where the Firm believes that it has a good chance of succeeding.


Where a customer proposes a turnaround plan which will enable the business to trade out of its difficulties, the LSB would expect that the Firm gives due consideration to the customer’s plan and where the Firm believes that this could succeed, the customer is given an opportunity to demonstrate that the proposed plan is viable.

 

10. If a Firm is unable to support a turnaround plan, the customer should be notified of the reasons why and given a reasonable period of time to consider the options open to them.


The LSB acknowledges that there will be circumstances where it is not possible for the Firm to support a business’ turnaround plan and in these situations, the customer should be told why the Firm is unable do so. The LSB would expect that the Firm engages with the customer in an open and constructive way and is clear as to the reasons why it cannot support the plan, what options, if any, are open to the customer and what the next steps in the process are.

The LSB would expect the Firm to advise the customer when it will withdraw its support, applying a reasonable period of time for the customer to seek advice or alternative sources of finance and help the customer and where relevant, their advisers, to consider other options.

 

11. Firms should guide the customer to appropriate advice which reflects their circumstances and level of borrowing. Where appropriate and available, the customer will be signposted to a third party offering free, impartial debt advice.


Where a customer is signposted towards independent advice, this should take account of the size and sophistication of the business and should reflect the borrowers’ circumstances, that is the advice provided would be at a cost which is appropriate for the level of the customer’s borrowing. For example, a sole trader or sole director of a small company would not be sign posted towards a firm which is more appropriate for a larger, more corporate business where the costs would be disproportionate to the size and needs of the customer.

 

Portfolio management

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on portfolio management.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

 

Customer outcome: when debts are sold, impacted business customers will be treated fairly and all communications regarding the sale, and what this means for the customer, will be transparent and provided in good time.

Firms will achieve this: with systems and controls to ensure that only eligible business customers are transferred to a third party and appropriate due diligence is undertaken on the Firm before a sale, which demonstrates that the customer will be treated fairly.

Unless otherwise stated, the following Standards apply to the sale of performing and non-performing debt, where responsibility for the day to day customer relationship transfers to the third party.

 

1. Firms should follow a robust due diligence process when selecting third parties for debt sale or debt collection activities to ensure that customers will continue to be treated fairly, in line with the requirements of the Standards of Lending Practice and the relevant contractual terms.


This standard is intended to ensure that where a customer’s debt is sold or passed to a debt collection agency, that the customer will continue to be treated in line with the standards that Firms apply under the Standards of Lending Practice. Customers therefore have comfort that while the debt is no longer being administered by the Firm, the protections offered by the standards will continue to be met.

The due diligence process for selecting third parties for debt sale or debt collection should be sufficiently robust to satisfy the Firm that the third party can meet the requirements of the Standards of Lending Practice. Whilst we do not specify the level of due diligence that should be undertaken, this should be comprehensive for the Firm to gain assurance that the protections offered by the Standards will continue to be met by the third-party, and should be proportionate to the risk associated with the materiality of the outsourced arrangement and the provider.

For the purposes of the Standards, areas assessed through a Firm’s due diligence may include the following:

  • an assessment of compliance against the Standards of Lending Practice for business customers relative to the activity undertaken by the third party;
  • an understanding of the business strategy, model and culture,
  • an assessment of governance and oversight arrangements in place including quality assurance activity, compliance and internal audit and the outputs of any recent reviews.
  • this may be supported by a review of policies and processes, training and incentive schemes, and the approach to dealing with vulnerable customers.

Firms may support this assessment with a review of third party compliance with contractual terms, relevant FCA regulation, data protection and, where applicable, adherence to relevant codes of practice that may apply to the customer’s borrowing. Whilst we do not prescribe the approach to due diligence, this should be sufficient for the Firm to assure itself that the Standards are being met and the right outcomes are being achieved through appropriate systems and controls to minimise the risk of customer detriment. In addition to this Firms may also wish to consider how it will ensure a smooth transition of customer accounts to a new outsourced provider, including what might happen when a vulnerable customer is identified or on service termination. Firms should also refer to the relevant paragraphs of Governance and Oversight for further guidance.

The LSB would expect that adherence to the Standards of Lending Practice forms part of all third party contracts and Firms should ensure that the outcomes for handling financial difficulty cases are applied by such agents, through due diligence and periodic audit and review. The due diligence should be reviewed where there is a change to the relationship, which the Firm considers to be material.

Firms should consider the benefit of receiving regular reports/updates from the outsourced provider to provide comfort that the outsourced provider is operating within the terms of the service agreement and that the Standards are being achieved. This may include: the identification of qualitative and quantitative performance targets; the evaluation of performance through service delivery reports or an independent review by its compliance or internal audit function, including any remedial action, and escalation processes for dealing with inadequate performance. The frequency of information exchange should be determined by the Firm, and should be proportionate to the risk presented by the outsourcer.

 

2. Firms should ensure that where the decision is made to sell a customer’s debt and the contractual terms require the customer’s consent to do so, this is obtained prior to any sale taking place.


One of the key elements of the Standards is to ensure that customers are provided with appropriate information, at the right time to enable them to better understand what changes are required or are being undertaken to the way they interact with their lender. Where a customer’s contract and/or terms and conditions provide for the customer’s consent to the sale of their debt, this should be obtained prior to any sale taking place. The LSB is mindful of the work of the  Banking Futures project, further information can be found here: http://www.meteos.co.uk/resources/banking-small-businesses-forging-closer-ties-banks-real-economy/ and UK Finance’s recent update: https://www.ukfinance.org.uk/bankingfutures-working-hand-in-hand/

 

3. Where an agreement allows for a Firm to sell a customer’s debt without their consent, Firms should ensure that:

a. the customer is provided with reasonable notice that the Firm intends to sell their debt and provided with clear information as to what the sale means for the product(s) that they hold with the Firm and;

b. if the relationship with the customer will be serviced by the third party, full contact details for the purchaser are provided


The requirement here is for Firms to ensure that where a debt sale is considered to have a customer impact, that customers are made aware that their debt has been, or will be sold, and understand what that means in terms of their relationship with their lender/funder. The LSB’s expectation is that customers know what is happening and the guiding factor is to ensure a seamless and uninterrupted customer experience and a fair outcome.

The notification requirements apply where, as a consequence of the sale, there will be a change in the customer’s day-to-day relationship with the Firm. If the debt is sold, but the Firm will continue to be the point of contact for the customer, and there is no other customer impact, the requirements of this Standard do not apply. The Standard is not requiring firms to notify customers that their debt could be sold, as this would not be appropriate from either a Firm or customer perspective, but it is instead seeking to ensure that customers are made aware that there will be a change in their relationship with the Firm. Where the relationship will be serviced by the third party, the customer should know who the third party is and provided with relevant contact details.

The Standard has been drafted to allow flexibility for firms to notify the customer either pre or post transfer to the third party, however firms are not required to provide notification prior to the completion of a sale to the third party.

Firms may wish to have regard to the audience, business type and form of financing when communicating with impacted customers. The LSB would also expect the customer to be provided with a contact point within the firm, should they wish to discuss the matter further.

 

4. If an individual has provided appropriate and relevant notification of an ongoing mental health or critical illness that affects the customer’s ability to repay their debts, or the Firm is aware the individual is terminally ill, the Firm should consider whether it is appropriate to sell the debt(s).


The LSB acknowledges that it may not always be possible for a Firm to know whether a customer is vulnerable but where the Firm is aware, the Standards of Lending Practice prohibit the sale of debt where there is evidence of an ongoing mental health problem or critical illness that affects the customer’s ability to repay their debt. Where vulnerability is identified by the Firm, which impacts upon the customer’s ability to repay their debt, the LSB would expect that these accounts are ring-fenced and not sold.

Vulnerability can occur at any time during a customer’s relationship with their lender, including post debt sale but pre-transfer. Where a Firm becomes aware that the customer is vulnerable (this refers to the individual who is able to able to exert significant influence over the way the business is run)[1] the debt should be ringfenced and excluded from the sale.

Responsibility for managing such accounts should be agreed between the creditor and the purchaser up front, though any decision should give due consideration to:

  • assessing each case on its merits, which may include having regard to the nature and longevity of the customer’s situation; and
  • the customer experience and risk to customer outcomes.

 

5. If a Firm sells non-performing debt, it should take appropriate and reasonable steps to ensure that the third party, to whom the customer’s debt has been sold, deals with the customer in a manner that is consistent with the relevant requirements of the Standards of Lending Practice and the relevant contractual terms.


Where the decision is made to sell non-performing debt, the LSB would expect Firms to ensure that the customer continues to be treated in line with the requirements of the Standards of Lending Practice for business customers.

Firms should be able to satisfy themselves that the third party to whom they have sold customers’ debts, continue to deal with such customers in a manner that is consistent with the relevant requirements of the Standards of Lending Practice and the contractual terms of the agreement between the Firm and the customer.

The results of these steps should be used to satisfy the Firm and the LSB, that all of the relevant requirements of the Standards of Lending Practice in respect of the debts sold are being adhered to.  If instances of non-compliance are identified, Firms should be able to evidence that appropriate action has been taken to remedy any breakdown of control or customer detriment.

 

6. Where a debt is sold and during the lifetime of the original agreement, a dispute arises between the customer and the third party which the parties are unable to resolve, Firms should ensure that they have processes in place to allow the customer access to the Firm’s complaints procedure.


The intention of this Standard is that customers are able to have recourse to their lender, if they are unable to resolve a dispute with the third party which purchased their debt. Firms should ensure that where a debt is sold, the customer has an access point into the Firm’s complaints process and should ensure that processes are in place to enable customers t

[1] See also section on vulnerability.

Vulnerability

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on vulnerability.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

This document will be kept under review and updated to reflect examples of good practice being undertaken across the industry in this area.

 

 

Customer outcome: inclusive products and services take into account the broad range of business customers to which they may apply and contain appropriate flexibility to meet the needs of customers who may be, or are in, a vulnerable situation. Where customers are identified as, or the Firm has reason to believe that they may be, vulnerable, appropriate adjustments are made to ensure that their individual circumstances are accommodated to enable the customer, or their authorised third party, to manage their account(s).

Firms will achieve this: with systems and controls that are capable of assisting in the identification of customers who are, or may be, in a vulnerable situation, and having appropriate measures, training, referral points and skilled staff to deal appropriately with the customer once identified.

The following Standards have been drafted to support firms in identifying and addressing situations where an individual within a business either is, or the firm has reason to suspect that they may be, vulnerable.

These Standards can be applied to a sole trader, partnership or to an individual within a limited company. The impact of the individual’s vulnerability on the business customer’s relationship with their registered firm will depend on a number of non-exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability. Firms will be at different stages of developing an approach to business customers and vulnerability and the applicability of the following standards will depend on the individual circumstances of the person.

  • Reference to an individual means a person who, when taking into account information available to the firm about the how the business is structured and operates, is able to exert significant control over the way in which it is run.
  • Reference to vulnerability is in relation to the individual rather than the business itself, for example, a business in financial difficulty would not necessarily be considered to be vulnerable for the purposes of these Standards.

 

Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loans Scheme (CBILS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products, including asset finance products, under CBILS in reliance on the Government guarantee under the scheme.

The Covid-19 pandemic has driven the need to develop products to facilitate fast and efficient lending to impacted businesses with responsibility for the design and application of the products sitting outside of firms’ control. The terms of the scheme require firms to make decisions outside of their normal processes and with access to limited amounts of information on the performance of the business. Similarly, firms are unlikely to have information on the business owner’s personal circumstances which may impact on the running of the business. The LSB recognises that firms’ ability to apply particular elements of the Standards may be reduced. This is particularly relevant in relation to the application of the Standards on customers in vulnerable circumstances. As set out in the Standards, the impact of the individual’s vulnerability on the business customer’s relationship with their registered firm will depend on a number of non-exhaustive factors such as: the legal structure of the business, its sophistication, the role and level of responsibility of the individual within it and the extent of the individual’s vulnerability.

It is recognised that by participating in CBILS firms may not be able to apply in full effect all provisions within this section of the Standards. Certain aspects of the products offered under the scheme are determined by the Government, and as such firms will have a limited role in the design and review process. Given this, the LSB accepts that firms cannot reasonably be expected to give full consideration to the design or review of products offered under CBILS.

 

1. Firms should have a vulnerability strategy, which defines its approach to the identification and treatment of individuals considered to be vulnerable, through whichever channel the customer chooses the engage


The treatment of customers in vulnerable circumstances, at all stages of the product lifecycle, is critical – starting with the culture and business model of a firm, the design and targeting of a product or service and its promotion and sale, through to the ongoing product and account servicing relationship with the customer, taking account of any change in circumstance, including any debt collection or debt sale activity. The LSB recognises that inclusive financial services are, in general, good for all consumers and that a consistent approach to vulnerability across the Firm is critical to ensuring the delivery of fair outcomes. An effective vulnerability strategy should be underpinned by a culture of care, which promises to do the right thing for the customer. The achievement of this goes beyond adherence to policy; Firms should lead by example and ensure employees feel empowered in making the right decisions, with performance management frameworks that support and promote the values of mutual trust, care, and respect.

The FCA defines a vulnerable customer as, ‘someone who due to their personal circumstance is especially susceptible to detriment, particularly where a firm is not acting with appropriate levels of care.’ The definition acknowledges the strong interplay between the individual circumstance, situation and the actions and processes of firms, with the expectation that firms establish policies, processes and controls which ensure the fair treatment of customers in vulnerable circumstances, at every stage of the customer journey. It is widely accepted that vulnerability is not a static state limited to a certain group of people and that anyone can encounter a situation that might make them more susceptible to detriment, particularly where this affects a person’s ability to make or communicate an informed decision, or maintain existing financial commitments. This experience is no different for an individual consuming products and services in a business capacity or ultimately the business, where the individual/s are integral to its successful running. In our view, whether engaging as a personal customer or a business, Firms should seek to support all customers to ensure they are given the helping hand they need to cope with a difficult circumstance, through whichever channel they choose to engage.

Factors such as mental and physical health, caring responsibilities and life changing events can put anyone in a vulnerable situation. This is particularly the case where it affects a customer’s ability to make, or communicate an informed decision, or engage with the market.

While the Standards refer to vulnerability in respect of the individual, rather than a business itself, the LSB recognises that the causes of a vulnerable situation can be multiple and complex. For the purpose of the Standards, a business in difficulty is not, in and of itself, deemed vulnerable, however in practice, a vulnerable situation is not always clear cut. Vulnerability may not always derive from personal circumstance alone but from a number of sources, including the business itself, or external environmental and economic factors. Firms may find that there is often a direct link between a business in, or at risk of financial difficulty and the personal susceptibility of the owner/s to vulnerability, factors which may sometimes stem from outside of their control. Firms should be alert to these factors, to ensure that where they become aware of a vulnerability the customer is adequately supported.

 

The LSB recognises that not all businesses have the same needs, resources and capabilities, with some more sophisticated than others, this can vary based on factors such as borrower type and size. Practically this means that the impact of a change in circumstance for one director or partner in a business can vary depending on the size and structure of the business, their day to day management responsibilities (in particular, their position in the context of the business’ core operations), the nature and permanence of the situation and the overall availability of resource. Firms must ensure, that when they become aware of a vulnerability, the impact on the business and individual is fully considered including their ongoing ability to meet and maintain ongoing business and financial commitments.

 

2. Firms should undertake appropriate monitoring and assurance work to ensure that the vulnerability policies, processes and controls are designed and operating effectively and delivering fair customer outcomes.


As firms document and develop their vulnerability strategies, consideration should also be given to their ongoing evaluation, to ensure that they continue to operate in a manner that is conducive to the delivery of fair outcomes. This may be achieved through the: ongoing review and assessment of the design and operational effectiveness of policies, processes and training, along with an assessment of the internal control framework, including the quality of first line quality assurance checks; testing the full customer journey, through using case reviews to form a view on the overall effectiveness of the firm’s strategy, response to a situation and appropriateness of the solution offered and the development of customer feedback mechanisms to explore the practical impact of the current structures in place.

 

3. Firms should have policies and processes governing the identification and fair treatment of individuals in vulnerable circumstances. These should take into account: the channel, where the individual is within the customer journey and the varying nature and degrees of permanence of different vulnerabilities.


Vulnerability can manifest itself in a number of different ways, such as an inability to work for a period of time, a reduced understanding of alternative products, or an inability to make informed financing decisions, where the capacity to evaluate products and services is impaired. Businesses are people led and run, and are therefore they are critical to a business ongoing success, and it is in this context that an individual’s vulnerable circumstance and the impact that it may have on a business, should be simultaneously explored and understood.

Whilst the Standards reference vulnerability in the context of an individual running a business, and not the business itself, the impact that a business in difficulty may have on an individual involved in the day to day running and management of a business, should not be overlooked. This is because vulnerability can be driven by a number of factors to do with the business itself or broader economic factors, not just personal circumstance. In practice, this could include: a personal bereavement or illness, loss of a key contract or a customer, poor business performance due to broader economic factors, or loss of key staff. The LSB recognises that the complexities of running a business, coupled with external market conditions, mean that these drivers may not exist in isolation. The interaction between personal, business and external market conditions may cause or exacerbate a vulnerable situation and limit the owner’s ability to engage with the market or increase their risk of harm. Firms should have processes in place to identify customers who are, or it suspects are in a vulnerable situation, irrespective of whether this derives from an individual circumstance or the business. The LSB encourages Firms to use a broad range of data to support the identification of customers in vulnerable circumstances. This may include proactively monitoring external indicators such as economic and market conditions, which may enable Firms to pre-emptively step in and offer timely intervention.

 

When considering the impact vulnerability can have on a business, Firms should have regard to:

  • The customer’s state of mind: how does the vulnerability impact their ability to understand or make informed financing decisions in relation to new applications for finance or reviewing the suitability of existing products held. Consideration should also be given to the extent to which the vulnerability might compromise the individual’s ability to make informed business decisions and how this might impact the business’ financial obligations with the Firm.
  • The nature and longevity of the vulnerability: how the vulnerably impacts the customer day-to-day and their ability to engage with the market or interact with the Firm, including where the situation limits the individual’s ability to enable the business to continue meeting its key strategic and operational objectives.
  • The sustainability of the business: focusing on their ability to manage existing commitments, and the impact the situation may have on current and future business income and expenditure, and the business’ ability to maintain sales or service volumes and contractual and financial repayments as they fall due.

These should be reviewed in the context of the individual and their role and significance in relation to the business and the legal structure of the business and its level of sophistication. This should be underpinned by a firm understanding of the type of vulnerability, the degree of impact and its permanence and presentation. Our expectation is that firms should consider every situation on its own merit.

 

4. Firms should seek to ensure that where an intermediary identifies an individual as potentially vulnerable, this information is passed to the Firm, with the customer’s consent, and it is taken into account during interactions with the individual.


This Standard seeks to ensure that a customer in a vulnerable situation is identified and supported by the Firm, irrespective of where the customer relationship originated. The LSB would expect Firms to treat information they receive about a customer in a vulnerable circumstance from an intermediary as if they would if the customer had a direct relationship with the Firm, subject to satisfying the requirements of the data protection legislation. Firms should satisfy themselves that, at a minimum, intermediaries are able to identify customers in vulnerable situations, and with the customers consent, are referred to the Firm for further support and assistance. Firms may achieve this through dedicated vulnerability training or a due diligence framework which ensures the intermediary has processes in place to identify, seek and record explicit consent in line with the GDPR with a sensitive referral process. Firms may consider this requirement as part of ongoing oversight to ensure it is fully embedded across all third parties including intermediaries. These controls should be documented in a Firm’s policy and process, to ensure consistency in application.

5. a. Firms should ensure that their employees are sufficiently trained to help them to identify vulnerability and deal with the individual in accordance with their policies and processes, with appropriate escalation points, where the circumstances require this.

b. When an individual is identified as potentially vulnerable, a Firm should ensure that its employees have appropriate referral and escalation points and are aware of how to access them.


Staff training is integral to embedding a Firm’s vulnerability strategy, to ensure policies and procedures are implemented and drive a consistent approach to the identification of customers in vulnerable circumstances, and the support and guidance that is offered. Firms should consider the appropriate mechanism and approach to delivering training in the most effective way to ensure that the key messages from the training are firmly rooted and can be evidenced in practice.

The fair treatment of customers should be at the forefront and conscience of everyone’s minds, and the training should be conducive to achieving this.  This may be achieved in some instances through a dedicated induction programme, with a specific module on vulnerability, supported by real-life examples of business related customer encounters, covering a broad range of vulnerabilities. The training should highlight the support that is available to business customers, with an understanding of how the Firm would expect staff to respond to these situations, with reference to policy and procedural guidance. Firms should seek to build structures and processes to allow staff to investigate situations fully, and equip them with the knowledge, confidence and skills to question and explore circumstances appropriately, with a view to identifying impact and likely support needs.

Building staff capability, along with staff training, is critical in empowering staff to handle difficult conversations with confidence knowing that they are fully supported in making the right decisions. Firms should seek to build on the work carried out in the personal space, whilst considering ways in which this material might be adapted to develop vulnerability training in the area of business lending. This can be achieved through:

  • The development of a bespoke computer-based training module on vulnerability, using scenarios to increase understanding of the different types of vulnerability and the corresponding needs of business customers highlighting the importance of considering vulnerability in the execution of everyone’s role. Material should be regularly refreshed with controls in place to monitor completion;
  • Training on conversation models, to support the implementation of the TEXAS and IDEA models, to assist staff in handling vulnerability disclosures and to probe situations fully, whilst documenting the customer’s support needs;
  • Delivering role-specific training using practical examples and the different types of situations staff may come across day to day. The use of role play may help to bring the concept of vulnerability to life. Staff are encouraged to break the conversation down, to identify areas where they could have probed further, or asked a question in a different way.
  • Building case studies based on ‘real life’ customer encounters to illustrate, and bring to life, the support that is available through the Firm, with reference to policy and procedural guidance. Case studies may be a positive way in breaking down some of the perceived barriers in implementing the policy, empowering staff to make the right decision based on the customer’s needs;
  • Creating a centralised repository of information to assist staff in identifying and supporting customers in their day-to-day role, for e.g. this may be achieved through a dedicated vulnerability hub. This hub may operate as a one-stop-shop, where the information is accessible through the Firm’s intranet site, enabling staff to retrieve and recall useful material to support their interactions with customers.

Whilst there are clear benefits in training all staff to identify, manage and deal with vulnerability, some Firms may wish to explore the availability of a dedicated specialist team, with greater levels of training, knowledge and the flexibility to make decisions. The Standards do not require Firms to establish a specialist team to deal with vulnerability, but where there are specialist teams in place, Firms should ensure appropriate mechanisms exist to refer the customer to appropriate support. We consider this decision to be a commercial one; but the outcome should be that customers have easy access to support. As Firms develop their approach, there is merit in evaluating the benefits of both approaches to ensure that there are fair and efficient structures in place, designed to suit the Firm’s business model (taking account of resourcing, capacity and driven by the need to achieve a consistent customer experience), to manage those customers identified as requiring further support. In all cases, staff should be encouraged to exercise discretion, thinking practically about the implications of their actions, being guided by their determination to resolve a situation, and deliver a fair outcome. This could then be reflected in the firm’s recruitment strategy and balanced by appropriate targets and measurement systems, which support the fair treatment of business customers in vulnerable circumstances.

 

6. Where appropriate, Firms should develop triggers and management information to assist employees in the identification and subsequent monitoring of individuals who may be vulnerable


Developing proactive and reactive triggers can support front line and back office staff in identifying signs of potential vulnerability. This could be underpinned by targeted, role specific training which involves educating staff on potential vulnerability triggers and customer impact illustrated through the use of practical examples and the types of situations staff may come across. Customers or third parties may volunteer information, whether consciously or not, when interacting with a Firm and these opportunities should not be lost. Each customer is different as is their ability to cope, therefore it isn’t possible to list all of the examples of information which the customer may provide or which could have a detrimental effect upon the customer. However, such examples could include life or business events such as the breakdown of a relationship or bereavement which may affect their ability to meet their commitments or even the ability just to cope with the day to day living which may have a direct impact on their business.

The LSB acknowledges that depending on the frequency and type of interaction and the distribution channels by which the business is serviced, the opportunities to identify vulnerability early on may be limited, particularly where the customer does not have regular contact, the product is transactional only, or where the customer is not forthcoming with this information particularly during early interactions. This may stem from a fear that volunteering information could adversely impact the customer’s ability to apply for finance, or the perception that the information may be construed negatively. Alternatively, customers may simply believe that the Firm does not need to know such personal information about them and lack understanding of how any information they provide will be used. In some cases this might be exacerbated by the denial of a personal or financial situation, in the hope that if the customer perseveres there may be light at the end of the tunnel for their business. Therefore, the importance of softer skills such as the ability to listen, empathise and question in a sensitive and patient manner is critical to a successful vulnerability strategy. Firms should delve deeper to improve their understanding of key reasons why customers may be reticent in volunteering information. Customer engagement activity could provide Firms with this insight including the use of customer case reviews, or engaging with customers already identified by the Firm as being in a vulnerable situation to understand if there is anything more the firm could have done to support early disclosure. Findings can be used to support timely customer disclosure and provide opportunity to engage and probe further.

Customers should be provided with a clear explanation of how any sensitive information they wish to disclose might be used and the circumstances in which it might be shared across the Firm, for example that it will be used to ensure that products and services offered to the customer take account of their circumstance and are appropriate for their needs.

Enhancing digital and branch literature to raise awareness of the support that is available to small businesses and how that information may be used might also help encourage self-disclosure, along with Firms branding and marketing strategies, which may help tackle some of the perceived stigmas around divulging sensitive information.

Statistics show that more and more customers are transacting digitally and in the case of some asset finance providers operating models, through an intermediary – limiting opportunities for Firms to engage in face to face or telephone contact with the customer. This generally sits at odds with most Firms’ strategies for identifying and dealing with vulnerability, which place a reliance on face to face or telephone contact with their front-line teams. Whilst there are clear challenges to identifying vulnerability digitally, the benefits of maintaining a digital platform mean that in most instances Firms have access to an array of transactional information on customers, which, with the correct data analytic tools, can help decipher trends and flag up anomalies and drive a pro-active contact strategy. Firms should seek to change the dialogue by re-articulating the challenge presented by digital channels as an opportunity and think of innovative ways in which digitalisation can support proactive identification of customers in vulnerable circumstance. Firms should ensure a consistent approach to identifying and managing vulnerability, irrespective of the channel through which the business customer chooses to engage. Given these limitations Firms should consider the benefits of  supplementing a reactive approach with a data driven activity, to support the proactive identification of business customers that may be vulnerable and therefore at an increased risk of harm.

In the case of an asset finance product, these anomalies may relate to a missed payment or where internal and external data sources show potential signs of financial stress, where the underlying cause may be attributed to vulnerability. Monitoring external indicators such as political, economic or market conditions may be a useful mechanism for the Firm to pre-empt the risk of adverse impact on their business customer base. Where relevant, the LSB would encourage Firms to use this information to offer timely intervention and support.

Whilst early identification of vulnerability is key to managing a detrimental impact on a business, Firms may encounter some situations where the impact of an individual vulnerability has already had a financial bearing on the business. Firms should have pre-delinquency triggers in place to identify customers at risk of financial harm. This could be supported by a proactive contact strategy to encourage early intervention and the timely provision of help and assistance. In these circumstances, where available, declining business performance, evident through a review of financial accounts or missed repayments may be a useful indicator of a change in situation, where further probing is required.

Depending on the customer relationship, other indicators may include but are not limited to:

  • Large increases or decreases in the business’s turnover;
  • The business is trading at a loss;
  • The business suddenly loses a key customer or employee
  • The customer does not keep to the conditions set out in the agreement and is in breach of the terms;
  • A winding up petition or other legal action is taken against the customer.

 

Irrespective of the indicator, getting to the root cause of the decline in business performance is key  and if there is any additional support or guidance that the Firm can provide this should be forthcoming.

This could include:

  • proactively engage with the business;
  • undertake a business review with a view to questioning and deciphering the root cause of the financial situation;
  • comprehend the factors contributing to this position to ensure the provision of timely support;
  • understand whether there is any evidence of a vulnerable situation, whilst considering the impact this has on the individual running the business and their ability to continue trading in the foreseeable future;
  • consider if there is any support that can be offered to minimise the impact of any detriment; and
  • identify opportunities to sign-post the business customer to external sources of support where relevant. This may include information on relevant third sector organisations;
  • exploring the option to refinance a product, provided this does not exacerbate the customer’s difficulties or indebtedness.

 

Whilst asset finance products tend to be transactional in nature, the LSB acknowledges that some customers may have a broader product holding with a Firm, and depending on the Firm’s method of customer segmentation, more likely to be relationship managed. For those businesses that are relationship managed, the model provides a sound basis to identify customers in vulnerable circumstances. The hallmarks of an effective relationship are built on trust and customer knowledge, which enable the regular exchange of information between the business and the relationship manager. The frequency of information exchange and the type of interaction can vary based on a number of factors such as the size of the business and a firm’s own criteria and method of customer segmentation, but at a minimum was likely to take place on annual basis. This means that in most cases, the relationship manager is well placed to identify a change in circumstance. This means that in most cases, the relationship manager is well placed to identify a change in circumstance and question or pre-empt the impact a change may have on the business in the normal course of the relationship, without exacerbating the situation or causing the business any alarm. Most businesses will have an annual review date which is fixed from the date of sanction. This usually provides the relationship manager with an opportunity to identify changes to the business profile from a financial and non-financial perspective, and will typically focus on assessing historic financial performance against current performance; whilst assessing product utilisation against expected use and in some cases is supported by a visit to the business premises. Relationship managers may also have responsibility for pro-actively managing arrears within their portfolio, where there are indications of a declining financial position. Triggers or indicators may include: persistent losses, missed or delayed payments, excesses and over-limits. Firms could use this opportunity to understand whether any changes may be attributed to a vulnerable situation.

Firms should continue working with their frontline teams to offer guidance on recording explicit consent and dealing with disclosures from a customer or a third party. This guidance has typically included:

  • Acknowledging the courage it takes for a customer or a third party to call a firm notifying them of a customer’s vulnerability;
  • Adopting a ‘can do’ attitude, recognising that a sensitive approach to handling the call is key, and that by proceeding with the call the firm may help alleviate some stress;
  • Preventing disclosure of account information or transactional data, but noting down any unverified disclosures from a third party in a factual manner so that this information is visible, where possible, at a single customer level;
  • If systems do not allow for a single customer view, ensuring there is a manual work-around to allow staff to identify each account the customer holds, to coordinate account activity and correspondence, and prevent conversations from having to be repeated;
  • Giving full consideration to any action that needs to be taken by the firm to prevent the account from deteriorating. This should be supported by an explanation of any appropriate action taken. This may include an explanation on how the account will operate; for example, ‘the account will be placed on hold; this will mean that during this time no interest and fees will apply.’
  • Recognising that evidence is not a prerequisite and is only requested where it is felt that this information will assist the firm in understanding the customer’s situation better and to help the customer. Where evidence is requested, firms ensure they do not follow a rigid process, giving consideration to alternative forms of evidence.

Vulnerability may occur at any point in the customer product lifecycle and is not something that is confined to financial difficulty. There is merit in firms undertaking deep dives on cases where vulnerability has been identified. Tracing the case back through the customer journey will help firms to understand if there is anything that it could have done earlier on and so inform the firms understanding of vulnerability in the context of small businesses including the key factors that can give rise to vulnerable situations and whether there have been missed opportunities to encourage early identification.

 

7. Where a Firm is developing a new product, or reviewing an existing product, it should consider vulnerability as part of the design or review process, paying regard to target market, clarity, accessibility and the operation of the product


Firms are encouraged to ensure that vulnerability is integral to their processes and is not approached as a ‘tick box exercise’ and that this can be evidenced through the product design, development and launch processes/stages. The targeting and design of a product is integral to providing an inclusive service, whilst building appropriate protections to minimise the risk of customer harm. Firms should ensure that product limitations and risks are drawn out clearly to assist a customer’s understanding of a product. This could be accompanied by adequate staff training for customer facing channels and consideration of all content distributed via marketing channels, to assist customers in making a balanced and informed decision on a product, having regard to their contractual obligations. Where products are being reviewed, the LSB would encourage Firms to assess how the product is performing in terms of accounting for vulnerability and whether any adjustments are required.

 

Firms should ask themselves the following:

  • What are the needs of a business customer in vulnerable circumstances, how can we factor these in, and does the product meet these needs?
  • Are there features and risks with the product that a customer may have difficulty in comprehending?
  • How might this impact the sales and distribution of the product acquired through a direct or intermediary model, and are there any enhancements that need to be made to the process or the customer journey?
  • Is there enough flexibility in the process?
  • What are the information needs for customers identified as being in a vulnerable situation?
  • Is there a need for enhanced training for staff to ensure the product is sold appropriately?
  • What mechanisms are in place to ensure the product is targeted in the right way?
  • What happens if a customer’s situation changes, and how would these circumstances be factored into the servicing of a product and the support that the firm is able to offer?

 

8. Firms’ sales policies and processes should take account of the impact vulnerability may have on an individual’s ability to make an informed decision about a product, and provide relevant support during the application process


Firms should have mechanisms in place to support customers identified as vulnerable, however, there is a challenge in ensuring that the customer is given sufficient information to help make a balanced and informed decision. Vulnerability can take many forms, and the needs of customers may also vary, which can make it extremely difficult for staff to manage, particularly where sales policies and processes do not account for vulnerability at the point of sale.

The stress associated with being in a vulnerable situation may have an adverse effect on a person’s emotional state and cognitive ability. This may include general feelings of anxiety, the feeling of being unable to cope, being too upset to talk, finding it difficult to concentrate and assimilate information to help make and communicate an informed decision. Firms could provide further training and guidance to staff, (whilst considering ways in which these measures could extend to third party intermediaries) which may include:

  • Educating staff on the types of support the Firm can offer in cases where vulnerability is identified at acquisition; this may include: giving customers the time to reflect on the information they have received, encouraging the customer to bring an adviser or other third party to a face to face meeting, or defining referral points for a specialist team to engage with the customer;
  • In cases where the Firm has concerns over product suitability, and depending on the type of business and the way this relationship is managed by the firm, the customer insists they want that product, having escalation points for those decisions to be considered in greater detail including, for example, considering further avenues of support. Where there remain concerns over the customer’s ability to understand, make or communicate an informed decision following the offer of further support, a decision not to lend may, in the circumstances, be considered an appropriate outcome.
  • Strengthening quality assurance frameworks to ensure staff are assessed on the quality of their sales, on a non-advised basis, reflecting this requirement in staff objectives and targets;
  • Increasing use of mystery shops and feeding the outputs of this into strengthening existing processes.
  • Where an asset finance product is offered through an intermediary, where possible, Firms should seek to ensure that intermediaries have processes in place to identify and support customers in vulnerable situations.

Governance and oversight

 

This document has been produced by the LSB and provides non-exhaustive examples of the approach Registered Firms (Firms) may wish to take into consideration when seeking to adhere to the Standards of Lending Practice for business customers (the Standards) on governance and oversight.

Registered Firms must be able to demonstrate to the LSB that they are adhering to the Standards of Lending Practice; however the LSB does not monitor compliance with the content of this document and as such, it is not intended to be prescriptive nor binding on Registered Firms. The LSB acknowledges that each Firm will have its own way of demonstrating that it is adhering to the Standards without the need to refer to, or take account of, the content of this document.

Where a reference to made to the Consumer Credit Act 1974, as amended (the CCA), the Consumer Credit Sourcebook (CONC), other Financial Conduct Authority (FCA) requirement or wider legislation, the examples or suggestions which follow represents the LSB’s view on how the Standard could be achieved.

 

Customer outcome: business customers will receive a fair outcome when taking out a credit product and throughout the whole customer lifecycle, wherever the interaction with the customer takes place.

Firms will achieve this: with processes, controls and governance arrangements that ensure that there is effective senior management oversight of the Firm’s achievement of the customer outcomes contained in the Standards of Lending Practice for business customers.

 

1. Firms should have adequate governance, policies, processes, management information and controls to enable effective oversight of adherence to standards and delivery of fair customer outcomes.


Typical areas for Firms to consider are:

  • Is the fair treatment of customers embedded within the culture of the Firm?
  • Is there executive accountability for conduct/customer?
  • Is there clear accountability for the achievement of the Standards and outcomes at an executive level, and is their effective oversight to ensure that any delegation of responsibility remains effective?
  • Do the Board/senior management have a clear line of sight of risks and issues relating to adherence to the Standards and outcomes?
  • Is adherence to the Standards and achievement of outcomes subject to committee oversight and challenge?
  • Are there policies in place for areas covered by the Standards of Lending Practice that are subject to effective oversight?
  • Where responsibilities have been assigned for the achievement of the Standards and outcomes, are these clear and understood?
  • Are there processes in place covering all aspects of the Standards with process owners?
  • Are there controls to ensure the Standards of Lending Practice are being achieved, and are these tested for design and operational effectiveness?
  • Are control owners defined?
  • Is there a mechanism for assessing the Firm’s adherence to the high level principles?
  • Is there adequate management information relating to areas covered by the Standards available to senior management:
  • To enable the right decisions to be made;
  • To enable any issues to be identified or risks mitigated; and
  • To ensure that achievement of outcomes is effectively monitored and measured?

 

2. Firms should have an effective risk management framework appropriate to the size of the Firm to ensure that the Standards of Lending Practice are achieved.


Typical areas for Firms to consider are:

  • Is there a clear separation between first, second and third lines of defence, albeit proportionate to the Firm’s size and complexity, with clearly defined roles, responsibilities and accountabilities?
  • Are the plans across all three lines of defence appropriately aligned to minimise the risk of gaps and duplication?
  • For smaller Firms, is the split between first line monitoring, second line oversight and third line assurance sufficiently split to enable senior management to obtain an independent view on the design and operational effectiveness of the controls relating to processes and systems covered by the Standards of Lending Practice?
  • If assurance work is outsourced, is there management of the outsourced activity from within the Firm?
  • Is this separation clearly articulated in risk management policies and understood by the senior committee representatives and senior management?
  • Is there clear reporting from each line into a senior level risk or audit committee, which covers risks, controls and issues relating to the Standards of Lending Practice?
  • Is there a control risk self-assessment process in place, with an effective challenge process in place, and results escalated?
  • Where risks or issues are flagged, is there a process for assessing them against defined criteria, prioritising them, reporting them and escalating them in accordance with the risk profile to a senior committee for oversight and actions assigned?
  • Where actions are raised to mitigate risks or address issues, is there a process for assigning actions, prioritising them and tracking them through to completion?
  • Is an assessment undertaken, once an action is complete, to ensure that the action has mitigated the risk or addressed the issue and whether any further activity is needed?

 

3. Firms should ensure that their employees are adequately trained to deliver the Standards of Lending Practice’s customer outcomes, and that any incentive schemes are driving the right behaviours to ensure fair customer outcomes.


Typical areas for consideration are:

  • If the culture is one focused on customer outcomes, does this filter through to the recruitment process and the training and development framework?
  • Does the training framework focus on areas covered by the Standards of Lending Practice?
  • Is root cause analysis undertaken from issues raised through monitoring, quality assurance work and complaints, including agents?
  • Is there a mechanism for feeding in training requirements for employees and agents with prioritisation given for areas impacting customer outcomes?
  • Is regular feedback provided to employees on performance, capturing areas covered by the Standards, and identifying areas for improvement?
  • If there is an incentive scheme in place, including at third parties, has this been assessed to ensure it drives good customer outcomes and does it have appropriate quality thresholds?
  • Are any incentive schemes, including those at third parties, monitored to ensure that it is driving the right behaviours?
  • Is the performance of incentive schemes, including those at third parties, overseen by an appropriate committee (rewards/conduct)?

 

4. Firms should have systems in place to ensure that the Firms’ employees and agents are promoting products in a clear and transparent way.


Typical areas for consideration are:

  • Is there a consistent approach to training employees, based on the job role and their role requirements?
  • Is there an induction programme for new starters, which using a blend of training techniques, encourages a consistent and baseline understanding of products and services offered by the Firm?
  • Does the training use a blend of classroom and on the job training to provide hands on experience? This could include a mix of soft and technical skills to support all learning styles and to maximise information retention.
  • Are there supporting material or tool-kits to support employees and agents in promoting the products available to a customer, clearly and transparently?
  • Is there a formal framework for staff training and competency, setting out the core competencies of the job role and knowledge?
  • Are there mechanisms in place to ensure individual competencies are reviewed and attested on an ongoing basis?
  • Is there a process for ensuring that employee weaknesses or failings are underpinned by a suitable action plan designed to address them?
  • Are there processes in place to ensure employees are supervised on an ongoing basis? Are the outputs of this used to support the implementation of training and the ongoing assessment of competence?
  • Is there a cultural focus on delivering fair customer outcomes, and are there mechanisms in place to review and assess the quality and delivery of fair customer outcomes?
  • Is there a process for capturing customer feedback?
  • Are there metrics or key indicators in place which may highlight instances where products have not been promoted in a clear and transparent way such as data on product retention rates, customer complaints or account dormancy?

 

5. Firms should have systems in place to ensure that any failure to adhere to the Standards of Lending Practice are identified and assessed for materiality and root cause. Where the materiality threshold is met, these are reported to the LSB and remediated in a timely manner.


Typical areas for consideration are:

  • Is there a system for capturing any failures to meet one of the Standards, or achieve one of the outcomes?
  • Are employees and third party agents trained on the elements of the Standards of Lending Practice and how to identify and report a ‘failing’?
  • Is there a clear escalation process that employees are aware of for reporting any ‘failing’?
  • Are failings assessed for materiality (refer to the LSB’s guide to breach management) and is this assessment reviewed and challenged?
  • Is there a process for ensuring that all failings are underpinned by a suitable action plan designed to address them?
  • Is there a process for ensuring that any failings that trigger the materiality threshold are reported to the LSB?
  • Does second line compliance oversee the materiality assessment?
  • Once an action plan has been documented, is there clear accountability for the actions?
  • Are overdue items identified promptly, and is there a process for reporting those at an appropriate level? Are extended dates challenged and is there an appropriate level of sign off?
  • Where actions have been completed, is there a process of validation to ensure that the actions have fully addressed the failing and is there a sign-off by the first line owner and second line?
  • Is there a clear reporting process for any failings at local level, and is root cause analysis undertaken on failings to identify improvements to policy, process, systems or a training need?
  • Are failings further assessed to establish whether a series of smaller failings can be aggregated to point to a more systemic and significant failing?
  • Is management information produced to identify trends from breaches that have occurred and improve systems and processes, including the prevention of further recurrence?
  • Is there a clear escalation process to ensure that appropriate management information and details of failings, actions and progress against due dates are highlighted to conduct/customer committees and then on to the key risk and audit committees?
  • Is the breach management process overseen by operational risk/second line and is there additional oversight from second line compliance for those relating to areas such as the Standards?
  • Does internal audit periodically review the breach management process?

 

6. Firms should have processes in place to identify when changes to the Standards of Lending Practice are made and to ensure that these are effectively incorporated within policies, processes and systems.


Typical areas for Firms to consider are:

  • Does horizon scanning take place to ensure that changes in regulation are taken into account and assessed for impact on policies, processes and systems?
  • Is there a process for communicating regulatory change to relevant parts of the business, and are there business owners who have responsibility for taking necessary action?
  • Is a materiality assessment undertaken with sufficient priority afforded to those items required to meet the Standards?
  • Is there a change management process in place to enable the change to be implemented in a timely manner?
  • Is there a process for ensuring that the required change has been implemented satisfactorily?
  • Is there a post implementation review to ensure that the change has been embedded and is operating as expected?
  • Is there a level of second line oversight of the change process and independent third line assurance?

 

7. Firms should ensure that when systems or processes are changed, or products are introduced or changed, the impact on meeting the Standards of Lending Practice is adequately assessed.


Typical areas for Firms to consider are:

  • Where products, systems or processes are changed, or a new product is developed, is there a formal change management framework in place that ensures that the change takes full account of any impact on compliance with the Standards, across all business areas, with appropriate prioritisation based on a full materiality assessment?
  • Is there a sign-off process at key stages to ensure that the work is satisfactorily completed before moving to the next phase of development?
  • Is there a process for communicating change promptly within the Firm and to relevant third parties?
  • Is there clear accountability for managing the change including implementation, staff training, testing and reporting at the Firm and, where applicable, the third party?
  • Is there second line oversight and challenge of projects in transit and third line independent assurance?
  • Post change implementation, does training take place for staff members at the Firm and, where applicable, at the third party to understand the changes?
  • Before go live and post change implementation, is there adequate testing to ensure that the changes have been successful and that regulatory requirements have been met, including the right customer outcomes, both at the Firm and, where relevant, at the third party?
  • Is regular reporting produced and reviewed by all relevant people to ensure any potential weaknesses in the new process are identified and dealt with promptly either at the Firm or, where relevant, at the third party?

 

8. Firms should ensure that the product design stage takes into account internal and external risks which could impact upon a customer’s ability to maintain their repayments so that new products do not lead to unsustainable borrowing.


Update to take account of measures introduced by the Government to support lending to SMEs impacted by the Covid-19 pandemic.

HM Government has established the Coronavirus Business Interruption Loan Scheme (CBILS) to support the continued provision of finance to SMEs throughout the Covid-19 pandemic. It is recognised that registered firms are prepared to support business customers experiencing disruption caused by the coronavirus pandemic, and in doing so may be prepared to offer products, including asset finance products, under CBILS in reliance on the Government guarantee under the scheme.

It is recognised that by participating in the Government scheme firms may not be able to apply in full effect all provisions within this section of the Standards as certain aspects of the products are determined by the Government, and as such firms have a limited or no role in the design of products.

Given this firms cannot reasonably be expected to apply the provisions of paragraph 8. to the design of products offered under CBILS as the parameters of the products are set out by the Government.

 

Typical areas for Firms to consider are:

  • Are all key stakeholders involved in the product review process (e.g. product, channels, marketing, customer operations (including collections), customer experience, second line risk functions (operational, credit and compliance), finance)?
  • Is there an appropriate level of oversight and challenge, proportionate to the organisation, of the product design and review cycles?
  • Is there an assessment of internal and external risks which may impact on the customer’s ability to maintain product repayments to help ensure that new products do not lead to unsustainable borrowing?
  • Is the target market identified and is this monitored post-launch?
  • Are product features, and their operation, reviewed both pre- and post-launch to ensure they are, and remain, fit for purpose?
  • Is product performance data taken into account as part of the design and review stage, for example:
    • accounts which operate within the terms of the product versus those that breach them, and any identifiable trends, such as accounts falling into arrears at an early stage?
    • evaluation of the ease of access for customers via the relevant sales channels?
    • customer research to test the understanding and usefulness of the proposed product and features?
    • application decline rates and the associated rationale for these?
  • Are wider economic factors taken into account (for example, changes in regulation within specific markets, potential Bank of England base rate changes, inflation rates) to assess the impact these may have on the ability of customers to service the account?
  • Do the product design and cyclical product reviews take into consideration customer feedback from a range of sources such as customer satisfaction surveys and complaints?
  • Does the product design framework include regular reviews to ensure the product is being accessed, sold and operated as expected?
  • If, following review, the product is not performing as expected, are appropriate actions implemented and monitored?
  • Are customer outcomes assessed when the performance of the products is reviewed to identify any new risks, which can inform any enhancement to product features or delivery?

 

9. Where part of the credit process/life cycle is outsourced, Firms should:

a. undertake effective and robust due diligence to ensure that the third party or intermediary can meet the requirements of the Standards of Lending Practice and deliver the required customer outcomes; and

6. exercise effective ongoing oversight of the third party or intermediary to ensure that it is meeting the Standards of Lending Practice and delivering the required customer outcomes.


Typical areas for Firms to consider are:

  • Are there policies and processes for third party outsourcing that cover the management of the third party and oversight arrangements, and the requirement that any regulatory obligations, including the Standards of Lending Practice, are met?
  • Are governance arrangements in place to monitor both the on-boarding of new third parties and the performance of existing ones?
  • Does the due diligence on a third party include an assessment of conduct risk which focuses on the achievement of customer outcomes and the fair treatment of customers?
  • Is there an assurance framework in place proportionate to the Firm that encompasses monitoring and quality assurance of transactions and processes, independent oversight, and independent assurance in respect of third party providers?
  • Is there a route for escalation, with clear lines of responsibility, that allows for Standards of Lending Practice related matters to be reported in a timely manner?
  • Is there complete, accurate and timely management information and reporting at the appropriate management and risk committees to ensure effective oversight of third parties in respect of meeting the Standards and achieving customer outcomes, including areas such as processing capacity, business continuity arrangements and data protection requirements?
  • Is due diligence undertaken on new suppliers that includes how the Firm’s regulatory obligations will be met by the third party and the resilience of systems to service the Firm’s requirements to achieve the right customer outcomes?
  • Does the due diligence include the identification and implementation of robust controls where the third party will sub-contract its services, whether partially or fully?
  • Is there a formal signoff process at senior management level before a new supplier is taken on?
  • Is there an oversight strategy for third parties, which accounts for the risk that the third party presents to the Firm in meeting its regulatory obligations and achieving the right customer outcomes?
  • Are regular assessments undertaken of the adequacy of controls at the third party, through quality assurance and monitoring, to ensure customer outcomes are being achieved and regulatory requirements are being met?
  • Is data at third parties adequately safeguarded?
  • Is there monitoring and testing of third party’s system’s integrity, performance and resilience to ensure that the supplier can maintain operations at all times?
  • Are third parties subject to relationship management with independent oversight and quality assurance?
  • Does internal audit conduct independent third line assurance on the oversight and management of third parties by the Firm?

 

10. Firms should have a robust complaints management process in place to deal with Standards of Lending Practice-related complaints and to undertake root cause analysis [DISP].


The requirements regarding complaint handling are set out in DISP, Firms should ensure that these requirements are applied to complaints relating to the Standards of Lending Practice.

 

11. Firms should assign an appropriately skilled and senior individual(s) with clear accountability for overseeing that the Standards of Lending Practice are being adhered to and customer outcomes achieved, and for ensuring that remedial action is instigated where this is not happening.


Typical areas for Firms to consider are:

  • Is there an individual in the organisation with clear accountability for ensuring the control framework is in place for meeting the Standards of Lending Practice?
  • Has the nominated individual been provided with an appropriate degree of authority to be able to fulfil the role?
  • Does the nominated individual have sufficient skills, knowledge and experience of products covered by the Standards of Lending Practice?
  • Does the nominated individual have sufficient awareness of what the Standards of Lending Practice are trying to achieve?
  • Is the nominated individual independent of first line processes and able to provide effective challenge?
  • Is the nominated individual of sufficient seniority:
  • to ensure that they have the organisational influence to initiate change to achieve the Standards of Lending Practice;
  • to hold the business to account where they feel the Standards are not being achieved;
  • to oversee progress of actions designed to meet the Standards and challenge first line senior management if they feel that these are either not on track or will not fully address the weaknesses;
  • to present an independent view to senior management/committees on the status of risks, issues and mitigating actions?

Is the nominated individual recognised across the organisation for the role that they have in respect of the Standards of Lending?

Statement of lender and borrower responsibilities

Registered firms have a responsibility to act fairly and as part of this they have committed to follow the Standards of Lending Practice.

A statement detailing financial institutions’ key responsibilities and what they ask of their customers, which some firms may choose to tailor according to their product offerings, can be found below:

Statement of lender and borrower responsibilities (SLBR)

Statement of commitment and borrower responsibilities

Registered firms have a responsibility to act fairly and as part of this they have committed to follow the Standards of Lending Practice.

A document, detailing debt collection agencies’ (DCAs) and debt purchase firms’ (DPFs) key responsibilities and what they can ask of their customers can be found below.

Statement of commitment and borrower responsibilities (SCBR)

The SCBR can also be used in the collections processes of our wider registered firm base as well as by non-registered DCAs acting on their behalf, as part of their recovery strategies.