COVID-19 has affected every person in one way or another, all over the world. This can be seen in how we shop, travel and interact with one another and how our business operates. Consequently, our industry has been irrevocably changed and as we all try to adjust to the new normal, ensuring we meet the expectations of customers and, for regulated business the Financial Conduct Authority (FCA), we’d like to try and clarify how we are now working; how it protects you and your customers and how it aligns with our commitment to being a responsible lender.
With this in mind, I’d like you to imagine an independent hardware shop owner, let’s call him Mr Smith, who has built his business steadily over the last 15 years. Early on Mr Smith understood the advantage of financing his insurance premium, so that he could rather invest his money in developing his business. The first year he invested in the latest inventory technology, the next year he hired more staff to help in the shop and so on. Mr Smith is a model client as he diligently repays monthly loan amounts on time and never defaults. Since he has such an impressive payment history and projected growth, his loan applications are always successful.
Let’s jump forward in time to March 2020. Overnight, Mr Smith’s income is sent into free fall due to the mandatory lockdown. With his shop shut down, he can’t keep up paying his full team their full salary and pay his rent. Mr Smith hears about the Government’s financial help scheme which will help him and his staff, so he puts them on furlough. After a few months Mr Smith’s shop is barely surviving but he is hopeful because the Government has started to loosen the initial lock down restrictions. Children return to school, building contractors return to work and business starts to pick up a little bit. However, the footfall into his shop is very small as the general public are still frightened and anxious about contracting the disease. Most customers actually want his products to be delivered to them rather than coming to the shop. Mr Smith’s income is very low, and he hardly has any cash reserves left after installing all the required social distancing measures in his shop. He starts to default on his repayments.
Mr Smith hears on the news talk about ‘forbearance’ (a term he has never heard of before) and decides to call his friendly insurance broker to talk things over. He decides that since sales are starting to increase and things look like they’re beginning to normalise, he’d like to buy more of his insurance products in repayment. Mr Smith is confident that because of his past payment history, his current accounts on Companies House and longevity of his relationship with his insurance broker, his application will be successful. To his surprise, just a few days later, Mr Smith is notified that he is required to provide additional information to support his application – which now hangs in the balance until this is provided. Mr Smith simply had not realised that his business and risk had changed so much as a result of Covid-19.
The premise of accepting a loan application on past financial performance paints an inaccurate, present picture of a business. If we chose to ignore this and proceeded in issuing the loan to Mr Smith without up to date information, we could potentially place an unreasonable burden on him and could also negatively impact his credit rating. Alternatively, should Mr Smith default on his loan, the broker would still be legally obliged to pay the repayment. Where the business is regulated, the FCA are keen that, whilst the lender considers the potential effects of Covid, any new lending must be in the customers best interests – without assessing the situation, this could be difficult to demonstrate.
The new guidelines and the resultant additional financial information required, helps the lender to clearly see the current financial state of a business and thus safeguards both the end-customer and the broker’s financial interests. As responsible lenders, we will continue to work steadfastly with our partners, keeping your best interests in mind – as well as those of our mutual customers.
To see what additional information is needed for loan applications (new or renewed) over £30k, please click here.
Please don’t hesitate to contact our account team on TAM@pcl.co.uk should you have any questions.