Jul 08, 2013 Simon Williams
Despite the undue negative focus that is sometime on the field, short term lenders have a definite role in the British economy. This has been particularly true the last five years or so since the global economic downturn took hold. When banks and traditional lenders closed their doors to everyone but those with perfect consumer credit scores, a sizeable portion of people in the United Kingdom had virtually no means of opening new lines of credit.
So they turned to alternative finance sources, namely, short term lenders. And these companies largely opened their arms to the masses. Rather than using peoples' poor credit scores - which in many cases were a direct result of the Global Recession - against them during the application process, these business reviewed other scores that were able to provide a more comprehensive financial composite of borrowers.
These models allowed lenders to establish creditworthiness in a way that was more fair to consumers. For example, one score, the Payment Reporting Builds Credit model, puts less of a focus on missed payments and more on the payments of utilities accounts that were made in a timely manner.
Despite all of the ways these businesses helped U.K. borrowers during the recession, there are still some detractors in relatively high positions. The latest move by British leaders to change the sector occurred when the Office of Fair Trading (OFT) recommended that companies in the industry be probed by the Competition Commission, an action that the OFT had been considering for some time.
Reviews to come
According to Scotsman, executives at the OFT cited "deep-rooted concerns" about the industry when they recommended the Competition Commission get involved in the situation. The main issue brought forth by the OFT was that the actions of some businesses within the industry led a number of consumers to become confused when comparing total expenses associated with some loans. The OFT will still have a role in the short term lending realm, so power hasn't totally shifted.
Reuters reported that some at the OFT state that companies within the sector are competing more on a speed basis than based on costs. Interestingly, part of the OFT's investigation also asserted that many of the borrowers have murky credit histories and therefore their options for opening new lines were limited, hence the decision to turn to short term companies.
Citizens Advice Scotland Policy Manager Keith Dryburgh told the news source that businesses in the industry promised last year that they would follow a new code of conduct, especially when concerning competition in the sector. Many leaders think that this has not come to fruition, something the commission will be checking up on.
"No other sector has faced such intense scrutiny in such a short space of time," a statement from the Consumer Finance Association read, as quoted by Reuters. What should lenders do?
The only thing lenders can do at this point is ensure they are complying with laws and following best practices when offering loans, training employees, communicating with customers and other factors central to business success. By doing everything they're supposed to do, this will give reviewers at the Competition Commission proof that the sector is legitimate and is actually an asset to the British economy.
In the meantime, while probes are going on, lenders should still plan on offering loans to their clients in a compliant manner. This move shouldn't scare good, legal companies into changing their strategies at all. This way, they can retain their loyal customers and make sure people in the U.K. still have access to funds no matter the state of the economy.