FCA publishes sample business plan and guidance for lending firms

On 29 April 2020, the Financial Conduct Authority (FCA) published a sample business plan and accompanying guidance for firms wishing to become authorised as a lending firm.

The FCA has prepared the plan and guidance in order to address the fact that some applications for authorisation by prospective lending firms take longer than necessary because the business plan submitted in support of the applications is insufficiently detailed.

Guidance for all lending firms

The FCA has stated that all business plans should explain:

  • whether the firm has identified a business opportunity or customer base;
  • where the firm will source customers from, with details of any lead generators or brokers;
  • the services (both regulated and non-regulated) that the firm will sell as well as the areas it will specialise in;
  • the experience that the firm’s governing body or senior management have of the regulated activities it wishes to carry out;
  • the background and experience of everyone performing senior management functions (including their employment background and copies of relevant qualifications/examinations) at the firm;
  • the firm’s long-term strategy and financial projections;
  • the fees the firm proposes to charge and how these are to be explained to customers; and
  • any promotions and communications the firm plans to issue and how they will comply with CONC 3.

In addition to the above expectations which apply to all prospective lending firms, the FCA has also provided specific guidance for firms that propose to undertake specific kinds of lending business.

Unsecured credit lenders must ensure their business plans include:

  • a summary of the firm’s positioning in the credit market and a comparison between its products and that of its competitors;
  • a summary of any security or guarantees the firm has and how customers will be notified of this;
  • how the firm will deal with customers who fall into arrears on their repayment (including how customers will be contacted, how the firm will provide assessments as to whether customers are in financial difficulty and details of any forbearance available);
  • details of any second charge mortgage business;
  • full details of how employees or agents of the firm will be paid; and
  • details of payments to lead generators or brokers.

Pawnbrokers must ensure their business plans include:

  • procedures for mitigating the risk of financial crime;
  • an explanation as to how the firm ensures the accurate valuation of items; and
  • an explanation as to what happens if a customer wishes to redeem their item (including details of how the firm will calculate and communicate to the customer (before contract completion) interest and other charges).

Home collected credit firms must ensure their business plans include:

  • an explanation as to how the firm refinances its high-cost short-term credit agreements;
  • how much income the firm expects to generate from loans repaid and from fees/charges for late payment;
  • full details and a demonstration of any algorithmic-based systems;
  • an estimate of the percentage of loans which will not be repaid on, or before, the original due date, as well as the reasons behind this; and
  • details of interest and charges applied to high-cost short-term credit agreements, how these are communicated to customers and how they comply with the CONC 5A rules on the cost cap.

Firms that arrange high-cost short-term loans on an electronic system must also explain to the FCA how they ensure that charges in excess of the cost cap are not imposed or collected (as explained in CONC 5A.3).

Hire purchase firms’ business plans should set out:

  • whether the asset on hire purchase is taken if a customer falls into arrears (and any forbearance considered);
  • a summary of the firm’s positioning in the credit market and how its products compare to those of competitors;
  • details of any immobiliser or equivalent fitted to the asset on hire purchase for use if a customer falls into arrears;
  • details regarding complaints handling, how debts are to be collected and arrears handling; and
  • details of any payments to lead generators or brokers.

Debt counselling, debt adjusting and credit information firms must make sure that their business plans include information as to:

  • how the firm plans to promote its debt management activities or other services; and
  • the firm’s debt counselling process and copies of the documents it will provide to customers.

Firms with appointed representatives (ARs) must also provide information regarding:

  • the number and geographical spread of their ARs;
  • how they will be recruited and monitored;
  • who will provide monitoring services; and
  • what fees will be paid.

The original guidance and the sample business plan can be found online.