Consumer Duty is ‘single biggest challenge’ this year, says NACFB CEO

Speaking to this publication, National Association of Commercial Finance Brokers’ (NACFB) chief executive Paul Goodman explained that the next deadline for Consumer Duty was 30 April.

At this point, lenders have to provide the documentation to the brokers/NACFB members in terms of documentation they would provide to brokers to give to clients as well as lenders’ requirements.

Despite the impending deadline he said that “lenders are just not there yet”.

Goodman said that the NACFB had reached out to lender members to confirm what they’re going to provide to brokers and their readiness for Consumer Duty and it had only had one response.

He said that if the trade body didn’t get responses and lenders said they would not participate in Consumer Duty then regulated brokers “shouldn’t really be using them”.

Goodman explained that if a broker was presenting three options to clients, and one lender provides documentation in terms of fair value, such as what the lenders target market is for this particular product, and the other two don’t, then the client “can’t make an informed decision”.

“From a broker point of view, I think that’s opening me up to potential mis-selling claims in the future, which I’m not prepared to do because it’s not today or tomorrow, it’s in 10 years’ time.”

Earlier this month the NACFB wrote an open letter to the government warning that Consumer Duty and Basel III could have “unintended consequences” on SME lending unless there was more clarity.

Crux of Consumer Duty is uncertainty around scope

Goodman continued that the “real crux” of the issue was that some lending activities are in scope and some aren’t.

“What lenders are not quite getting yet is the fact that we’re regulated brokers so if we’re dealing with a regulated party, then Consumer Duty falls right into our laps. From the lender’s point of view, it may be an unregulated lending, but it isn’t for us,” he explained.

Goodman said that the NACFB was “trying to get clarity” from the FCA in terms of a “definitive scope of what’s out”.

“The lender is the manufacturer, and, in our eyes, the broker is the distributor of the product, but some of the lenders are saying that if you go by the true definition of a distributor, we’re not distributors we’re just introducers. There’s a kind of a split across the marketplace.”

He continued that while for some specialist brokers only two per cent of their business would be regulated, they “operate as if everything’s regulated” as the FCA didn’t want businesses to run two systems.

“We just treat everything as if it’s a regulated deal. Some lenders say, well, Consumer Duty is a good thing let’s just embrace it, whereas some of them are saying it doesn’t apply, but it does really.”

He added that the key deadline was the 31 July to fully embed Consumer Duty and the NACFB was supporting its members with its Consumer Duty hub where all documentations and processes have been laid out.

‘Broker has become the bank manager for the 21st century’

Goodman said that there had been a “trend” from high street lenders for shutting branches and “lifting the level of turnover branding” for SMEs in terms of whether they get a face-to-face meeting with a manager.

“A lot of clients now are managed out of call centers, so the broker has become the bank manager for the 21st century, so that will continue,” he added.

Goodman added that technology is playing an increasing role but “people buy from people” and SMEs appreciate somebody “going out and actually touching the business and understanding what it does and what it needs”.

He continued that high street banks are also settling down post-pandemic, noting that there had been “several years’ worth of lending in a very short space of time”.

“Naturally, it is going to take a while for them to sort their balance sheets out and understand what they’ve got. So, whilst that lending tap remains open, it’s not as open as it as it would have been pre-pandemic. I think the next two to three years will be a great time to be a broker.”

Goodman said that there was a “gap in the marketplace for people who have been turned down”, and this was partially due to being turned down by the high street and a lack of an effective referral scheme.

NACFB research from earlier this year showed that 29 per cent of successfully funded members had been turned away previously.

He continued that the biggest challenge for this year would be managing clients’ expectations, pointing to the fact that many people who used commercial finance brokers had already been rejected.

Goodman added that “you’re not always getting a good time running into the deal”.

“If you speak to the membership, there’s a lot of drag and delay within the deals so that causes its own challenges. You’ve got to manage client’s expectations.”

He noted that there was pressure in the marketplace from valuers, who were being hit by heightened professional indemnity insurance so there was a “shortage of valuers”.

“It’s a case of being able to deliver what the client needs in a timely fashion,” he added.

New lenders will continue to come into the market

Goodman said that there was a “period of time” when some lenders had their liquidity pulled by those that funded them, which had created some uncertainty, so that’s “starting to settle down”.

“There’s new entrants, such as, GB Bank who have got their full banking license and they’re looking to increase their offering and size of lending. There’s always going to be new lenders come into the marketplace so competition is great,” he added.

The NACFB report earlier this year also found that 40 per cent of lenders did not have a formal referral system for direct enquiries that had been declined, and that there was a lack of signposting.

Goodman said that the reason a bank referral scheme has not yet succeeded has been a combination of volume and technology.

He added that the NACFB was working with key stakeholders like British Business Bank and Bank of England to create “signposting service” to the trade body and other funding solutions.

“It is our strategic plan to be more widely known, recognised and understood. Not only within the commercial finance space, but for SMEs, the government and wider stakeholders.

“There’s absolutely a push to be that home for the commercial finance protocol. It’s not just about numbers, it’s about fostering with our members and partners to provide that professional expertise,” Goodman said.