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The Lending Standards Board might have run its course, but something must take its place


Layers of regulation, standards and rules

Emma Lovell, Chief Executive of the Lending Standards Board (LSB) announced today that the LSB would close at the end of October.  


The LSB provides standards and codes and independent oversight over consumer and business lending, including its Asset Finance Standard. Paragon Business Finance announced only last month that it had signed up to the Asset Finance Standard. Others signed up to the Asset Finance Standard include AIB, Cambridge and Counties, Danske and Virgin.  


The closure seems to have been unavoidable after Lloyds, HSBC and Santander all decided to withdraw last year. 


Although the Banks’ view appeared to be that the FCA Consumer Duty makes the LSB’s standards and codes redundant, the LSB noted pithily in its announcement today that the Consumer Duty was neither designed not intended to cover SME lending.


I'm not sure that's right. The Consumer Duty covers all regulated lending, which includes unincorporated businesses, unless fully exempt.  More importantly, not only does the structure of Consumer Duty work very well for small business lending (the outcomes, the cross-cutting rules) but banks are very likely to follow similar policies and procedures across all their small business clients. 


But equally Consumer Duty on its own doesn't replace the need for the Lending Standards Board, Whether it's in the Consumer Duty rules and guidance, or in the Consumer Credit Sourcebook, there's barely a mention of small business lending in the FCA Handbook.


By comparison, taking as an example the LSB 19-page Standard of Lending Practice for Business Customers – Asset Finance, it contains 81 specific business finance points. They are not rules (many are things that ‘should’ rather than ‘must’ be done) but if a firm signs up to the Standard, it’s tricky to not adhere to everything, particularly for larger banks with highly refined, detailed and technology-enabled lending procedures.


The 81 points may all seem innocuous on first reading, but following them to the letter, and proving they were followed, can be tough.  Some examples of the requirements (summarised) with questions that might arise:

  • Before providing asset finance, lenders need to assess whether the customer will be able to afford the payments.  How it this assessment to be done for anything other than a stable, well-established business, and if a business then gets into difficulty, could it claim the lender’s assessment was flawed? 

  • Firms looking to sell their books will need the buyer to follow the Standards and will need to allow customers to come back to them if they cannot resolve a dispute with the new owner.  How could the original lender deal with a dispute with the new owner?

  • Intermediaries need to pass details of vulnerable customers to the lenders.  What happens when, as is usually the case, this is unnecessary because the business customer is happy to proceed without requiring additional support beyond any help provided by the broker? 


I’m not surprised that eventually this type of approach to Standards had to collapse. Yet Emma Lovell is undoubtedly right to warn that the demise of the LSB leaves SMEs exposed.


One solution I believe is for the FCA to issue guidance on how to apply the Consumer Credit Sourcebook to business lending. It doesn’t need to be detailed - just a few pages could go a long way to making the Handbook relevant to small business lending.


This would capture all key parts of the LSB’s business lending material but fully interconnected to the existing CONC rules and guidance, together with Consumer Duty. Critically it would clarify existing regulation, providing product-specific guidance developed with the input of market experts, rather than layering on an additional set of requirements.


Once that is done, lenders, probably through the relevant associations, should voluntarily commit to following the same guidance for all small business lending. This would, in turn, provide a framework that the Financial Ombudsman Service could refer to when considering small business complaints.


Compared to the LSB’s Standards, I think not only would the banks welcome this, but the outcomes for business customers could improve. It will be easier to lend, but also easier to identify where businesses haven't been given the right service and to get problems fixed.

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