Name
Global FinTech Guide
Country _ Name
United Kingdom
SectionTitle
Loan services / factoring / loan broking / finetrading
Body
FinTechs belonging to this category act as a loan creditor (even short and very short-term loans), are broking loans or receivables or conduct factoring of loans, which were given to private or business customers. In this business area you also find “peer-to-peer” (P2P) services, in which FinTechs enable a multitude of users to give loans (and brokered by the FinTech-platform) to other users or companies.

Finetrading is hereby a financial service of FinTechs, where they buy due receivables and grant the debtor an extension of payment time.

As an ancillary service some FinTechs offer alternative credit assessment services to check the solvency of a borrower.

Introduction

Attitude of the country towards loan-giving-, factoring-, brokerage-, finetrading- and ancillary services

There are no plans to bring lending to companies or exempt business lending into regulation.

There have been social and regulatory concerns about the fast expansion of consumer credit (often at high costs), particularly in the context of economic pressure on UK households due to high inflation, rising interest rates and decline in real wages.
 
In 2014 the FCA took action to address consumer harm by high-cost short-term credit (“HCSTC”) lenders (also known as “Payday Loans”) by capping interest and fees at 0.8% per day of the amount borrowed, limiting default fees to £15 and limiting the amounts that borrowers could be required to pay in fees and interest to 100% of the amount borrowed. This led to the collapse in 2018 of Wonga, the UK’s biggest payday loan company, which had previously been charging APRs of more than 5,000%. Payday lending was seen as presenting substantial risks of consumer harm, and was often a “distress purchase” of last resort by consumers facing considerable financial difficulties and unable to access mainstream sources of credit.

“Buy Now Pay Later” credit agreements (“BNPL”) are not currently regulated (because they fall within the exemption for fixed-sum credit repayable in twelve or fewer payments over less than 12 months). However, the expansion of the BNPL market (which nearly quadrupled in 2020 to £2.7 billion) has given rise to concerns. A recent FCA review found potential harm to consumers in the contracts of market participants such as Clearpay, Klarna, Laybuy and Openpay. Those companies agreed to change their contract terms, and Clearpay, Laybuy and Openpay also agreed to voluntarily refund customers that had been charged late payment fees in certain circumstances. The FCA considered their action to be “at the edge of our remit as a regulator” but demonstrated that the FCA will apply pressure on unregulated firms where it considers that there is potential harm to consumers.

Legal affairs

Obligations and requirements to provide loan-giving-, factoring-, brokerage-, finetrading, and ancillary services described above

Credit activities (lending, factoring, broking, finetrading) with corporate entities is unregulated, and so no FCA authorisation is required.

Only “consumer credit” activities are regulated: lending or providing other types of credit (including hire) to a “relevant recipient of credit” (an individual, a partnership consisting of two or three persons not all of whom are bodies corporate, or to an unincorporated body of persons that does not consist entirely of bodies corporate and is not a partnership).

There are extensive exemptions from regulation based on the nature of the agreement, the nature of the lender, the number of repayments to be made, the total charge for credit and the nature of the borrower. The following are examples of some of the main exemptions:
  • Credit agreements
for an amount exceeding £25,000 entered into wholly or predominantly for business purposes.
  • Lending by an investment firm or qualifying credit institution to enable the borrower to carry out a transaction relating to one or more financial instruments in which the lender is involved.
  • A borrower-lender-supplier agreement for fixed-sum credit repayable in twelve or fewer payments over less than 12 months.
  • A borrower-lender-supplier agreement for running-account credit where the borrower is required to repay in one payment within a period of less than three months.
  • Credit to finance a life insurance premium
  • A borrower-lender agreement offered by a lender (or group company) to an employee.
  • Credit for more than £60,260 to a “high net worth borrower” (a borrower with net income totalling at least £150,000 during the previous financial year, or net assets of at least £500,000).

    • Specific conditions and procedural requirements may apply to fall within the exemption.
    Mortgage lending (where the borrower’s obligation to repay is secured by a mortgage on residential property) is also a regulated activity requiring FCA authorisation (or PRA authorisation if the lender is a bank or insurance company). The UK regulation implements the EU Mortgage Credit Directive (2014/17/EU), now as on-shored into UK domestic law, post Brexit.

    Consumer credit, regulated mortgage contract and credit brokering activities are regulated on the basis of the activity undertaken, regardless of whether or not via a FinTech platform. There is no specific FinTech regulation for credit activities.

    Peer-to-peer lending platforms are regulated as the special category of operating an electronic system in relation to lending (see above).

    As explained above, lending is only a regulated activity in relation to mortgages and consumer lending to individuals (and small partnerships). The credit related activities requiring FCA (or PRA) authorisation are: 

    • entering into a regulated credit agreement as lender;
    • exercising, or having the right to exercise, the lender’s rights and duties under a regulated credit agreement;
    • entering into a regulated consumer hire agreement as owner;
    • exercising, or having the right to exercise, the owner’s rights and duties under a regulated consumer hire agreement;
    • credit broking;
    • debt adjusting;
    • debt counselling;
    • debt collecting;
    • debt administration;
    • providing credit information services;
    • providing credit references;
    • operating an electronic system in relation to lending;
    • advising on regulated credit agreements for the acquisition of land; and
    • entering into a regulated mortgage contract.

    Consumer credit activities have been highly regulated in the UK since 1974. Strict compliance obligations are imposed on lenders, who may not be able to enforce repayment if they fail to comply with those regulations.

    Other laws which may apply include the consumer protection laws, anti-money laundering regulations, the Bribery Act, and the Payment Services Regulations. Authorised lending firms will have to comply with various systems and controls under FCA rules. 

    The level of fees for application for authorisation depends on a matrix of factors, generally ranging from £1,000 to £10,000. As with other regulatory permissions, ongoing annual fees will be payable, and the firm will be required to maintain prescribed levels of regulatory capital. 

    Additional comments regarding the legal situation for loan-giving-, factoring-, brokerage, finetrading-, and ancillary services or what FinTech’s must

    be aware of in this business area Although the FCA does not currently regulate all BNPL products, but the Government intends to introduce regulation in the future. Lenders are currently required to comply with consumer protection legislation, which the FCA is able to enforce even where lending is not regulated.

    Economic conditions

    Market size for loan-giving-, factoring-, brokerage-, finetrading- and ancillary services and biggest companies in this business area

    FinTech lenders include: Funding Circle, Banking Circle, RateSetter, Yobota, iwoca, LendInvest, LANDBAY, Sharegain, Newable.RateSetter, OakNorth Bank

    Whilst the market breakdown for loan services FinTech’s is not expressly discernible, see 1.a.i for a more general overview of the FinTech sector, the market is substantial.

    Additional comments regarding the economic situation for loan-giving-, factoring-, brokerage-, finetrading- and ancillary services or what FinTech’s must be aware of in this business area

    N/A

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