On 1st July 2023, the Lending, Credit and Finance Law came into force in Guernsey. It offers new protection to customers who make use of secured lending and consumer credit and will ensure that the Bailiwick remains compliant with international standards. Cherry Godfrey, who have worked closely with the Guernsey Financial Services Commission throughout the development process, welcome the move towards greater transparency for the consumer.
We caught up with Cherry Godfrey COO Tanzy Cherry this week to discuss the new legislation, and to explore – in greater detail – some of the elements that consumers should be aware of.
Hi, Tanzy – thanks for taking the time to chat. It’s great news that the LCF is now in force, particularly as Cherry Godfrey has been involved since the idea was in its infancy. First of all, what is the function of the LCF, for anyone who isn’t sure?
Well, in a nutshell – and this is going to be a nutshell, as the legislation stretches to 96 pages! - the LCF is there to make sure that, across the sector, everyone is operating to the same standards; and that everything is transparent and clear for the consumer to understand. It affords the consumer protection if they have been misadvised or mis-sold and will help to make sure the consumer is getting the financial product that they actually want and need.
As Cherry Godfrey already operates to an FCA standard throughout the Group, the framework needed to comply with the Law was already in place, and we welcome this legislation in that it ‘evens’ the playing field across the consumer finance industry. It’s been a long time coming!
How does this work, in practice – what changes will those involved in consumer finance need to make?
It starts with transparency. Does the customer fully understand the product? Have all fees / charges been fully explained to the customer? Is that conversation documented? Once the customer decides to go ahead with the product, are you verifying, as a lender or broker, that they can really afford to take this loan out? Is the customer vulnerable in any way, if so, can you make accommodations to ensure the product is fit for purpose and suitable for this customer, not only now but if their situation changes in the future?
A lot of the legislation is to do with making sure are properly explained and there aren’t any ‘hidden’ elements; for instance, in the motor trade, the lender and the garage are now obligated to tell the customer if a commission has been received. Transparency is so important, and there’s now an obligation to not only make a token effort but also to really adopt processes which ensure nothing is opaque or difficult to understand. APR is another good example of a common mechanism that can be very confusing to the consumer, and changes have also been brought in to remedy this.
What about APR – can you expand?
Well, APR – in basic terms – is essentially the total cost of credit. However, if you’ve ever tried to Google the APR calculation, you’ll find there are a multitude of different equations to help work it out! It becomes very dense and murky. In the new law, though, a calculation has been stipulated – this means all lenders will be using the same calculation, which makes it much easier for customers to compare the total cost of credit across lenders.
Saying that, it can still feel confusing! Our advice at Cherry Godfrey is to always get in touch if there’s anything you don’t understand, and we’ll explain it. By the same token, we do recommend seeking independent financial advice where appropriate to ensure the deal you’re considering is right for you. There are no silly questions, and you can never be too prepared!
It sounds as although the new legislation is welcomed, there are still some elements to be ironed out – it won’t solve every issue at once. Are there any other grey areas to be aware of?
Existing loans are a little bit of a grey area because any loan written prior to 1st July technically isn’t subject to the same regulation. However, we are required to treat such loans ‘in the spirit’ of the new regulation, which should afford consumers some comfort.
Another thing to be aware of is when a company falls outside of scope – if they’re registered in the UK, for example. Though UK-registered lenders can’t advertise in Guernsey unless they are ‘registered’ with the GFSC, there’s nothing to stop a resident from seeking out such a product, and if they do, they should be aware that the protections offered by the new Law don’t extend to companies not registered in the Bailiwick. If, for example, the company is registered in the UK, the consumer may be afforded some protections under UK law, but this can vary – so always read the fine print carefully.
There’s also been the introduction of ‘cooling off’ periods; but this can be more complicated than it sounds. Say, for example, that you purchase a car and drive off with it, but you decide the finance deal isn’t quite right and want to cancel. Your cooling off period gives you the right to do that – but you can’t just return the car! The ‘cooling off’ is only for the finance, but you’re still obligated to find some way to pay for the car. It sounds daunting, but doesn’t need to be; however consumers do need to be careful and make sure they understand the finance they’re getting into, before signing on the dotted line, because whilst they have the technical right to cancel their deal, it may not be as simple as driving the car back and saying ‘I no longer want this’.
Our understanding is that solutions to this are in progress and consideration to something similar to the UK’s Sale of Goods Act is underway (which will work in tandem with the ‘cooling off’ period concept), which should improve things. But it’s something to be aware of in the meantime.
What about commercial lending – how has that been affected?
Well, commercial loans are exempt from the legislation – but in practice there’s been quite a shake up in the industry, and small businesses, in particular, will be affected. You see, if a bond is taken over a business owner’s property when they take out a commercial loan or overdraft facility, that’s now captured by the new law; say, for example, you’re a builder and you’ve got a 30 grand overdraft for cash flow that’s secured on your property – well, that overdraft is now regulated. And, in response to this, all the banks that we’re aware of have pulled those overdraft facilities because there are elements of the regulation that don’t easily accommodate commercial lending.
One key hurdle is that of proof of affordability. If a customer comes to us with an idea for a new start up, we base our credit risk assessment on the strength of their business plan, financial forecasts and current assets. The new Law requires us to prove affordability, which is difficult to do when the business isn’t actually up and running yet. So it is difficult to comply with that element of the new Law, thus meaning the appetite for commercial lending within Guernsey is dwindling. It’s a new and tangible problem that will have a real impact.
At Cherry Godfrey, we’re currently looking at our commercial lending book, and working closely with clients to see what we can do. We’re looking at alternative security arrangements and restructuring. We don’t want our clients to worry – they’re in good hands with us – but these roadblocks are an unintended consequence of the new legislation.
In conclusion, it sounds as though the new legislation is a positive step forward – but there are some things to be aware of.
Exactly that. We want customers to have transparency and protection, and this legislation goes such a long way towards supporting this. It’s necessary that we put ourselves in the shoes of the customers. After all, it’s easy for those us who write loans all day and use terms interchangeably to forget that the customer doesn’t necessarily automatically understand the phraseology used and what that means in reality. This is something we’ve always focused on but now customers can take comfort that the benchmark is being met by all licensed lenders in Guernsey. Without a doubt, the LCF is a very good thing for Guernsey to have.
However, there are some issues that will need to be ironed out in time… so do watch this space for more advice as we monitor the developments!
