Consumers in the 21st century are credit savvy. Unlike their parents and grandparents, the millennial generation is less likely to save up for a new bike, lavish holiday or new TV—they are happy to buy now and pay later. The same is true for their aesthetic procedures, few of which are inexpensive, but many have been made popular by television personalities and online influencers.
Clients expect to be offered credit terms when they make expensive purchases; if they are not, they can always turn to their credit card or apply for a personal loan, but if a clinic can offer a ‘one-stop shop’ by selling them consumer credit for their surgery, it is likely to increase the number of procedures it will carry out.
However, as Jeanette Burgess, Head of Regulatory and Compliance at Walker Morris LLP, knows, consumer credit is a highly regulated business. She says, ‘before you can offer credit to your clients, there are a number of legal and compliance standards you will need to meet.’
Becoming regulated
Most firms selling to the public do not provide credit terms themselves, they partner with one or more specialist lenders. In these circumstances, as Burgess notes, the seller is a ’credit broker’. For a firm to operate this way, it ‘must either be authorised by the Financial Conduct Authority (FCA) or be an ’appointed representative’ (AR) of another business (usually the lender to which it refers business) that is so regulated.’
Practically speaking, getting regulated as an AR is quicker and cheaper than applying to be directly authorised, which requires the completion of detailed forms, the provision of considerable amounts of information and payment of a fee. In both cases, the clinic needs to agree a contract with the lender, setting out their respective legal roles and responsibilities, and this is likely to include provisions under which the clinic is obliged to compensate the lender for losses they suffer due to acts and omissions outside the scope of the agreed activities.
Regulatory responsibilities
However, whatever route a clinic chooses, Burgess says that its role as a credit broker will mean it will be subject to a wide range of FCA rules that are set out in its handbook: ‘You must be assessed as ’fit and proper’ by the FCA to undertake regulated activities. You may receive compliance visits from the regulator and will need to report details about the business every year. A failure to comply can result in FCA disciplinary action, including fines and, in some cases, may mean the loan agreements you introduce are unenforceable without a court order.’
The rules are outlined below (FCA, 2016):
Key risks
On the face of it, partnering with a lender to give clients a credit option is a win–win situation for everyone; it sells more, the lender gets more business and clients can spread the cost of payment to suit them.
However, it is not quite that simple and, as a broker, the clinic needs to be fully aware of the risks and responsibilities it is taking on, as detailed below.
Section 75 rights
‘Just as when you buy goods on a credit card,’ says Burgess, ‘when a client uses credit to pay for goods and services, the lender is jointly liable with the supplier—the clinic—for claims arising from misrepresentation or breach of contract. If suppliers go out of business, the lender will be liable for any claims from clients, which is why lenders are often very careful to undertake due diligence on their broker partners that supply goods and services.’ She adds that they also build in contractual protections to seek to claw back from the supplier any payments they have to make. Sometimes, this may extend to requiring personal guarantees from directors.
Rules governing remuneration
In 2015 (and updated in 2017), the FCA undertook a review of how retail credit brokers paid their staff and found that the commission and incentive/bonus schemes presented a high risk of mis-selling in 64% of cases (FCA, 2017). This is because those selling credit to customers, sometimes in the home, were paid more if they met sales or performance targets. Even if related to the goods/services rather than the credit itself, this meant salespeople were more likely to prioritise the sale over the suitability or affordability of the credit used to pay for it. To combat this, Burgess notes that ‘the FCA has now introduced new rules that require retail credit brokers to put policies in place to ensure that their payment structures do not risk consumer detriment.’
A win–win situation
Selling via credit can most certainly increase the revenue a clinic can generate. Yet, there are onerous obligations to meet that, if ignored, may lead to penalties and unenforceable contracts. However, get the process right and everyone wins.
FCA guidance
The FCA published a guidance note (FCA, 2016) that outlines the principles and process behind the regime and how firms become authorised, as well as supervision and enforcement. The FCA explains that ‘we have the power to make rules that are legally binding on firms. Where we find problems, we will generally seek to work with firms to resolve issues voluntarily in the first instance. However, if we cannot agree a voluntary solution, we may rely on our formal powers in order to limit ongoing risks to consumers’ (FCA, 2016).
It is worth noting that the FCA were to report to HM Treasury by 1 April 2019 on the provisions of the law relating to consumer credit. In other words: change may be coming.
Remember that there are rules on pre-contract credit information, credit agreements, copy documents and statements and notices, as well as termination and early settlement.
Furthermore, firms will be subject to other general consumer protection legislation, including the consumer protection from Unfair Trading Regulations and the Unfair Terms in Consumer Contracts Regulations (that was replaced by the Consumer Rights Act on 1 October 2015).
Access to credit
It is not hard to find examples within the profession where clients are offered consumer credit. Many aesthetic clinics have dedicated pages on their websites that specifically address the issue of payment, with, at times, more than one finance option, depending on the treatment and the cost. For example, a more expensive procedure may require a deposit of £500, following which, 12 monthly payments are made by the client to pay the bill.
Alternatively, clients wishing to spread the cost of treatment over 2–5 years will still pay a minimum deposit. However, they will then borrow the remaining amount over either 24, 36, 48 or 60 months, but with interest.
Another option is to seek out credit from a finance house directly. For example, Norton Finance is active in this field (2019). It claims to be able to access more than 600 lenders in this field, can offer clients flexible terms from 1 to 25 years and can help those who ‘have a poor credit history or county court judgement, are self-employed or even retired.’