Addressing lending compliance challenges

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Lending compliance is a vital regulatory requirement for all businesses that provide and administer loans. Banks, financial institutions and other lenders who operate in the UK must ensure that their activities comply with the law and meet strict national and international guidelines when arranging and managing loans. 

Lending compliance is increasingly challenging because regulations are tightening in response to rapid digitalisation, the emergence of new business models, and the need to maintain privacy and combat cybercrime and other illegal activities. 

While digital transformation is part of the challenge, requiring lenders to update their policies and procedures to adjust to change and the growth of online business, it is also part of the solution. Automation and advanced digital tools can help lenders mitigate risks, comply with the latest regulations – notably Consumer Duty in the UK  – and build trust with customers.  

This blog explores the lending compliance landscape, the challenges facing lenders today, and how the right software can build operational efficiency and help avoid costly breaches that damage both reputation and profitability. 

Who’s who: regulators and lending compliance in the UK

The UK financial industry is highly regulated, with numerous regulatory bodies operating in a constantly evolving legal landscape. The Financial Services and Markets Act (FSMA), updated for the post-Brexit world, together with subordinate legislation, provides the regulatory framework for financial services. Three regulatory bodies are authorised under the FSMA:  the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), and the Bank of England Financial Policy Committee (FPC). For cross-border operations, lenders now face changes following the UK’s departure from the European Union, underlining the complex and fluid nature of the lending compliance landscape and the need to keep up with new requirements. 

UK obligations and challenges

Let’s look at how legislation is shaping the market and impacting lenders, and what the consequences are for those who are not compliant. 

  • The Consumer Credit Act is a long-established cornerstone of lending compliance. Originally enacted in 1974, and updated in 2006, this important legislation is under review. Reform proposals were announced in June 2023 by the government and will reflect the digital economy and the new lending environment.  
  • Consumer Duty is an immediate priority for lenders. Introduced in July 2023, the law boosts consumer protection across financial services. It stipulates that consumers should receive a high level of support, communication that is always comprehensible, and products and services that are relevant to their needs and offer fair value. Lenders are therefore compelled to ensure that their practices are customer-centric and aligned with the provisions of the new standard. 

  • Anti-money laundering (AML) and countering the financing of terrorism (CFT) are both stringent lending compliance requirements. Lenders must maintain careful oversight and accountability across all their lending activities and observe rigorous due diligence in their dealings with borrowers and third parties. Above all, there is the duty to know your customer (KYC), which demands intelligent control systems and comprehensive fraud checks/alerts. Whether the risk is from money launderers, the financing of terrorism, or the rise of cybercrime, lenders must build strong defences against illegal activities and report to regulatory authorities on the countermeasures they are taking. 

  • Open banking and digital connectivity mean that lenders are increasingly collaborating with third parties and drawing data from a wide range of different sources. This can have positive benefits for straight-through processing and data verification, but lenders must implement strong KYC checks to ensure that all data sources and data partners are compliant with lending regulations in the UK. 

  • FCA enforcement can have severe financial and reputational consequences for non-compliant lenders. Heavy fines and legal action may follow breaches, so lenders must ensure they remain transparent and compliant through all stages of the lending journey. For example, the FCA fined one lender £811,900 in 2022 for deficient affordability checks. This underlines the FCA’s determination to monitor the consumer credit market at a time when the cost-of-living increase is causing financial stress.  

The role of loan management software in lending compliance

The right loan management software will help lenders meet current and evolving lending compliance requirements, such as the new Consumer Duty. Automation and the latest financial software tools enable teams to quickly and accurately address lending compliance developments and reduce operational risks. Among other things, loan management software can contribute to:

  • Accurate credit/borrower/third party assessments, with enhanced due diligence and better customer profiling to satisfy KYC requirements.

  • Faster, more precise credit scoring to save time and eliminate human errors.

  • Better customer insights to understand lending issues and challenges, such as the cost-of-living crisis, and generate reliable data to make accurate affordability assessments. 

  • Early warning of fraud and other illegal activities, thanks to technology that can counteract cybercrime and identify suspicious patterns in application data. 

  • Rigorous data audits and comprehensive and timely lending compliance reports. 

  • Thorough reviews and stress tests to strengthen key risk indicators and risk reporting. For example, by highlighting disclosure gaps and weaknesses or omissions in reporting.

  • Ongoing intelligence and adjustments to reflect and respond to changes in the compliance landscape. For instance, Consumer Duty means lenders must show regulators that they always put consumer needs first and continuously review their operations to identify and correct any weaknesses. 

Meeting lending compliance challenges with Lenvi

Lenvi places lending compliance at the heart of successful loan management, ensuring that lenders can keep up with regulatory changes and better serve their customers. KYC checks are a core part of the platform together with a comprehensive range of other lender compliance services.  

To find out more about Lenvi’s loan management software and lending compliance capabilities, contact the Lenvi team.