Memorandum submitted by The Finance & Leasing Association (FLA)

(E 19)

 

1. The Finance & Leasing Association (FLA) is opposed to discrimination in any form. While age is a consideration in lending decisions, this is for the primary purpose of responsible lending.

 

2. Clause 190 of the Equality Bill enables the Government to allow certain age-based treatment in particular circumstances. Without an explicit exemption in the Bill in respect of credit scoring (the way in which lenders assess risk), there will be severe consumer detriment. Lenders will be prevented from making responsible lending decisions at a time when the Government is calling upon them to do so.

 

3. Far from placing customers in a better position, the legislation poses a number of risks and would give rise to unintended consequences, including:

 

· Irresponsible lending decisions;

· An increased cost of credit;

· Higher default levels;

· An increase in fraud;

· Increased financial exclusion, if lenders have to withdraw certain financial products.

 

4. We are also concerned that the need for new age discrimination legislation has not been fully demonstrated.

 

Background

 

5. The FLA is the leading trade association for the consumer credit, motor finance and asset finance sectors. FLA members provided £60.2 billion to the consumer sector in 2008, representing almost 30% of all UK unsecured lending. This includes £18.1billion provided to the motor sector. FLA members financed more than 50% of all new car registrations in the UK in 2008.

 

6. The FLA is opposed to discrimination in any form. The FLA's Lending Code which is binding on FLA members requires its members not to discriminate on the basis of race, sex, disability, ethnic background or sexuality.

 

7. Age is nonetheless an important factor in FLA members' credit risk models and ensures that responsible lending decisions are made. Age is a well-established indicator of the likelihood of default on a credit agreement. The removal of age from risk modelling would lead to increased costs both to the industry and to the consumer. It would also lead to less responsible lending decisions.

 

8. The FLA therefore calls for an explicit exemption from the legislation for the use of age in credit scoring and in credit risk models.

 

Responsible lending

 

9. The Consumer Credit Act 2006 requires lenders to lend responsibly (Section 29(2)). Responsible lending is also a requirement for an Office of Fair Trading (OFT) consumer credit licence. The current economic climate has of course highlighted the importance of responsible lending, including to young and older people.

 

Risk assessment

 

10. As responsible lenders, FLA members ensure that all loan applications go through a sound and proper credit assessment. This assessment may look at a combination of factors, including age.

 

11. Age is rarely used in isolation as a predictor of creditworthiness in members' credit risk models. Other factors include length of time at address, employment, income etc. But the removal of age from credit risk models would fundamentally undermine their effectiveness. Each variable included in the credit risk model has a predictive power.

 

12. The use of age also helps the credit risk model to predict the likely risk of default. This allows lenders to lend only to those people who they believe would be able to repay the loan. For example, an older applicant might represent a better credit risk based on their future earning potential and consequent ability to service the loan repayments. Some lenders have also found that applicants under 21 have a greater propensity to default. This could lead to credit being refused or a parental guarantor being sought.

 

13. Some lenders also take additional precautions for older customers by recommending or requiring legal advice before a loan application can proceed. This is an example of good practice. A prohibition on the use of age would effectively outlaw this action. Relevant customers might therefore be placed in a more vulnerable position.

 

Fraud prevention

 

14. Lenders also include age in their models to prevent fraud. Date of birth is a key piece of information used to determine whether a lender is dealing with the correct individual when a credit search is being conducted and identity confirmed.

 

Lack of evidence

 

15. The FLA has seen no evidence of consumer detriment arising from the use of age by lenders in their credit risk models. The opposite may be said to be true. As part of the FLA Lending Code, we operate a complaint conciliation scheme where we handle complaints brought against our member companies. In the past 5 years, we have not received any complaints about age discrimination.

 

Cost

 

16. Without an explicit exemption from the legislation for the use of age in credit scoring, lenders will face significant costs to make changes to their business systems. Smaller FLA members have indicated that the one-off costs could be between £50k and £70k. Added to this will be annual costs of between £445k and £635k.

 

17. In addition, lenders' reduced ability to assess risk could mean increased bad debt. Lenders may also re-think their lending strategies, exacerbating financial exclusion. Changes are also likely to result in more manual underwriting, the cost of which could be passed on to the consumer.

 

June 2009