The consumer credit industry is changing fast. Digital solutions delivered by technology-driven businesses are making credit increasingly accessible for consumers to make purchases which would otherwise not be affordable. Customers expect competitive finance packages, instant decisions and reduced administration. Businesses rely increasingly on data to make strategic decisions and cutting-edge systems to reach their markets.
Against this backdrop are challenging conditions. On the supply side, businesses are imposing stricter lending criteria, managing higher credit risk and dealing with tougher regulation. However, the slow pace of economic growth, and continuing levels of both existing household debt and retail sales mean that the demand for consumer credit will likely hold.
Regulatory focus
The FCA understands that for most borrowers, credit performs an important function, smoothing income and expenditure which, if affordable, can be beneficial. The FCA wants a well-functioning credit market where customers are treated fairly and supported if they get into financial difficulty.
The introduction of Consumer Duty for some firms will require a significant amount of work including making the best use of internal data including appropriate identification of vulnerable customers.
The focus on customer outcomes from the FCA and its active supervision of the sector and monitoring of compliance with its rules will result in the need for new and quicker information to be made available to decision makers across the business.
Simplifying the complex
Our Consumer Credit team acts for some of the largest and fastest growing consumer credit businesses in the UK and Europe – from those offering secured asset-backed lending to short term consumer credit firms offering loans through an online platform.
We will draw on our industry knowledge to inform every aspect of working with you, including an audit that focusses on understanding and harnessing your IT systems, and providing guidance on authorisation and ongoing regulatory compliance.
Financial Reporting
Financial reporting and accounting for lenders can be complex. IFRS 9 is now well established for international reporters but continues to evolve and the increased expectation around disclosures and providing relevant information continues to be challenging for all lenders. We will provide support and guidance on accounting for credit loss provisions under IFRS 9 and ISA39. The use of special purpose vehicles under IFRS 10 also requires careful consideration.
We will spend time to understand the impact of these and other accounting standards on your business, and ensure your financial reporting reflects this.
Credit loss provisions
Funding structures
Credit loss provisions
In advising on accounting for loan provisions, we will draw on our knowledge of expected credit loss provisioning under IFRS 9, the credit loss provision under IAS 39 and the relevant component inputs of probability of default, exposure at default, loss given default ands well as the role of forward looking macro-economic factors.
Our team will spend time with you to understand how the provision calculation works for your business and evaluate how it complies with IFRS or UK GAAP.
Funding structures
The ability of consumer credit businesses to grow depends on the availability of funding for loans. Unlike banks, you may not have the capital base to fund ambitious growth so need to look for alternative financing options such as warehouse finance or forward flow arrangements, whereby new loans are sold immediately to a special purpose vehicle (SPV) financed by third party investors.
We will guide you through the complexity of accounting for these arrangements – such as IFRS 10 and the need to consolidate SPVs, as well as IFRS 9 and the requirement to recognise/derecognise loans in the balance sheet – and the consequent impact that this may have on revenue recognition.
Future developments
UK GAAP
Whilst the proposals put forward as part of the FRC’s (Financial Reporting Exposure Draft) FRED 82 excluded the alignment of FRS 102 to IFRS 9 in the short term, the proposed amendments would see a removal of the option of applying IAS 39 to financial instruments alongside the introduction of the main reporting requirements of IFRS 15 (revenue recognition) and IFRS 16 (lease accounting). The proposed effective date of the changes is 1 January 2025.
For consumer lenders currently applying FRS 102 the amendments may have an impact in the following areas:
- The removal of the ability to apply IAS 39 to financial instruments requiring a decision and impact assessment of applying the requirements of section 11 and 12 of FRS 102 or IFRS 9. The expectation is that most consumer lenders would look to apply section 11 and 12 of FRS 102 which is very similar to IAS 39.
- Revenue recognition (Section 23 of FRS 102). The new five step model for revenue recognition will be broadly aligned to IFRS 15 but with some simplifications and therefore if there was any fees, charges or other revenue streams which did not form part of the effective interest rate this revenue would need to be recognised based on the five steps of IFRS 15.
- Lease accounting (Section 20 of FRS 102): The new lease accounting model will be broadly aligned with IFRS 16, but with some simplifications. It will require almost all leases to be brought onto the balance sheet from the lessee’s perspective. It requires the recognition of a right-of-use asset and a lease liability for all leases with a term of more than 12 months, unless the underlying asset is of low value.
The new lease accounting model will require most leases to be brought onto the balance sheet. This could have a significant impact on financial statements and key ratios, as it will increase lease liabilities and right of use assets on the balance sheet while also increasing finance expenses and depreciation of the right of use assets and decreasing the operating lease rentals in the income statement.
The IFRS 16 definition of what constitutes a lease might also mean that new contracts are identified as leases that were not previously accounted for as such. For example, in group scenarios, consideration on which entity has the right of use of an asset could result in new leases and sub-leases being identified resulting in more complexity.
- Other changes: FRED 82 also proposes a number of other changes, mostly seeking alignment with IFRS, including the adoption of the IFRS 13 definition of fair value, guidance on factors to consider when accounting for uncertain income tax positions, share-based payments and business combinations.
Our experienced accounting advisory team can help you with impact assessment, implementation and transition to the amended FRS 102 standards. We have a team of enthusiastic and experienced individuals who have previously worked on IFRS 15, IFRS 16 and IFRS 9 transitions and understand the challenges these accounting changes pose to preparers. Please do not hesitate to contact us to discuss further.
Climate change and the impact on financial reporting
The impact of climate change is affecting all industries whether that be on the products they offer, the risks they need to manage or the ability to keep up with the reporting demanded of them from regulators or wider stakeholder groups.
The reporting requirement in this area has significantly increased for certain entities in recent times and we only expect that to increase in the future, impacting a larger cohort of entities. Whether that be the disclosure requirements within the financial statements (such as how to account for product features such as loan climate incentives, and the incorporation of the impact of climate risks in impairment assessments) as well as increased reporting such as TCFD reports, SECR, and viability statements. Stakeholders are expecting the information in these areas to be prepared with the same rigour and confidence as other areas of corporate reporting increasing the risks relating to “green washing” and issuing inaccurate information.
Our corporate reporting and ESG experts are on hand to help guide you through these complex issues and requirements.
