Default rate transparency should go hand-in-hand with client engagementPosted by oblixcapital on Jul 12 2019
By Andy Reid – Sales Director, Intermediary and Network
The recent announcement by the Financial Intermediary & Broker Association (FIBA) to start publishing lenders’ default rates, has brought facility extension charges to the forefront of the industry.
Following concerns about the default rates charged by some lenders, FIBA announced that it would start publishing lenders’ rates in its online lender directory to provide greater transparency. This move was quickly supported by the Association of Short Term Lenders (ASTL), which pointed out that its code of conduct for members was amended in 2017 to ensure all members applying an alternative higher interest rate, such as the default of a loan, must make this clear and transparent in all of their documentation.
This type of transparency is absolutely vital. In fact, I would go as far to say that it is a hygiene factor for customer-focused lenders. We are therefore in full support of any initiative that enhances transparency, professionalism and the reputation of the industry.
Client engagement is as important as rate transparency
It is also important, however, that we consider the way that default rates are used as well as the transparency of the charges. A responsible and flexible lender, for example, should always explore alternative options with the borrower before the default rate ever needs to be charged.
Default rates help focus the mind of a borrower as they approach the term end of a facility and encourage them to discuss alternative options before it’s too late to do so. Borrowers can only make evidence-based decisions when they are presented with the full information, which is why transparency is key.
Alongside this transparency, lenders should always prioritise client engagement to find an alternative approach. At Oblix Capital, for example, we clearly communicate any default rates that are applicable on our loans, but we only ever charge them as a last resort.
As the end of the facility term approaches, we would much rather engage in discussion with the borrower to identify whether repayment of the facility is likely by the due date and, if not, we explore alternative options. If, for example, there is a viable, but slightly later exit plan in place, we could extend the existing facility without incurring any default charges. Alternatively, we could look to re-structure the loan, perhaps by moving to a different product.
I’m pleased that, as an industry, we are discussing the transparency of default rates and I am sure that this transparency will drive higher standards. But we shouldn’t rest on our laurels and pat ourselves on the back just yet. Transparency is just one element of the use of default rates and we would like to see all responsible lenders follow the lead of Oblix Capital and commit to only charging these higher rates as a last resort when all other options have been exhausted.