Private credit seems to have been everywhere this year. The sector has been expanding so quickly, it is a surprise it is not among the nominees for Oxford University Press’s word of the year.
Brain rot, demure, dynamic pricing, lore, romantasy and slop made the list, but private credit is surely a glaring omission from the dons. Where were they on June 6 when the Global ABS conference in Barcelona featured a private credit summit for the first time? In Oxford, presumably — dreaming spires, ivory towers and all that.
With the rise to prominence, a consumer flavour has crept into the conversation, previously dominated by corporate lending. The Global ABS summit even included a discussion of consumer lending’s “idiosyncrasies, opportunities, and challenges” as part of one panel.
As Basel Committee-imposed capital constraints reign in banks, private credit is taking over their business, one borrower at a time be they a large corporate, SME or consumer.
However, the UK Court of Appeal certainly delivered a stark reminder of the consumer sector's idiosyncrasies and challenges at the end of last month. It found three customers were due compensation because of a lack of transparency around commissions paid to brokers, opening the door to claims that could run into the billions of pounds.
A lot of uncertainty remains. The legal minds of the securitization industry are still working through the implications. Indeed, the whole judgment could still be overturned by the Supreme Court.
But there is a lesson for private credit, as it pushes to add consumer lending to its growing remit. Consumers are rightly well protected and if you don’t judge the risk right, it will cost you.
That is a big problem for anyone entering the fray without experience, given even seasoned lenders are getting it wrong. Separate to the Court of Appeal ruling, Volkswagen was fined £5.4m last week for failing to treat customers in financial difficulty fairly.
There’s an extensive machinery that exists to protect consumers, from FCA regulation to claims management companies. Consumer duty introduced by the FCA last year tightens the rules further and makes non-compliance more costly, consigning to history the idea that fines could just be a cost of business.
However, the car financing ruling wasn’t even based on FCA regulations, but rather a common law principle of fiduciary duty. Much has been made of what that means for other sectors where finance brokers work on commission, but there is also another lesson.
Premising the judgement on fiduciary duty proves that there could be mechanisms to protect consumers, even if you venture into unregulated asset classes, like buy now pay later, where KKR and PayPal agreed an enormous portfolio sale last year.
That is not say that private credit cannot or should not get involved in financing consumer assets. But if they do, consumer duty must be top of the agenda in their due diligence.
Otherwise the industry might find another way on to the word of the year list. There's precedent after all. Just this year in September, the Competition and Markets Authority launched an investigation into Ticketmaster, over consumer protection concerns about the dynamic pricing of Oasis tickets.
Incautious private lenders might find the price of their involvement in consumer financing turns out to be very dynamic indeed.