OFT Refuses Licence to Three Applicants

In January 2013, consumer credit regulator the Office of Fair Trading (OFT) announced that it has refused the applications of two debt management firms to renew their Consumer Credit Licence, and had not granted a licence to a new applicant.

Debt Connect (UK) Ltd, a Manchester-based debt management firm, lost its licence because the OFT had concerns over a number of its business practices, including the information it was providing to its customers. Its associate claims management company Connected Claims Ltd has also lost its licence. Debt Connect has said it is shocked by the OFT’s decision, and has exercised its right to appeal to the First-Tier Tribunal (Consumer Credit). It will continue trading as usual while the appeal is heard.

Welcome Solutions, based in Lancashire, and which trades as debtsorters.co.uk, had its renewal application declined because the OFT ruled it was incorrectly suggesting that it provided free and impartial debt advice. The regulator also had issues regarding the content of its advertising and the reliability of the customer testimonials it published. Welcome also has 28 days from the date of the OFT decision to launch an appeal. As of mid-February 2013, the company website suggested it was business as usual and made no mention of the OFT judgement.

At the same time it was announced that a new licence application from Cornwall-based Rowena Koning has been declined, with the OFT suggesting she lacked the necessary experience to run a consumer credit business, and saying she would have required considerable third-party compliance support. Ms Koning’s appeal to the First-Tier Tribunal has already been dismissed.

The OFT press release added that “all three traders lacked the necessary skills, knowledge and experience to operate compliant consumer credit businesses in the debt management sector.”

Commenting on the decisions of his organisation, David Fisher, OFT Director of Consumer Credit, said: “The OFT will not hesitate to refuse licences to those who cannot establish that they are fit to operate a debt management business and we will revoke existing licences when necessary. Our goal is to ensure that people in financial difficulty who pay for debt advice can be confident that they are dealing with businesses that are competent to give them good advice.”

In September 2010, the OFT published the results of a review into standards in the debt management sector, and warned 129 firms that they risked losing their licence unless they changed their practices. The main areas of concern identified were: misleading advertising, with particular regard to fees charged; poor competence levels amongst debt advisers; and lack of awareness of the Financial Ombudsman Service complaints procedures. Since September 2010, over 100 debt management firms have ceased trading.


MPs criticise OFT for not acting against Provident

The Public Accounts Committee of the UK Parliament has strongly criticised the Office of Fair Trading (OFT), which regulates consumer credit in the UK, for failing to revoke the Consumer Credit Licence of doorstep lender Provident Financial Group. The Committee is reviewing the regulatory environment for consumer credit in preparation for the transfer of consumer credit regulation to the new Financial Conduct Authority (FCA) in April 2014.

In January 2013, Provident and payday lender Wonga both appeared in front of the Committee, before the OFT were also questioned by parliamentarians. Committee chairman Margaret Hodge MP described herself as “shocked” on hearing that 15% of Provident customers receive benefits, and “absolutely appalled” that 13% receive benefits from the social fund.

Ms Hodge confronted the OFT at their appearance before the Committee, saying: “I was appalled to hear from our officials that when they’d gone round with someone from Provident, he was encouraging new loans. That seems to me shocking practice. I don’t understand why you haven’t revoked their licence.”

Ms Hodge also questioned whether the company’s clients realise just how much interest they are paying. Provident’s typical annual interest rate is around 400%.

David Fisher, the OFT’s director of consumer credit, reminded the Committee that the OFT needed evidence before it investigated a firm. The OFT can revoke a licence or take other enforcement action if it has issues regarding a firm’s competence; any criminal offences committed, especially involving fraud or dishonesty; compliance with consumer credit legislation; discrimination; and deceitful, oppressive, unfair or improper business practices.

The Committee also questioned the OFT over the fact that it only spends £1 on regulation for every £15,304 in the consumer credit market.

Provident was founded in 1880 and now employs over 1,000 people in Bradford, West Yorkshire. It sponsors the local professional rugby league team, Bradford Bulls, and according to its website, wishes to be “the leading non-standard lender in the UK.” The site also refers to their “enviable levels of customer satisfaction.” It is expecting a pre-tax profit of £178 million in 2012 and to gain 300,000 new customer accounts.

In October 2012, an investigation by the BBC’s Panorama identified that Provident was prepared to offer a loan to a schizophrenic woman, even though the company’s agent described her as “not all there” to the undercover reporter.

The campaigning efforts of many MPs regarding the high-cost credit market have resulted in the FCA being granted the power to cap interest rates when it takes over consumer credit regulation. Such powers are widespread in countries such as the USA, Australia and Canada.


Cost of running a claims management company set to rise

Claims management companies (CMCs) can expect the fees they pay to their regulator, the Ministry of Justice (MoJ), to increase for the 12 months starting 1 April 2013. The MoJ conducted a consultation on this topic in November and December 2012, and now needs to increase fees in order to maintain effective regulation of the claims management industry.

The fee changes are as a result of:

  • the ban on referral fees in the personal injury sector
  • the ban on offering inducements to make a claim
  • a reduction in the number of CMCs, which may occur as a result of the above two restrictions
  • the need to carry out greater scrutiny of applicants
  • the need to fund the Legal Ombudsman Scheme as regards assessing complaints made against CMCs
  • the need to tackle bad practices, especially in CMCs engaged in financial services activities
  • the need to monitor whether the referral fee ban is being adhered to
  • a possible rise in the number of unauthorised CMCs, and the resulting need to take action against them
  • Government reforms to the costs of civil litigation

The proposals will see CMCs engaged in financial services activities paying three different fees:

Application fee – the standard application fee will rise from £950 to £1,400.

Annual regulation fee – the level of this fee will be assessed against each CMC’s annual turnover, but will now be capped at £40,000 for all firms, instead of the current caps of £17,500 where there is no contractual relationship with clients and £30,000 where there is a contractual relationship. The annual regulation fee will comprise an amount for regulation costs and a separate amount for the costs of the Legal Ombudsman. The regulation part of the fee will be only £200 for firms with a turnover of below £5,000, but for those with turnover between £75,000 and £132,653 it will be £650. Above £132,653 the fee will be 0.49% of turnover up to £1 million, 0.332% of turnover between £1 million and £5 million and 0.24% of turnover above £5 million, subject to the cap. The complaints handling part of the fee will be £300 for firms with a turnover of below £5,000, rising to £1,100 for those with turnover between £75,000 and £224,490. Above £224,490 the fee will be 0.49% of turnover up to £1 million, 0.332% of turnover between £1 million and £5 million and 0.24% of turnover above £5 million, subject to the cap.

Uplift fee – this will only be payable by CMCs in financial services, due to the additional costs of regulating these types of companies. The uplift fee will be 0.125% of turnover, subject to a cap of £25,000.

The MoJ hopes that these changes will lead to constructive changes in the claims management marketplace, and will reduce the number of CMCs only trading for a short period.


Enforcement Action by the Ministry of Justice Against Claims Management Companies

The Ministry of Justice (MoJ) has taken action against a number of claims management companies (CMCs) in 2012, and companies in this sector can expect an increased regulatory burden in 2013. The MoJ regulates CMCs who practise in areas such as personal injury claims and compensation for mis-sold payment protection insurance (PPI). The claims management sector has seen considerable growth in recent years, and therefore increased scrutiny of companies engaged in these activities must be expected. However, the Government has so far resisted calls for CMCs to be regulated by the new Financial Conduct Authority.

Between April and November 2012, 209 CMCs had their authorisation withdrawn by the MoJ, while three companies were suspended and another 140 issued with warnings. This takes the total number of companies that closed as a result of MoJ action to over 900 in the last five years.

In the same year, 539 CMCs ceased trading voluntarily.

Common areas of concern for the MoJ include companies not being transparent regarding their fees, taking upfront fees when they know there is little or no chance of a successful claim being made, and sending unsolicited marketing messages and texts. In November 2008, the two owners of Tetrus Telecoms were fined £440,000 after the Information Commissioner’s Office (ICO) found that it had sent as many as 840,000 illegal text messages a day regarding re-claiming PPI or claiming for accidents. The ICO is also pursuing legal action against Tetrus for alleged breaches of the Data Protection Act.

Justice minister Helen Grant said: “We will not tolerate claims management companies that rip off consumers and flout the rules.

“We have introduced a number of new measures in the past year which will mean consumers are much better protected and which offer a route of complaint and compensation while sending a clear message to the minority who break the rules their tactics will not be tolerated.”

Head of the Claims Management Regulation Unit at the MoJ, Kevin Rousell, said: ‘We will continue to tackle bad practices by claims management companies and take action against those who break the rules.”

In 2013, CMCs can expect to have to draw up a written agreement before taking any fees from their clients. Previously, many CMCs had relied simply on oral disclosure. Consumer complaints about CMCs can also be referred to the Legal Ombudsman from April 2013, which can order companies to pay compensation of up to £30,000.

Chris Lawrenson, head of legal services at the Building Societies Association, welcomed the Legal Ombudsman move, by saying: “The matter is urgent as it is clear that the CMCs operating in the PPI sector are generating by far the most consumer complaints, 74% according the Ministry of Justice.

“Worse still, the vast majority of these complaints are made against just 15-20 firms out of the 1,000 plus authorised in the financial services category.”


MAS consults on debt advice standards

The Money Advice Service (MAS), an independent organisation set up by government to provide advice on money matters to the general public, has launched a 12-week long consultation on debt advice standards in the UK. Following this consultation it intends to create a single framework for quality standards in the debt advice sector, which would apply to both free to use debt charities and to commercial debt management companies. The latter already have their own codes of practice such as the Code of Conduct of the Debt Managers Standards Association.

Compliance with the requirements of the new framework will be mandatory for all organisations who wish to receive MAS funding. The move is aimed at reassuring customers as to the service they will receive in the future.

MAS assumed responsibility for co-ordinating the debt advice sector in April 2012, and is seeking to improve the accessibility, quality and consistency of advice.

A survey by the Money Advice Trust, a charity which operates the National Debtline service, has previously found widespread differences in how debt advice is delivered and regulated across different organisations.

MAS has three principles which it sees as key to the new framework: being receptive to client needs, demonstrating strong governance and promoting reflective and on-going learning.

The new framework is likely to require role profiles of debt advisers to be much clearer, and to set minimum standards for skills, knowledge and competencies for staff working in the sector.

After the consultation, MAS will finalise the new framework, and from April 2014, organisations which receive funding from MAS will need to demonstrate that they are complying with its requirements. MAS will be able to accredit existing codes of practice and quality standards that meet the requirements of the framework.

Opinions are invited from the debt advice sector on the proposals, and comments can be made via the MAS website until March 15 2013. Alternatively views can be expressed at one of the consultation events MAS will hold across the UK in February 2013.

Caroline Siarkiewicz, Head of the UK Debt Advice programme at MAS, said:

“In the current economic climate, it is vital that debt advice is always of the highest quality. When people look for advice they need to know they can trust what they are hearing and that the right people, with the right training, are helping them. We have seen excellent practice in many parts of the country and today’s consultation is the start of a process to bring the standard across the whole country in line with that best practice.”

Responding to comments that commercial debt management companies already have their own codes of practice, Ms Siarkiewicz added:

“We are conscious the fee-charging sector has its own codes of practice. This framework is not to preclude them but we want them to look at our framework and map their existing standards against our framework.”


Regulators round on PPI failings

Attempting to learn lessons from past events, in late January 2013 the Financial Services Authority (FSA) and the Office of Fair Trading (OFT) issued joint guidance regarding certain types of product which might be seen as an alternative to payment protection insurance (PPI). These alternatives may include short-term income protection, debt freeze and debt waivers. The FSA’s press release states: “The previous failings in relation to PPI must not be repeated.”

PPI has become the most widely mis-sold financial product ever in the UK, with banks and other financial institutions forced to pay billions in compensation to disadvantaged customers.

Short-term income protection (STIP) works in a similar way to existing long-term income protection insurance (permanent health insurance), except that benefits are only payable for a limited period, such as two years. In the event that the policyholder cannot carry out their occupation, or cannot perform specified day-to-day tasks, then the policy pays out a fixed income each month until the plan expires or the customer returns to work. Policies are usually sold with a choice of deferred period – the period following a claim before any benefit is paid – which may be anything between 4 and 52 weeks. Unlike PPI, there is no cover for unemployment with this type of plan. STIP, like PPI, can only be offered by the lender once seven days have elapsed since the loan completion. You are free to shop around for alternative cover.

Debt freeze is where the lender agrees to defer all or part of the borrower’s obligation to make repayments. At the end of the debt freeze period, repayments must recommence, including repayment of the deferred amounts.

Debt waiver is where the lender agrees to waive interest and/or charges on the loan. At the end of the debt waiver period, there is no obligation for the borrower to make up the missed payments, although repayments may recommence at a higher interest rate.

All short-term income protection sales are regulated by the FSA. Debt freeze and debt waiver are regulated by the OFT under the terms of the Consumer Credit Act, unless they are sold with a first-charge mortgage, in which case they are subject to FSA regulation. However, from April 2014 all consumer credit regulation will transfer from the OFT to the new Financial Conduct Authority (FCA), one of the successor bodies to the FSA.

The guidance calls for products to be transparent and targeted at the right customers, with particular emphasis on the cost structure and risk implications of purchase. Providers must avoid creating barriers preventing consumers from comparing, exiting or switching cover.

Firms have been urged to treat customers fairly and not to engage in unfair business practices. The OFT has made clear that failing to comply with the guidance could result in a firm losing their Consumer Credit Licence.

When the FCA is launched, it will have powers to ban products, which the FSA did not have in relation to previous poorly designed products, such as single premium PPI.

The British Bankers Association (BBA), the banking trade association, who contributed to the FSA/OFT consultation on the subject, appeared to welcome the guidance. “We will now be reading the guidance issued today to ensure the instructions are implemented,” said a BBA spokesperson.


Royal Assent for Finance Bill

The Government’s Financial Services Bill passed into law on December 19 2012. Under the new Financial Services Act, from April 1 2013, the existing Financial Services Authority (FSA) will be replaced.

The Prudential Regulatory Authority (PRA) will be responsible for the prudential regulation of banks, large insurers and large investment companies. It will impose new requirements on firms it regulates in areas such as capital, liquidity and risk management. It will be a subsidiary of the Bank of England.

Overall responsibility for the stability of the UK financial system will sit solely with the Bank of England, whereas previously responsibility was shared between the Bank of England, the FSA and the Treasury.

The Financial Conduct Authority (FCA) will conduct much of the day-to-day regulation of firms’ behaviour that the FSA currently undertakes.

A third new body created by the Act is the Financial Policy Committee, which will identify any fundamental macro-economic risks.

The FSA was much criticised for failing to identify the systemic risks within individual firms and in the wider economy that led to severe problems in several UK banks, which resulted in the Government spending billions on bailing them out. These issues were some of the main drivers behind the change in the regulatory regime.

The FCA will be granted certain powers that the FSA does not have at present. One will be the power to ban poorly designed products from being sold. Previously, the FSA could take action against firms who failed to comply with its rules when selling products such as payment protection insurance, but was powerless to prevent a product with fundamental flaws being sold.

The FCA will also be able to limit credit interest rates. It will take over credit regulation from the Office of Fair Trading in April 2014, and consumer credit firms have been warned to expect higher fees for Consumer Credit Licences (perhaps around £1,500).

The FCA will have promoting competition within the industry as one of its key aims.

The FCA will also be allowed to publicise the fact that it has commenced disciplinary proceedings against a particular firm. At present, the FSA can only make this public once it has completed its investigations and identified failings at the firm.

On the legal cutover date of April 1 2013, new rulebooks for the PRA and FCA will replace the existing FSA Handbook. It is anticipated that most of the existing requirements of the FSA Handbook will be included in one or both of the new Handbooks. The new Handbooks will be published prior to April 1 to allow firms to make any necessary changes to their practices and procedures.

Smaller firms, such as local financial advisory firms, should expect to be regulated only by the FCA, with this body responsible for both their conduct and their prudential regulation. Large insurers and banks should expect to be regulated by both the FCA and the PRA.

More information on the changes can be found in the document ‘Journey to the FCA’, available on the FSA’s website.