Will the OFT complete processing of new applications before the switchover?

The Financial Conduct Authority (FCA) will take over as the UK’s regulator of consumer credit on April 1. Firms who are already authorised by the existing credit regulator, the Office of Fair Trading (OFT) now need to make an application to the FCA, after which they can expect to be granted interim permission to continue trading under the FCA regime.

However, new entrants to the consumer credit market still need to apply to the OFT. If their application is approved by the OFT before April 1, they will then need to apply to the FCA for interim permission once approval has been received. If the OFT has not reached a decision on a firm’s application by the switchover date, then their application will be passed to the FCA.

The OFT has issued some guidance on its website indicating how likely it is that a firm applying for authorisation today will receive their Consumer Credit Licence before the end of March. As 90% of ‘low risk’ applications are approved within 25 working days, the OFT expects that applications made after February 21 will not be approved in time. 75% of ‘high risk’ applications are approved within 50 working days, so here the OFT expects that applications made after January 17 will not be approved in time. Of course, there is no guarantee that any application, whether low or high risk, will be approved by the OFT before its responsibility for regulation ceases.

Firms wishing to make a new application for consumer credit authorisation, or to vary their existing permissions, are thus advised to submit their applications as soon as possible.

High risk firms include:

  • Lenders offering secured loans, sub-prime loans or payday and other high-cost short-term loans; or those selling loans in the customer’s home
  • Brokers offering secured loans or sub-prime loans; or those selling loans in the customer’s home
  • Debt adjusters (other than those carrying out not-for-profit activities)
  • Debt counsellors (other than those carrying out not-for-profit activities)
  • Debt collectors
  • Debt administrators who deal with secured loans or sub-prime loans
  • Credit information service providers
  • Credit reference agencies

Low risk firms include:

  • Lenders not offering secured loans, sub-prime loans or high-cost short-term loans; and who not offer credit in the borrower’s home
  • Brokers who avoid all the above activities
  • Debt administrators who avoid all the above activities
  • Not-for-profit debt adjusting or debt counselling

Firms intending to carry on with consumer credit activities after April 1 must retain their Consumer Credit Licences until the switchover date, even if they are informed before this that their interim permission application to the FCA has been successful. The FCA will only consider interim permission applications from firms who have licences valid until March 31, and who have paid the necessary maintenance charges to ensure that their licence stays in force until this time. The OFT webpage also urges firms to ensure that the firm details on their licence, e.g. contact details, are up to date.


Insolvent payday lender faces loan book deficit

Less than £1m of the £10.8m owed by customers to a failed payday lender is expected to be recovered, according to the firm’s administrators.

Web Loans Processing appointed Freddy Khalastchi and Martin Atkins of Harris Lipman as its administrators in November 2013. The company had been experiencing financial difficulties since September 2013 when some of its creditors called in their loans. Nevertheless, it still took out two bridging loans of £250,000 each in October 2013.

The company used the trading names Toothfairy Finance, Cashkingdom.co.uk, Easyfinanceclub.co.uk and Wegivecredit.co.uk. Web Loans Processing also took over the outstanding debts of payday lender MCO Capital when it was stripped of its consumer credit licence in March 2013.

Loads of Dosh Limited has subsequently purchased the assets of Web Loans Processing for £30,000.

The loan book of Web Loans Processing is valued at an estimated £822,500, which is little more than 7% of the total amount owed.

The administrators have also suggested that consumer credit regulator the Office of Fair Trading (OFT) had expressed concerns about whether Web Loans Processing and its associated companies Northern Debt Recoveries Limited and Marshall Hoares Bailiffs Limited were fit to hold a Consumer Credit Licence. The OFT found that Web Loans Processing staff were obstructing access to the company’s records, and it was also concerned about the use of an Israeli-based subsidiary, Transco, to collect debts, as this subsidiary was not licensed in the UK.

Back in September 2011, the Daily Mirror alleged that Toothfairy Finance was engaging in a series of disreputable practices, which included: imposing disproportionate charges when recovering debts, pressuring customers to repay when they had indicated they were in financial difficulty, making unwarranted claims about legal action that might be taken, making threatening phone calls, pursuing customers for repayment after they had taken out Debt Relief Orders and taking more from customers’ accounts than they had been authorised to.

A direct of both Web Loans Processing and Northern Debt Recoveries, responded to the newspaper article by referring to the company’s “100,000s of happy customers”. He went on to say that “collectors undergo extensive and ongoing training”, and that his company had the lowest amount of bad debt in the industry.

As of January 9 2014, the Toothfairy Finance website was still operational at www.toothfairyfinance.co.uk, suggesting it may be able to provide loans to anyone aged over 18 and resident in the UK.


Adviser trade body urges FCA to act over MAS levies, overcharging and consumer credit clarification

The Association of Professional Financial Advisers (APFA), the principal trade association for financial advisers, has responded to a consultation paper from the Financial Conduct Authority (FCA) by urging the regulator to act in three key areas.

On October 31 2013, the FCA published Consultation Paper 13/14 regarding the proposed fees and levies for authorised firms in 2014/15.

One of the proposals is to merge two fee blocks used when calculating a firm’s authorisation fee. Block A12 is for advisers, arrangers, dealers or brokers who hold client money or assets, and Block A13 is for advisers, arrangers, dealers or brokers who do not hold client money or assets. In the paper, the FCA acknowledges that this step is necessary “to remove an anomaly”.

APFA has asserted that this amounts to an acknowledgement that firms falling under the A13 block “have been picking up a greater share of the bill than they should have been.” The trade association has thus asked the FCA to reduce the 2014/15 fees for these firms accordingly.

Next, APFA’s response addresses Money Advice Service (MAS) funding, which is a thorny issue for financial advisers at present. The advisory community is still required to pay levies to fund MAS, the body that was set up by the Government to offer general advice on financial matters to the public, even though the performance of this organisation has been much criticised. Here APFA calls for a closer link between usage rates of MAS amongst the general public and the way the organisation’s funding costs are allocated.

The third issue the submission addresses is whether financial advisers who do not sell consumer credit products require consumer credit authorisation, on the basis that they may sometimes give generic advice to customers concerning their debts. Many advisers are understandably reluctant to pay the additional costs of consumer credit authorisation in the absence of a definitive statement that this is required. However, Positive Solutions, one of the largest financial adviser networks, has asked all its members to obtain a Consumer Credit Licence.

In a webinar of December 2013, FCA chief operating officer Lesley Titcomb said not all financial advisers require a consumer credit licence, or will require consumer credit authorisation come April 2014, but did not give details of the circumstances in which these firms may or may not require a licence.

Also on the subject of consumer credit, APFA commented that many smaller firms for whom credit was an incidental activity would have difficulty in identifying their exact amount of income derived from credit activities. In view of the fact that initial FCA fees for consumer credit authorisation will be dependent on a firm’s turnover from credit activities, the trade body has asked whether it will be sufficient for these firms to issue a declaration that their credit turnover is below £50,000 or below £100,000.

The deadline for responses to the consultation paper passed on January 6 2014.


Regulators Confirm They Will Investigate Co-op Bank

Both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have announced that they intend to commence investigations into recent events at the Co-operative Bank. In a statement on its website, the FCA said that it would conduct an enforcement investigation relating to decisions and events up to and including June 2013. The PRA’s statement said that its investigations would include consideration of the conduct of senior managers at the bank.

The FCA is responsible for regulating the conduct of authorised firms, while the PRA is responsible for ensuring the financial stability of banks and other large institutions. Both regulators have the power to fine the bank and/or its key personnel, and to ban key individuals from working in financial services.

The Co-operative’s financial troubles – involving a £1.5 billion capital shortfall – forced them to accept a re-financing led by two US-based hedge funds. These funds became the majority owners of the Co-operative, effectively removing the bank’s mutual status.

Much recent publicity has surrounded the bank’s former chairman Reverend Paul Flowers, who had no banking experience prior to taking up his role. There have been many lurid headlines about Mr Flowers’ private life, but of greater concern to the regulators is that, when questioned by the Treasury Select Committee (TSC) in November 2013, Mr Flowers estimated the size of the bank’s balance sheet as £3 billion, when it was in fact £47 billion. Despite his lack of experience and knowledge, the FCA’s predecessor, the Financial Services Authority (FSA), still approved Mr Flowers’ application to perform the role.

Prime Minister David Cameron MP said of the regulators’ announcements:”The Chancellor will be discussing with the regulators the appropriate form of inquiry. There are clearly a lot of questions that need to be answered. Why was Reverend Flowers judged suitable to be chairman of a bank? Why weren’t alarm bells rung earlier, particularly by those who knew?”

The day after the regulators announced their investigations, FCA director of supervision Clive Adamson told the TSC he had ‘no regrets’ over the decision to approve Mr Flowers as chairman. “I stand by the decision I made at the time. I was as surprised as all of us about Flowers’ apparent misdemeanors. I don’t think it was a mistake with the information I had at the time,” said Mr Adamson in his testimony. He added that two experienced deputy chairmen had served alongside Mr Flowers.

In November 2013, FCA chief executive Martin Wheatley pointed out that the approval process for senior individuals has changed since Mr Flowers was approved in March 2010.

TSC chairman Andrew Tyrie MP said he believed the FSA’s decision was “pretty catastrophic” and “negligent”.

The regulators’ actions are in addition to the Co-operative’s own internal review, led by former Treasury minister Lord Paul Myners; the Treasury review ordered by the Chancellor of the Exchequer George Osborne MP; and the police investigation into drugs allegations regarding Mr Flowers. The Treasury’s independent review will be delayed until the regulators have completed their investigations.


FCA Bans Adviser After Fraud Conviction

In its first Final Notice of 2014, the financial services watchdog, the Financial Conduct Authority (FCA), banned Acomb, North Yorkshire-based financial adviser Michael Bains from working in financial services, after concluding that he is not a fit and proper person. It is perhaps not surprising that the FCA has taken this action, as Mr Bains pleaded guilty in July 2013 to six counts of fraud at York Crown Court, totalling £160,500, and he is currently serving an 18 month prison sentence at HMP Northallerton. Mr Bains committed his illegal actions over a three-year period from April 2009 to March 2012.

Mr Bains has previously been an appointed representative of Bright Future IFA Ltd; and companies he has held the CF30 function for include City House Investors Ltd, Investors Ltd and Financial Ltd. Bright Future suspended Mr Bains from acting on their behalf in June 2012.

Mr Bains did not refer the FCA’s decision to the Upper Tribunal.

North Yorkshire Police told the court that Mr Bains had gambling debts of over £100,000, and that in response to these debts, he started signing clients up for non-existent property development and investment schemes in order to repay his debts and fund his continuing gambling habit. He also sought funding for his lifestyle, which included regular visits to escorts. His four victims included a 58 year old Hertfordshire woman who lost her entire life savings of £100,000. All the victims lost at least £15,000 at Mr Bains’ hands.

Detective Sergeant Dave Edwards, of North Yorkshire Police’s financial investigation unit, commented: “Bains has used his position to convince people who trusted him to invest their life savings wisely. He has cynically used their hard earned cash to indulge his obsession for gambling and escorts – there was no investment scheme – only other victims to repay.”

When passing sentence, Judge Michael Mettyear said: “These are people that knew you and to a greater or lesser extent trusted you, put their faith in you.”

Mr Bains has now been declared bankrupt, which reduces the chances of his victims receiving compensation for their losses.


MoJ Issues Special PPI Bulletin To CMCs

The Claims Management Regulator at the Ministry of Justice (MoJ) has issued a special bulletin regarding payment protection insurance (PPI), aimed at claims management companies (CMCs) who assist with claims in this area. The bulletin is designed to highlight recent developments in PPI claims and to provide guidance in areas where issues have been identified by the MoJ.

The first issue highlighted is the time limit on submission of complaints to the Financial Ombudsman Service (FOS). In normal circumstances, a complaint will not be considered by the FOS if it is referred to them more than six months after the date of the final response letter.

CMCs are then alerted to the fact that many PPI providers are attempting to settle complaints on an ‘alternative redress’ basis. This essentially involves the financial institution deciding that regular premium PPI would have been more suitable than single premium PPI, and the redress offer may be calculated on the basis of the difference between the amount paid under the single premium PPI and the amount that would have been paid had regular premium PPI been taken. The compensation amount is likely to amount to significantly less than would be the case if a full refund of PPI premiums plus interest was offered. The MoJ is concerned that some CMCs are failing to identify alternative redress offers, or are dealing with them in the same way as a full compensation offer. The regulator advises CMCs to consult with their customers as to whether they are satisfied with their alternative redress offer. All offers of compensation for mis-sold policies should be calculated on the basis that the customer is put back in the situation they would have been in had they not purchased the product.

CMCs are asked to review their past business and identify any cases which they may not have handled correctly, relating to either the FOS time limit or alternative redress, and to consider what remedial action is appropriate in these cases. The bulletin quotes several rules which it believes CMCs may be in breach of if they do not handle such claims correctly.

The next item reminds CMCs of the open letter issued by the FOS in September 2013, which asks claims firms to ensure that information provided when submitting a complaint is accurate, complete and specific to the client. The bulletin asks CMCs to follow this guidance both when submitting the original complaint and when referring complaints to the FOS.

A reminder is then given that the deadline for responses to the consultation on changes to the Conduct of Authorised Persons Rules is January 9 2014.

Reference is also made to the requirement to conduct due diligence on any data providers that a firm uses with regard to marketing communications. If marketing communications are made in breach of the Telephone Preference Service rules, or to consumers who have not consented to receive them, then the CMC will be deemed responsible, even if a third party is used. It is not sufficient to rely on the data provider’s assurances in this area.

Elsewhere in the bulletin, firms are reminded of issues such as:

  • Giving customers sufficient time to consider the pre-contractual information that CMCs must provide
  • Alerting customers to where their internal complaints procedures can be located
  • Disclosing typical fees in monetary amounts as part of the pre-contractual information
  • Keeping customers updated as to the progress of their claim, particularly once the matter has been passed to the FOS
  • Making the MoJ aware of whether they handle client money

Government Confirms Super-Complainants

HM Treasury has announced the four bodies that will be able to make super-complaints to the financial watchdog, the Financial Conduct Authority (FCA). Allowing the FCA to receive super-complaints is considered to be a major advance, as previously grievances of this nature could only be made to the Office of Fair Trading (OFT), which does not have as wide-ranging powers as the FCA.

Super-complaints are made when one of the eligible bodies believes that features of a particular financial services market are not working in the interests of consumers.

The four bodies that will be able to make complaints of this nature to the FCA are:

  • Which?
  • Citizens Advice
  • Federation of Small Businesses
  • Consumer Council Northern Ireland

The Federation of Small Businesses is included in the super-complaint system for the first time.

The FCA will be required to respond to super-complaints within 90 days. The regulator may decide to act solely on the basis of evidence provided in the complaint, or it may decide to conduct its own investigation. Depending on the nature of the issues identified, the FCA may then decide to: ban certain activities, alter its conduct rules for firms, take action against offending firms or put in place a system for paying compensation to disadvantaged customers. If the FCA believes no action is required, it must set out in detail why it believes this.

Financial Secretary to the Treasury, Sajid Javid MP, said of the new system: “Super-complainants have an important role, and coupled with the strong remit of the Financial Conduct Authority to protect consumers, these measures are a significant step in our drive to tackle bad practice in the financial services sector ever more rapidly and robustly.”

Which? Executive director, Richard Lloyd, explained the need for the super-complaint system by saying: “For too long, consumers have suffered from a series of financial scandals. That’s why we need the regulator to proactively monitor the market, respond to evidence from consumers and take tough action against bad practice.”

Although the OFT’s powers were limited, its response to some previous super-complaints has achieved effective outcomes for consumers. The FCA’s predecessor, the Financial Services Authority (FSA), was the body charged with regulating the conduct of firms who mis-sold payment protection insurance (PPI), but the OFT’s actions following a Citizens Advice super-complaint had arguably the biggest impact on the PPI market. The OFT chose to refer the PPI market to the Competition Commission, which subsequently banned PPI from being sold at the same time as the loan.

Following other super-complaints, the OFT persuaded the Government to restrict surcharges on credit and debit card purchases; and persuaded the FSA to introduce new rules on cash ISA transfers and interest rate disclosure.


MPs’ Committee Issues Report On Payday Lending

Parliament’s Business, Innovation and Skills Committee have issued a detailed report on the payday lending sector, in which they make a number of far-reaching recommendations. The Committee sought evidence from lenders, trade associations and consumer organisations before issuing the report.

The Committee welcomed the fact that political leaders are devoting more attention to the subject of payday loans. The main Government policy announcement on payday lending in recent months was the cap on the total cost of credit.

However, the Committee believes that a number of additional measures are required, as illustrated by the stark language used by Committee chairman Adrian Bailey MP in the press release accompanying the report. Mr Bailey said: “1.2 million people plan to take out payday loans to cover the cost of Christmas.  The evidence we heard suggests they should think very carefully before doing so.  Inadequate affordability checks, unacceptable targeting and inappropriate use of rollovers all are symptoms of a payday loans sector in urgent need of overhaul.”

The Committee’s recommendations include:

  • Lenders to submit their affordability tests to the Financial Conduct Authority (FCA) for approval
  • Unless the industry has established real-time data sharing by July 2014, the FCA to be compelled to make it a requirement. (This refers to the fact that lenders do not share information in this way at present, and customers are often able to take out loans with multiple lenders on the same day.)
  • Lenders to give three days notice of their intention to use continuous payment authority (CPA), and such a notice should refer to a customer’s right to cancel such an arrangement.
  • A ban on payday loan advertising on children’s television
  • Health warnings to be given the same prominence as Annual Percentage Rates on advertisements, and these warnings to be repeated at every stage of the transaction process
  • A possible ban on marketing of payday loans by email and text, if discussions between the FCA and the Information Commisioner’s Office uncover evidence of a major problem in this area
  • Payday loan authorisation fees paid to the FCA to be ring-fenced to give the Money Advice Service additional resources to provide debt advice

The new FCA regulations for payday lending, which come into force in April 2014, contain a number of new rules for lenders on issues such as affordability checking, CPA and health warnings on adverts. However, the Committee recommendations go much further on these issues and on other matters.

Reacting to the report, Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), disagreed with the Committee’s assessment of the scale of the problems. The CFA is a trade body that counts payday lenders Quick Quid and Payday UK amongst its members.

Mr Hamblin-Boone began by saying that his members already refrained from advertising on children’s television. Various statistics have been quoted about children’s exposure to payday loan advertising, and broadcasting regulator Ofcom said the average child saw 70 loan adverts in 2012, but it is unclear how many of those were during children’s programmes.

He went on to say that CFA members are already subject to restrictions on the use of rollovers, already give three days notice before using CPA, carry out rigorous affordability checks and comply with a strict CFA code on the use of electronic marketing. Moves to establish real-time data sharing were described as “already well advanced.”

The Committee can offer advice to the Government, however it does not have the power to make policy decisions. But regardless of how the Government reacts to the report, it is clear that the introduction of FCA regulation will not put an end to the debate about payday loan regulation.


Adviser Trade Body Head Says Clients Being Turned Away From Advice

The head of a financial advisers’ trade association has raised concerns over the number of people in the UK who are having difficulty accessing financial advice – the so-called ‘advice gap’. In a review of the year posted on the website of the Association of Professional Financial Advisers, the organisation’s Director General, Chris Hannant, said that he believed that almost 60,000 people may have been turned away by financial advisers in 2013.

The Retail Distribution Review (RDR), which came into force at the start of 2013, banned the payment of commission by product providers to investment advisers. Advisers can now only be remunerated via fees paid by the client. It was always feared that this would mean that, in order to remain profitable, advisers would be forced to stop seeing clients whose income and/or assets were below a set level.

The costs of complying with regulatory obligations have been increasing for many years. Some say that this additional regulation is definitely necessary – one only needs to read the newspapers to hear about misconduct in the financial services industry on a regular basis. However, the costs of regulation have had an impact. It was the early to mid 2000s when many traditional life insurance companies ceased their home service operations, spelling the end of ‘the man from the Pru’ and other company advisers. More recently, the major high street banks have started restricting the advice services offered in their branches. Barclays, Co-operative Bank, Yorkshire Bank and Clydesdale Bank are some of those who have ceased offering branch advice completely, while banks such as HSBC restrict their advice to higher net worth clients. Financial adviser numbers fell by 3,000 just after the implementation of RDR, and many of this number are likely to have been bank advisers.

Now that it is more difficult to obtain advice from insurance companies and banks, it is a real concern that many ‘mass market’ clients have nowhere to go to seek advice. Levels of financial literacy amongst the general public remain low, leaving many people uncomfortable about taking a do-it-yourself approach to their finances.

The Money Advice Service (MAS) was set up by government to offer general advice on financial matters to the public via its website, face to face and via telephone. In theory, organisations such as the MAS would have an important role to play in closing the advice gap, but the MAS’s performance has been much criticised by bodies such as the Treasury Select Committee and the National Audit Office, as well as by the financial advisers whose levies fund the service.

In the same bulletin, Mr Hannant said that his association continues to campaign for reductions in authorisation fees and levies to fund bodies such as the MAS.

The advice gap issue has previously attracted the attention of Martin Wheatley, chief executive of the regulator the Financial Conduct Authority. Appearing before the Treasury Select Committee in September 2013, he said: “It is a concern that people with portfolios below £50,000 to £100,000 are not getting the same service they were getting.” He went on to recognise the issue of advisers remaining profitable by adding: “Most advisers have worked out you can’t provide a fully advised service without five or six hours work, and that costs money.”


Licence Suspended For Motor Dealer With Immediate Effect

In December 2013, consumer credit regulator the Office of Fair Trading (OFT) exercised its power to suspend a consumer credit licence with immediate effect when it withdrew the licence of Jonathan Edward Rochford, a Shropshire-based motor dealer who uses the trading name Phoenix Car Centre. No reasons were given in the release for the decision, but the OFT’s press release says that “suspending the licence is urgently necessary to protect consumers.”

Mr Rochford has until January 10 2014 to make representations regarding the decision to the OFT. The OFT’s Adjudicator can then decide whether to confirm the suspension, or withdraw it.  When the OFT uses this power to suspend a licence with immediate effect it has 12 months to commence proceedings to revoke the licence permanently.

It was anticipated that the OFT would  act in this way where there was evidence of fraud, dishonesty or violence; where there was a need to protect vulnerable customers; or where the firm failed to comply with previous instructions from the OFT or Trading Standards.

Most firms who are subject to OFT enforcement action are allowed to continue trading until appeals have been heard against decisions to revoke licences.

In March 2013, Mr Rochford was jailed for eight years for supplying class A drugs. Several other employees of the Phoenix Car Centre in Telford were also jailed for drugs offences at the same time.

This is only the third time the OFT has used this power since it came into force in February 2013. In June 2013, Donegal Finance Ltd, a Staffordshire-based credit broker and debt collector which used the trading names Donegal Finance, Donegal Investigations and Donegal Recovery was suspended from trading. Then in July 2013, Andrew James, a Worcestershire-based motor dealer who used the trading name Apex Car Finance, became the second to lose his licence in this way. On these two occasions, the OFT also gave no details of the reasons for the action.

Citizens Advice, a nationwide charity that offers advice on consumer issues, wrote to the OFT in April 2013 calling on it to suspend the licences of four payday lenders and three debt collection firms with immediate effect. None of the firms were named, but two of the lenders were said to be household names. However, given that eight months has now passed since then, it appears that the OFT did not consider that an immediate suspension was appropriate in these cases.

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