‘Low cost’ payday lender enters administration

Essex-based Money Republic Limited entered administration on January 29 2014, after struggling to service its obligations to creditors. The company had marketed itself as a low cost payday lender, which charged interest of only 1% per day and offered longer repayment periods than many other lenders. It did not offer extensions to loans similar to the ‘rollovers’ commonly associated with payday loans.

Money Republic owed its creditors £633,588 on entering administration, and had only £331,881 in fixed assets, monies owed by debtors and provision for liabilities.

Alex Cadwallader and Neil Bennett of corporate insolvency specialists Leonard Curtis have been appointed as administrators.

Some commentators have suggested that smaller payday lenders will find it increasingly difficult to survive, given the intense competition in the marketplace and the increased regulatory burden.  Lenders are currently subject to regulation by the Office of Fair Trading (OFT). The OFT requested submissions from 50 leading payday lenders, in which they were required to explain how they have changed their practices and procedures in order to address concerns identified by the OFT in its compliance review of the payday sector, the results of which were published in March 2013.

In one respect, the review appears to have had a significant impact, as 19 of the 50 lenders have informed the OFT that they are ceasing payday lending activities, although 15 of these firms intend to continue trading in other areas of consumer credit. None of the household names have exited the market, so it seems reasonable to assume that these 19 firms are amongst the smallest of the 50 lenders.

Since the publication of the report into the compliance review, six more lenders who were not among the 50 firms covered by the OFT probe have also ceased to lend – three have done so voluntarily and three more have unsuccessfully appealed against OFT decisions to revoke their Consumer Credit Licences.

Since November 2012, lenders who are members of one of four trade associations have been required to meet the requirements of a new Good Practice Consumer Charter in addition to complying with OFT requirements.

From April 2014, payday lending and all other consumer credit activities will be subject to the regulation of the Financial Conduct Authority, which has additional resources to supervise firms and a wider range of enforcement powers than the OFT does at present.

Dollar Financial, one of the biggest names in the payday lending sector, believes that the regulatory crackdown will make it impossible for smaller lenders to survive. Chairman and chief executive Jeffrey Weiss said: “We think many of the other operators, including some of the larger ones, will struggle with the necessary implementation and self-monitoring activities.”

Trading names used by Dollar Financial in the UK include The Money Shop, Payday Express and Payday UK. The financial giant has itself reported that profits have been hit by the OFT review – reporting a 2.9% fall in turnover from online lending in the second quarter of 2013, compared to a 34% increase in the same period in 2012.


CMC forced to change advert

Claims management companies (CMCs) are advised to review their advertising material to ensure that any statistics included are correct and can be substantiated.

Devon-based CMC EMC Advisory Services Limited, which trades as Emcas, was ordered to clarify a statement on an advertisement which appeared in the Wakefield Express newspaper, which said that one in four clients had been victims of mis-selling.

Emcas has now added a caveat to clarify that this ‘one in four’ statistic refers only to the six retail banks who were the subject of a Financial Services Authority mystery shopping exercise into the quality of their investment advice in February 2013.

This exercise found that in 11% of cases unsuitable advice was given, and in another 15% of cases the bank failed to gather enough information to ensure suitability. 15 % of cases showed that the customer had been recommended an inappropriate product for their attitude to risk.

The banks involved are undertaking a past business review and have agreed to write to customers who may have been mis-sold inviting them to claim compensation.

The ASA has said it believes that the new wording is “unlikely to breach the code.”

The complaint to the ASA was made by Wakefield-based independent financial adviser (IFA) Neil Liversidge. Mr Liversidge, who is a member of the ruling council of the advisers’ trade body, the Association of Professional Financial Advisers (APFA), was concerned that the advert could imply that one in four investment products recommended by IFAs were also unsuitable.

Mr Liversidge said of the ASA’s action: “It’s a small victory. Hopefully through APFA’s prompt action a lot of inconvenience will be avoided for adviser firms who won’t now be tarred with the same brush as the banks.”

This is not the first time that Mr Liversidge has taken action against a CMC. He has asked Hampshire-based CMC Money Claims (UK) to pay his firm, West Riding Personal Financial Solutions, the sum of £3,861 for what he says was an unjustified claim regarding an interest-only mortgage that he recommended. He wants compensation for: the time spent by his personal assistant in scanning documents relevant to the case, the time he spent interviewing the adviser involved in the sale, the time spent writing letters associated with the complaint and the disruption to his family holiday caused by the complaint.

Alan Lakey, partner at Highclere Financial Services, another IFA who has campaigned for stricter controls on CMCs, submitted a complaint about Emcas to their regulator, the Ministry of Justice, in November 2011. He alleged that the clients they were claiming on behalf of in fact did not have a grievance against his firm. This is similar to the case in October 2013, when Mr Lakey won compensation in court from CMC Aims Reclaim after they submitted a false complaint to him regarding the alleged mis-selling of payment protection insurance.

In February 2014, APFA repeated its call for CMCs to pay case fees when they refer complaints to the Financial Ombudsman Service.


Citizens Advice claims credit brokers charging excessive fees

National advice charity Citizens Advice (CitA) has hit out at the actions of some credit brokers. Their concerns relate principally to the size of fees being charged by brokers and the lack of transparency surrounding this.

490 issues regarding the actions of credit brokers were reported to CitA during June and July 2013, and it is claimed that 40% of the complainants had issues regarding the fees they had been charged. Of those complaining about fees, 58% say they were asked to pay fees that they had not expected to have to pay. The other 42% reported a variety of concerns ranging from being asked to pay fees that were higher than agreed, or for services they never agreed to receive.

Other borrowers have been led to believe that a broker is in fact a lender, sometimes because they received misleading marketing texts similar to those sometimes sent by payday lenders. CitA thus believes that the true number of complaints about brokers is much higher as many do not realise they have been dealing with a broker.

Other issues reported to CitA include: passing details to other brokers without the client’s consent, taking money from consumers who did not even complete the application process – some 19% of complainants never even took out a loan, and failing to refund fees where loans are not taken out.

CitA is now asking MPs to debate the subject of brokers’ conduct and to take action.

Credit brokers, like lenders, are currently subject to regulation by the Office of Fair Trading, but will come under the jurisdiction of the Financial Conduct Authority (FCA) from April 2014. CitA has urged the FCA to treat credit brokers as a priority area when it takes over responsibility for their regulation.

Citizens Advice Chief Executive Gillian Guy commented on these issues by saying: “Credit brokers should not be making people’s money problems worse by charging unexpected fees. In some cases, brokers are preying on people’s need for short-term credit and adding to the pain of poor payday lending by posing as a direct lender.”

Ms Guy then added: “Credit brokers must be transparent about the service they offer and any fees they charge.  The FCA needs to recognise the harm menaces in this industry can cause and come down hard on those who break the rules.  Preventing unscrupulous brokers from entering the market in the first place, through a strict authorisation process is essential. The FCA should also be seriously concerned about the prevalence of data sharing among brokers as money is being siphoned from people’s bank account without clear permission.”


Obstacles to new young advisers entering the financial advice industry

Generally speaking, any industry or profession needs new blood to replace people either retiring or leaving the industry. Yet concern has been expressed by some that it is difficult for new entrants to financial advice to become established.

Many training providers exist to get new entrants to the industry through their Diploma examinations, which have been required in order to give investment advice since the implementation of the Retail Distribution Review (RDR) in January 2013. Yet once they are qualified, what do they do then?

A great many financial advisers in the UK are self-employed, and operate either on their own or with a single business partner. Yet the requirements for a new industry entrant considering setting up on their own are rather onerous. Consider the need to meet regulatory rules on capital adequacy; pay the authorisation fees to the Financial Conduct Authority (FCA) and the levies to fund the Financial Ombudsman Service, the Financial Services Compensation Scheme and the Money Advice Service; and to meet the costs of ensuring compliance with regulatory obligations.

Owing to these factors, it might be anticipated that newly-qualified advisers would join existing firms. However, the problem here is that many firms only wish to take on advisers with established client banks, and of course a new adviser would not be expected to have such a client bank.

The number of traditional practice-based financial advisers has remained fairly static since the introduction of RDR. The fall in adviser numbers is largely due to bank advisers losing their jobs as the big high-street names either scale down their financial advice operations, or abolish them altogether. Many within the industry have commented on the ‘advice gap’ that may be created as a result, where some customers, especially those considered to be ‘mass market’, find it increasingly difficult to access financial advice. Even FCA chief executive Martin Wheatley has indicated that he is concerned by this.

But if it really is so difficult for new entrants to the industry, this could create a bigger problem with access to financial services than the withdrawal of bank advice.

Derek Bradley, chief executive of online forum Panacea Adviser, has commented that one anonymous new adviser has expressed his concerns by saying to him: “I want to progress as an adviser but firms only want ready-made advisers with an existing client bank. It’s a short-sighted approach and it ultimately means there are fewer advisers coming through, with many clients priced out of advice. Even if I were to set up my own firm, the costs would be prohibitive so it’s a catch-22 situation.”

21 year old Ben Philpott, who has joined his father’s firm in Huddersfield, commented: “I am very lucky compared to other young advisers who struggle to find client banks and I am unconvinced that networks would want to take them on because they’ve got nothing to work with.”


MPs debate payday loans

MPs held a debate in the House of Commons on January 20 2014 regarding the activities of payday lenders.  During the debate, many MPs highlighted their own experiences of payday lenders, and those of their constituents.

Shadow Treasury Minister Cathy Jamieson MP highlighted several Labour Party policies that the Government has so far failed to implement. These include: bringing forward the cap on the cost of credit (which may not be implemented until 2015), forcing lenders to implement real-time data sharing, banning loan advertising on children’s television and imposing a windfall tax on lenders’ profits. “It’s clear from their speeches that some members of the government have come round to our way thinking and are now prepared to back some of the actions we’ve been calling for. Too many people have suffered at the hands of payday lenders and many more will continue to unless we act,” said Ms Jamieson.

Charlie Elphicke, the Conservative MP for Dover & Deal, called for a cap on the amount that can be borrowed, as well as on the cost of borrowing. He also remarked on the level of charges imposed on borrowers who default on their loans. “If we want Britain to be a land of opportunity for all, we also need to protect the most vulnerable in society,” he said.

Naomi Long of the Alliance Party, who is the MP for East Belfast, spoke of her own experiences of being pursued by a payday lender for a loan she had not taken out. Her initial letter to the company querying this was not replied to. It eventually transpired that fraudsters had taken out a loan in her name. Ms Long said of this occurrence that “it simply raises more questions as to how [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][payday lenders] handle personal data.” She also told the debate: “Regulation of the sector is key to prevent people taking multiple loans, to check affordability before lending, to introduce caps on total cost of loans and on default charges, to deal with aggressive marketing in the sector and the management of people’s personal information.”

Roberta Blackman-Woods, the Labour MP for City of Durham, describes lenders as pay day loan sharks” in the line above a transcript of her speech on her personal website. In her speech, she raised four key issues: the interest rates charged, which she said “should not be tolerated in our society”; the debt cycle which many borrowers became trapped in; the high number of payday loan shops on our high streets and the targeting of disadvantaged customers.

The Labour MP for East Lothian, Fiona O’Donnell, said one payday lender in her constituency had been marketing its services by handing out balloons to children.

Conservative MP for Stratford-upon-Avon, Nadhim Zahawi, claimed to highlight the lax checks done by payday lenders by revealing that he had successfully applied for a loan under the pseudonym Boris Peep.

Labour Adrian Bailey MP, who represents West Bromwich West and is a member of the Business, Innovation and Skills Committee, summarised the comments made in the debate and added: “I recognise that the FCAdoes not have all the powers it needs to do so, and that requires Government to look at other means of addressing the issues.”[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]


Adviser trade body meets FOS and calls for CMCs to pay case fees

In January 2014, the Association of Professional Financial Advisers (APFA), the principal trade association for financial advisers in the UK, repeated its call for claims management companies (CMCs) to pay case fees when they forward complaints to the Financial Ombudsman Service (FOS). It will now lobby the FOS and the Financial Conduct Authority regarding this. APFA’s ruling council unanimously agreed this course of action after a meeting at which Tony Boorman, the FOS interim chief executive, was also present.

Under APFA’s proposals, the CMC will need to pay a fee when they refer a complaint to the FOS. However, if the complaint turns out to be valid, the fee will be refunded, whereas fees currently charged by the FOS to firms who are the subject of complaints are not refunded if the complaint is judged to be invalid. APFA also stressed that it wishes the FOS to remain free to members of the public, however one of the issues that has previously been raised when case charges for CMCs are mentioned is that CMCs would pass on the fees to their customers. The FOS used this justification to reject a similar call from the advisory community made in July 2012.

APFA has been concerned for some time about complaints being made by CMCs, many concerning payment protection insurance, where either no such policy was sold or where there is clear evidence to refute claims being made by the CMC. Advisers also claim that they are having to spend valuable time investigating spurious and unfounded complaints, and allege that these complaints are extending the time taken by the FOS to resolve genuine complaints.

Neil Liversidge, an APFA council member and managing director of Yorkshire-based West Riding Personal Financial Solutions, has previously demanded a payment of £3,861 from Hampshire-based CMC Money Claims (UK) Ltd for: the time spent by his personal assistant in scanning documents relevant to their complaint, the time spent interviewing the adviser involved in the sale, the time spent writing letters associated with the complaint and the disruption caused to his family holiday.

On the subject of this decision by APFA’s council, Mr Liversidge said: “The FOS was not set up to be a tool for claim-farmers but that is what it has become, a lever by which they can exert undue influence on advisers and impose on them undeserved costs. If the rules are changed to force CMCs to pay the FOS fee up front they will be forced to properly pre-vet cases. This will reduce the FOS workload, reduce the cost to the sector and also ensure that genuine claims are not unnecessarily in the pipeline behind spurious and fraudulent claims.”

A spokesperson for the FOS said: “We have regularly said that we do not believe charging claims managers would prevent claims being made, as inevitably those costs would be passed on to consumers. Additionally, the number of frivolous and vexatious complaints that are made to the ombudsman by claims managers remains incredibly low.”


Adviser trade body responds to MoJ proposals for new CMC rules

The Association of Professional Financial Advisers (APFA), the principal trade association for financial advisers in the UK, has responded to the recent proposed changes to the Conduct of Authorised Persons Rules for claims management companies (CMCs).

In late November 2013, the Claims Management Regulator (CMR) at the Ministry of Justice published a consultation paper, in which its proposals included: a requirement to establish that claims have a realistic chance of success before submitting them; new obligations to provide evidence to back up claims; and the need to conduct thorough audits of data obtained, e.g. sources of marketing leads.

In the main, APFA approves of the proposed new rules, and the recently announced new enforcement penalties available to the CMR. Given the demands the advisory community says CMCs place on them in terms of time spent looking into complaints and case fees to the Financial Ombudsman Service (FOS), it is perhaps not surprising that this is APFA’s stance.

However, APFA does highlight a possible way in which its members might mis-interpret one of the proposed new requirements, namely the need to substantiate claims made. The Association asks if some financial services providers will interpret this as meaning that written documentation is required to be provided, and will thus automatically reject complaints when this is not available. However, it goes on to say that it does not believe that the risk of this happening is high, as it is accepted practice to accept oral submissions from clients when a complaint is made. Even if this did occur, it says there would not be customer detriment, as the FOS would overturn any judgement which the firm made against the customer as a result. APFA does state however that the customer must provide some evidence of having dealt with the firm it is complaining about, e.g. a policy number.

In the response, the adviser body acknowledges the merits of CMCs by saying: “We … accept that the best claims management companies can provide a useful service to some consumers.” However, in the very next sentence it touches on a number of concerns it has about the activities of CMCs, when it comments that: “APFA has become increasingly concerned about the proliferation of cases where CMCs submit claims where no policy ever existed or there is no evidence of mis-selling. A number of our members have reported to us that they have received claims which upon investigation proved to be completely unsubstantiated.” Alan Lakey, partner at Hertfordshire-based Highclere Financial Services, won a court case against Lancashire-based CMC Aims Reclaim in October 2013. Aims Reclaim was forced to pay Mr Lakey’s costs and to compensate him for the time he spent investigating a payment protection insurance claim where no such policy had in fact been sold.

APFA has campaigned for tighter regulation of CMCs for some time. Also in January 2014, the Association called for CMCs to be required to pay case fees when they forward complaints to the FOS, and for these to be refunded only if the complaint is successful.


Compensation amounts soar for mis-sold interest rate swaps

The amount paid in compensation by the UK’s banks for mis-sold interest rate hedging products (IRHPs) almost doubled in December 2013. £81.2 million had been paid in redress by the end of November, and this rose to £158.1 million in December. This amount was divided between 1,040 successful applicants, meaning average payouts exceed £150,000. In 672 cases to date it has been determined that no redress is payable – any bank decision to this effect must be verified by an independent reviewer.

The official redress scheme ends in May 2014, so any businesses who suspect that they were mis-sold these products but have so far not submitted an application for compensation are urged to do so as soon as possible. It is thought that a further 3,700 companies are eligible to participate in the review. The banks say they expect to complete their assessments of individual cases within 12 months of receipt. £3 billion has been set aside by the UK’s banks to pay compensation, but many experts think the final bill could be as high as £10 billion.

11 high street banking groups are currently in the process of reviewing their sales of IRHPs, including all of the largest banks, after an investigation by the regulator, the Financial Conduct Authority (FCA) found evidence of significant mis-selling. IRHPs are designed to protect against rises in interest rates on business loans, however interest rates have been at a historic low for many years, meaning that the products have been of little value recently. Many businesses have been hit with significant fees and exit costs as a result, and many have said that have experienced significant financial problems or even gone bust as a result.

In an echo of the payment protection insurance mis-selling scandal, many purchasers of IRHPs allege they were pressured into buying the product, or were told that taking out the product was mandatory.

The review is focussed on smaller businesses who do not pass the ‘sophistication assessment’ – an assessment of whether they were likely to have understood the complex nature of the product. Companies who are not eligible for the review but still believe they have a case for mis-selling need to make a complaint in the usual way, i.e. complain to the firm that sold the product, and then appeal to the Financial Ombudsman Service if necessary.

The media has largely used the term ‘interest rate swaps’ as an interchangeable term with IRHPs, but a swap is in fact just one of four main types of IRHP. The four types are:

  • Swaps – where the interest rate can be fixed
  • Caps – where the rate is not allowed to rise above a set level
  • Simple collars – where the rate stays within a pre-defined range
  • Structured collars – similar to simple collars, but if the reference interest rate falls below the bottom of the specified range, the rate payable by the customer may still increase

Clive Adamson, director of supervision at the FCA, said: “Banks have picked up the pace since November. We asked that they focus their efforts on making far more rapid progress in assessing individual cases and crucially in providing redress.”


Parliamentary report calls for levy on payday lenders to fund debt advice

A report by the Low Commission has recommended that payday lenders are forced to pay a levy in order to fund debt advice. Costs may also increase for other firms regulated by the Financial Conduct Authority (FCA) if the Commission gets its way.

The Commission, chaired by Lord Colin Low, a cross-bench member of the House of Lords, notes that advice agencies are struggling to cope with the numbers of people contacting them with problems regarding debt, welfare, housing, legal issues and employment. Lord Low is also an experienced disability lawyer and vice-president of the Royal National Institute of Blind People. In compiling the report, he was assisted by nine other people with experience in the field of welfare provision.

The Commission believes that an implementation fund of £100 million per year for the next ten years is required, in order to introduce a nationwide strategy for advice and legal support. It recommends that £50 million of this is funded by central government, via the Ministry of Justice, the Cabinet Office and the Department for Work and Pensions; and that the remaining £50 million is obtained from other sources. These sources would include: the Big Lottery Fund, clinical commissioning groups, housing associations, levies on payday lenders and a 20% increase in the FCA’s levy on firms it regulates. The report mentions the payday lending levy as a separate item to the increase in the general FCA levy, but does not specify the size of contribution it believes lenders should make.

The report also recommends that: a new ministerial post in Government is created to oversee implementation of the new strategy, legal education is introduced into schools, local councils take a greater role in co-ordinating local advice services and greater use of technology is made by advice agencies. Over 100 recommendations are made in all, and the Commission says its intention is to influence policy-making of the major political parties as the 2015 general election approaches.

The Commission has discovered evidence of consumers waiting for up to five weeks to obtain appointments at their local Citizens Advice Bureau (CAB), and of other CAB offices being forced to make advisers redundant owing to budget cuts. Some MPs have reported that more and more people are coming to their advice surgeries with issues that should be handled by the CAB and other advice agencies.

Lord Low said: “Our report makes sobering reading and we are calling on political parties of all stripes to recognise the need to act before we reach crisis point.  All around the country we found advice agencies buckling under the strain, and ordinary people left with nowhere to turn.”


Logbook loan adverts banned

Logbook lender Loans 2 Go Ltd has been banned from showing again two of its recent television adverts, after the Advertising Standards Authority (ASA) found issues with the tone of the adverts and with the way interest rate information was displayed.

The adverts both featured a man in traditional Austrian costume, including lederhosen and a feathered cap. He played an accordion and sang a jingle about the Manchester–based lender’s services to the tune of ‘For he’s a jolly good fellow’. Three dancing women, also dressed in Austrian costume, accompanied him, and in both adverts, the man hands a vehicle driver a wad of £20 notes. In one of the adverts, the participants were seen fooling around by smearing each other with ice cream.

Following complaints from viewers, the ASA ruled that the adverts trivialised the serious business of taking out a loan, and also that the Annual Percentage Rate was not displayed sufficiently prominently. On-screen text towards the end of the advert made reference to ‘Same Day Logbook Loans’, while the representative APR of 356.3% was in smaller sized text.
On the first issue, the ASA said in its judgement: “We considered that the overall atmosphere of both ads was jolly, light-hearted and humorous, in contrast to the serious nature of the business of taking out a loan,” and later added: “Due to the celebratory atmosphere of the ads and the lack of emphasis on the potential consequences of taking out a loan, we felt the ads trivialised and presented a casual attitude to taking out a loan. For those reasons, we concluded they breached the Code.”

The latter issue was judged to represent a breach of regulation 6(2) of the Consumer Credit (Advertisement) Regulations 2010, which requires that the representative APR is stated, and is given greater prominence, whenever the advert provides any sort of incentive to take out the loan. It was judged that the reference to providing loans on the same day amounted to an incentive because it was suggesting that the company may be able to provide loans quicker than some of its competitors.

This is just the latest in a series of recent rulings regarding advertisements by short-term lenders. Other reasons why the authorities have found fault with lenders’ advertising methods include: sending unsolicited marketing texts, suggesting loans can be used to supplement regular expenditure and suggesting loans can be used to fund a social life. There have also been several examples of lenders’ adverts displaying the same issues as Loans 2 Go’s, i.e. failing to highlight the seriousness of taking out a loan, and failing to display interest rate information correctly.

Now may therefore be a good time for lenders to undertake a comprehensive audit of their marketing material to ensure it complies with regulatory obligations.

Posts navigation