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An initial assessment of promotional material being used by consumer credit firms has found that almost one in five do not comply with the Financial Conduct Authority (FCA)’s rules in this area.

The FCA commenced regulation of the consumer credit sector on April 1, and six weeks later it revealed that since its responsibilities commenced, it had reviewed 554 promotions, and that 108 of these, representing 19.5% of the total, breached its rules in some way.

Of these 108, 38 were from payday lenders, while 19 were from other lenders or from credit brokers and 18 were from debt managers.

All credit firms should take note of the issues identified, and re-check their promotional material to ensure that the same failings cannot be laid at their door. Issues identified across the credit industry include:

• Encouraging applicants to press the Apply button on a website before they have considered important information
• Targeting under 18s
• Incorrectly suggesting a credit product would repair the borrower’s credit rating
• Suggesting a credit product would ‘clear’ the borrower’s debt, when in fact one form of borrowing would be replaced with another

Issues relating to specific firm types include:

Payday loans

• Not giving the required risk warning – “Late repayment can cause you serious money problems. For help, go to: moneyadviceservice.org.uk.”
• Failing to state fees, or not displaying them sufficiently prominently
• Not giving the Annual Percentage Rate (APR), or encouraging customers to disregard it
• Failing to explain the risks of not repaying the loan

Debt managers

• Failing to acknowledge that whilst monthly payments may decrease, total repayments and/or the term of the loan will increase
• Misleading statements about interest freezes

Home collected credit

• Misleading comparisons as to the type of customer they might lend to when compared to the banks
• Misleading explanations of APR

Logbook lenders

• Failing to acknowledge that non-repayment may result in re-possession of a car or other assets

Pawnbrokers

• Failing to acknowledge that non-repayment may result in re-possession of the assets offered as security
• Not stating the APR

The FCA has acknowledged that most firms have been quick to make amendments where issues were identified. Many of the promotions have now been amended or withdrawn.

Clive Adamson, director of supervision at the FCA, said: “It is particularly important in this sector that advertisements for financial products enable customers to make informed decisions. We think that more can be done to ensure that advertisements are fair, clear and not misleading.”

The FCA has an ongoing programme of supervision of the firms it regulates, which includes a series of visits to firms’ premises. But even if a firm is not visited by the FCA, its promotional material may still be highly visible if it is broadcast on TV or radio, or printed in a newspaper. Firms should also be aware that their website is also considered to be a financial promotion, as is an email or postal marketing campaign.

On May 13 2014, the UK’s second largest high-street payday lender exited the short-term credit market after the Financial Conduct Authority (FCA) found fault with the firm’s conduct. The issues at the firm were first identified by the former consumer credit regulator the Office of Fair Trading (OFT), and the FCA took over the matter when it became the new credit regulator on April 1.

The FCA has not given precise details of the failings identified at Edinburgh-based The Cheque Centre, which has 451 branches throughout the UK, but the issues are sufficiently serious that the firm has ceased offering payday loans that are repayable in one lump sum, and has also suspended attempts to collect unpaid debts via telephone. The firm will not be allowed to start making such calls again until it has satisfied the FCA that sufficient improvements have been made.

According to the FCA press release, the firm has also made a number of other changes, which include alterations to policies and procedures and to training arrangements. It will also be subject to a Section 166 skilled persons review – an exercise the FCA uses to gain an independent view of the level of risk posed by a particular firm.

There is no indication at present as to whether the FCA will take formal enforcement action against The Cheque Centre, which is a subsidiary of US-based Axcess Financial.

The firm continues to offer cheque cashing, foreign exchange and pawnbroking services.

Martin Wheatley, the FCA’s chief executive, said: “This is an early victory for people that use payday lenders. We made our tougher expectations clear to Cheque Centre and they have wasted no time in making changes. I have said before that firms would need to dramatically improve their operation or exit the market, and we are now seeing that happening. This is an important step in the right direction and other payday lenders should take note.”

“The FCA made clear their expectations, under the new rules, and we offered to make immediate changes,” said a spokesman for Cheque Centre. “One of the decisions we made was to accelerate our exit from payday lending.”

This news should serve as a warning to all payday lenders that they need to get their house in order. Whilst there is a six-month amnesty of sorts, in that prior to October 1 2014 firms will only be punished by the FCA if their actions are at odds with the old OFT rules, the FCA’s scrutiny of payday lenders has clearly already commenced, with this announcement coming just six weeks into the new regime. Mr Wheatley had previously warned credit firms they would notice an immediate difference in their regulatory environment.

The FCA has promised to undertake a series of supervision tasks concerning the payday loan sector, which include:

• Visiting all five of the largest lenders
• Taking over a number of investigations from the OFT
• Conducting a thematic review into the way lenders collect debts and treat borrowers in difficulty
• Examining lenders’ business plans
• Reviewing promotional material

On May 8 2014, the Financial Conduct Authority (FCA) issued five warnings about firms suspected of carrying out consumer credit activities without its authorisation. These firms were Manchester-based debt adjuster GEO Finance Ltd; Liverpool-based personal loan lender City Loans; Stockport-based City Financial Ltd; London and Manchester-based personal loan broker UK Loans; and a broker of many types of loan, Loan To Loans, whose location is unclear.

None of these firms that have a website make any claims on their sites to be authorised by the FCA or any other body. Interestingly, the City Loans website appears to contain endorsements from three well-known daily newspapers. The site also says they are a ‘reputable’ company, which some might disagree with in the light of the FCA warning.

There has also been the first recorded example of an authorised credit firm being ‘cloned’, when a payday loan broker started using the name QuickCash. This firm is not authorised by the FCA, but a Dorset-based short-term lender called Chandler Hart Ltd, which uses the trading name QuickCashClub, is authorised. The website of the unauthorised firm is www.quickcash.co.uk, and even though it uses a UK web address and the FCA says it has evidence the firm is targeting people in the UK, the site actually refers to loan amounts in dollars.

Sometimes an authorised firm will adopt a very similar name to an existing regulated firm in an attempt to trick customers into thinking they are authorised. For example, on April 25 a warning was issued by the FCA about a firm using the name ING Bank, which was not connected to the well-known Netherlands bank of this name; and on May 7 a warning was given about a firm calling itself BNY Mellon Wealth Management, who have no association with the investment bank BNY Mellon. Cloned firms are often associated with cold calling by fraudsters, in that they use a name which appears to be that of a well-known reputable firm.

Customers are advised to check the Financial Services Register and the Consumer Credit Interim Permission Register to ensure that firms they deal with are authorised, and to report any unauthorised firms to the FCA. Customers who do business with unauthorised firms will not be able to make a complaint about that firm to the Financial Ombudsman Service, or make a claim to the Financial Services Compensation Scheme if the firm becomes insolvent.

As part of its enforcement activities, the FCA seeks to prevent firms carrying out regulated activities without its authorisation. Doing so is a criminal offence.

It has been known for some time now that the Financial Conduct Authority (FCA) was planning to make payday lending an area of high priority when it took over as consumer credit regulator. Now that the FCA’s Business Plan for the 2014/15 financial year has been published, we know for certain that all five of the largest payday lenders will be visited by the FCA in the next 12 months.

A comprehensive FCA on-site assessment of a firm’s compliance standards could cover areas such as:

• Business model and strategy
• Culture
• Business processes and procedures
• Systems and controls
• Governance, including the fitness and propriety of key personnel
• Suitability of advice, including affordability assessments
• Training and competence standards
• Treatment of customers
• Complaint handling practices

Lenders can expect to be particularly closely scrutinised as to whether they are following the new rules which were introduced by the FCA. These include: the need for rigorous affordability assessments, restrictions on rollovers and use of Continuous Payment Authority, provision of information about debt advice to borrowers in difficulty and risk warnings on promotional material.

Other examples of supervision activity the FCA will carry out in the near future include:

Taking over a number of investigations into payday lending firms from the previous consumer credit regulator, the Office of Fair Trading (OFT)

• Conducting a thematic review into the way payday lenders collect debts and treat borrowers in difficulty
• Examining payday lenders’ business plans
• Reviewing payday loan promotional material

The thematic review is regarded by the FCA as being particularly important as 60% of payday loan complaints to the OFT concerned debt collection practices, and one third of all payday loans are either repaid late or never repaid at all.

Other payday loan work to be undertaken by the FCA includes:

• Consultations into the level at which it will set its cap on the total cost of credit. Payday lenders will be subject to this cap from January 2015.
• Encouraging the introduction of real-time data sharing across the sector
• Liaising with consumer groups and trade associations

Previous quotes from FCA chief executive Martin Wheatley on the need to regulate payday lenders have included: “There will be no place in an FCA-regulated consumer credit market for payday lenders that only care about making a fast buck,” and “I’m putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking.” 

All of the 50 largest lenders in the UK were ordered to make urgent improvements to their practices and procedures by the OFT back in March 2013.

The Treasury has launched a review of the arrangements relating to enforcement activities of financial services regulators, and the processes these regulators use in reaching their enforcement decisions. The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are included in the exercise. Many people have asked the question in recent years as to who regulates the regulators – exactly who are they accountable to?

In its press release on the subject, the Treasury comments that these regulators have wide-ranging powers, and considerable flexibility regarding how these powers are used.

It is then highlighted that the Government has recently brought activities such as LIBOR manipulation into the regulatory environment, and that it has legislated for a new approval regime for senior personnel within the banking sector.

Mention is then made of the fact that an enforcement regime is only effective if potential wrongdoers believe they are likely to be held to account for their actions, with meaningful penalties being imposed; and if the general public has confidence that these wrongdoers will be punished.

The Treasury has now launched a ‘call for evidence’ on the subject, and the responses to the consultation will be presented to the Chancellor of the Exchequer in autumn 2014.

The scope of the review includes:

• The process by which suspected wrongdoers are identified for investigation
• The process by which the FCA and PRA coordinate their investigations and their enforcement action
• How the early settlement process operates
• How the process in which disciplinary sanctions are decided works
• The arrangements for making representations when subject to enforcement action
• The arrangements for appealing enforcement decisions to the Upper Tribunal.

Speaking about the review, the Chancellor of the Exchequer, George Osborne MP, said:

“The government has taken action to provide a welcoming business environment for those in the financial services industry who play by the rules whilst ensuring that those intent on breaking them are held to account. I am committed to ensuring that the financial services regulators pursue a model of enforcement that delivers the appropriate balance of fairness, transparency, speed and efficiency.”

The Financial Ombudsman Service (FOS), the independent body that adjudicates on complaints when the customer and a financial institution cannot reach agreement, held a ‘PPI tweets day’ on May 1 2014.

Throughout the day, messages were posted on Twitter about the issues related to payment protection insurance (PPI) that the FOS was handling. Details were given of customers who were self-employed when they took out PPI, who only worked eight hours per week, who were not resident in the UK, who were students at the time, or who felt pressured into taking out PPI.

At one stage, an FOS staff member said on the blog that they were explaining comparative redress to a “confused consumer”. Comparative redress involves the financial firm deciding that whilst single premium PPI was indeed unsuitable, that regular premium PPI would have been suitable instead. Consequently, the firm does not offer the customer a refund of all premiums paid, and instead offers a lower amount of compensation. Anyone who thinks this is an unfair way of resolving their case, and who thinks they deserve a full refund, can refer the firm’s decision to the FOS.

One interesting tweet concerned a customer who contacted the FOS on this day thinking she had PPI, when in fact she had card protection insurance from Card Protection Plan (CPP) Ltd. Customers of CPP do not need to submit a complaint in the usual way, as a formal redress scheme has been agreed by the regulator, the Financial Conduct Authority, and CPP and the major banks.

Other issues covered in the tweets were that the FOS can cater for customers whose first language is not English, and that they do chase up firms who have not responded to theri adjudications.

 

PPI remains a big issue for the FOS. Although numbers of PPI complaints were down by over 30% in the final quarter of 2013 – the last three month period for which figures are currently available – when compared to the previous three months, the figure of 79,578 complaints received in the period October to December is still significant. In the words of the FOS outreach officer Rupert Simpson, PPI has “industrialised” the FOS.

 

The initiative highlights that it is very much still possible to make a PPI complaint. The FOS will consider complaints concerning sales made in the last six years, or alternatively where it is no more than three years since the customer should reasonably have known there was a problem. Many PPI sales will not satisfy the first criterion, as most were sold before 2008. Yet most PPI complaints will still be admissible as a result of the way the second criterion is interpreted. Many people are still finding out that they were sold PPI without their knowledge, and even those who did know they had the insurance may not have realised how unsuitable it actually was.

Whilst they may not always agree with the decisions they reach on suitability of advice issues, financial firms are used to the Financial Ombudsman Service (FOS) making adjudications of this nature on complaints made about them.

But now it seems that the FOS has entered previously uncharted waters by ordering a firm to pay almost £30,000 in compensation to two clients on the grounds that the commissions taken were too high.

The case concerns two sales of Self Invested Personal Pensions (SIPPs) sold by Berkshire-based D M Cager Ltd in 2008. In its ruling, the FOS said that the commission amounts taken during the first 12 months of the policy were too high, and that other products with low charges, such as stakeholder pensions, could have been more suitable.

D M Cager asserted that the commission payments were also to cover other work they were carrying out, besides arranging the SIPP, but the FOS countered by saying that this was not explained in the client agreement. The firm also say that the clients agreed to the commission levels, and that the option of paying for the advice via a fee was offered.

In his adjudication, Ombudsman Roy Milne said: “I am not satisfied a pension with high initial charges was suitable because if the contributions stopped before the selected retirement age, the effect of those charges would be significant.”

D M Cager’s managing director Martin Dubber reacted to the adjudication by saying: “It is not the role of the ombudsman, several years later, to decide if the figure was too high.”

However, he added that his firm would be unable to contest the decision as the costs of a judicial review would be too high.

Initial reaction from financial advisers on the Money Marketing website was mixed. One said that “taking £30k commission is simply a rip off and you ‘reap what you sow’ doing things like this,” while another referred to the FOS’s actions as “a blatant abuse of power.”

It remains to be seen how the FOS will react in future cases of a similar nature. Commission payments are of course no longer permitted for pension and investment sales, but advisers must make sure that their fees are clearly explained at the start of the advice process, and that the level of fees charged reflects the costs of the work carried out on the case. In a recent thematic review, the regulator, the Financial Conduct Authority, found that 73% of firms surveyed were not properly explaining the costs of advice.

The Financial Conduct Authority (FCA) has released its Business Plan for the financial year 2014/15.

In the foreword, chief executive Martin Wheatley says that, in its first 12 months, the FCA has made “good progress in advancing our objectives, embedding consumer protection, market integrity and the promotion of competition.” He highlights the interventions the FCA has made in areas such as interest-only mortgages, general insurance add-ons and introductory interest rates.

He then looks forward to the first 12 months of consumer credit regulation at the FCA, and refers to the new requirements for firms in this area, and the forthcoming price cap on payday lending. He also says he expects culture changes to take hold in high street bank branches.

This message is enhanced further in the Executive Summary section, where the FCA promises to be “judgement-based, forward-looking and pre-emptive in assessing potential and emerging risks.”

New activities for the FCA in 2014/15 are said to be:

• The integration of 50,000 consumer credit firms into the FCA regime, which trebles the number of firms it regulates. Consumer credit regulation will have a “direct impact on significantly higher numbers of consumers, ensuring that they are treated fairly when obtaining credit or debt advice.”

• Implementation of the recommendations of the Parliamentary Commission on Banking Standards, working in conjunction with the Prudential Regulation Authority, which regulates prudential matters for banks and other large firms.

• The establishment of a new retail payment systems regulator, which will be a subsidiary of the FCA

Other key activities for the financial year will be:

• More market studies to assess competition standards, including studies on wholesale markets and credit cards

• More thematic reviews in areas where customers are being put at risk, or market integrity is threatened. Areas of focus will include life insurance, consumer credit and benchmarks.

• Considering the case for a 15 year ‘long stop’, i.e. an overriding time limit on how long after the advice a complaint can be made

• Looking at payment protection insurance (PPI) complaint handling standards, and at how providers go about contacting customers who may have been mis-sold PPI but who have not yet complained

• Further work on assessing implementation standards of the Retail Distribution Review requirements

• Implementing the Mortgage Market Review, which will deliver wide-ranging changes to the mortgage marketplace

Much of the report focuses on what the FCA will do for customers’ interests. Activities in this area will include work on: packaged current accounts, sales practices concerning retirement income products, quality of investment advice, client money protection and data security.

Specific activities the FCA will undertake surrounding consumer credit include: 

• Thematic reviews into competition in the credit card industry; payday lenders’ debt collection practices and treatment of borrowers in difficulty; and advice standards at debt management firms

• Reviewing credit promotions to ensure they are clear, fair and not misleading

• Consulting over the price cap for payday loans

• Encouraging the implementation of real-time data sharing

 Specific mention is made of the fact that the five largest payday lenders will be visited by the FCA.