Wonga makes loss as new payday loan environment takes its toll

Faced with new regulatory costs, the UK’s best known payday lender, Wonga, has announced that it made a pre-tax loss of £37.3 million in 2014. This compares to a pre-tax profit of £39.7 million in 2013, and the firm is predicting it will again lose money in 2015.

The firm fell foul of the new consumer credit regulator, the Financial Conduct Authority (FCA), on two occasions in 2014. Firstly, it was forced to pay £2.6 million in ‘distress and inconvenience’ payments to 45,000 customers who received debt collection letters purporting to come from law firms – firms which did not exist. Then the firm reached agreement with the FCA to write off some £220 million of loans made to 375,000 customers, on the grounds that the loans would not have been granted under new lending criteria.

These new lending criteria resulted in a 36% fall in lending volumes, from £1.1 billion to £732 million. The actual number of loans granted to UK customers fell by almost a third, from 3.7 million to 2.5 million; and total customer numbers are down from around one million to 575,000. Overall revenue fell by 31% in 2014 to £217.2 million.

The FCA introduced a series of tougher rules for payday lenders when it took over as consumer credit regulator in April 2014. Lenders are now subject to additional requirements when assessing affordability, as well as restrictions on use of Continuous Payment Authority and rolling over of loans. The FCA also has additional resources to supervise firms, compared to the previous credit regulator, the Office of Fair Trading.

These new compliance requirements have contributed to a 12% increase in Wonga’s operating costs, and in 2015 Wonga has already announced the loss of 325 jobs, more than a third of its total workforce. The FCA has admitted that it expects to see a number of payday lenders exit the market as they struggle to remain profitable.

Since January 2015, payday loans have also been subject to an interest cap of 0.8% per day.

Wonga’s Chairman Andy Haste said: “We said Wonga would be smaller and less profitable in the near term as we focus on creating a sustainable business that lends responsibly and transparently to customers who can afford to borrow from us.

“We know it will take time to repair our reputation and gain an accepted place in the financial services industry.”

He added that he believed it was still possible for a payday lender to remain profitable in the new environment.

Wonga is expected to announce later in the year that it will start offering loans over longer periods than the traditional one-month payday loan.

Wonga has committed to a number of changes to its business practices since Mr Haste took the helm in July 2014. Measures include: new lending criteria, ceasing to use the elderly ‘puppet’ characters in the firm’s advertisements, and removing the firm’s name from children’s Newcastle United replica kits.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


ICO fines personal injury claims company

The Information Commissioner’s Office (ICO), which oversees data protection in the UK, has fined a personal injury claims company £80,000 for making unsolicited marketing calls.

Over an 18 month period, the ICO received 801 complaints about Bolton-based Direct Assist Ltd making marketing calls to individuals who had registered with the Telephone Preference Service (TPS). 575 of these complaints were initially made to the TPS and then forwarded to the ICO, while the remainder were made direct to the ICO.

The issues concerning this company included:

• An elderly and deaf person informed the company that their calls had left her in fear of answering the phone, yet Direct Assist continued to call her
• One household received 470 calls from the company
• One household repeatedly asked for their details to be removed from the company’s records, yet Direct Assist still informed them that they would continue to call for three years, or until they agreed to make a claim
• The company continued to call a particular number in spite of being repeatedly told that the calls upset the householder’s autistic daughter
• One customer said the repeated calls from Direct Assist caused him to re-live his traumatic car accident
• Another customer said Direct Assist staff ‘laughed at him’ when he asked for calls to cease
• Direct Assist deliberately instructed its staff to phone TPS registered numbers
• The company ignored 525 warnings from the TPS about its conduct
• The company had no documented procedures explaining how it would ensure compliance with the applicable regulations

One of the defences the company attempted to use was to accuse someone else of making the calls using their name.

Steve Eckersley, Head of Enforcement at the ICO said:

“Direct Assist’s behaviour shows a blatant disregard for the law and the customers they tried to contact. Even though the TPS contacted them 525 times to warn them about complaints being made they continued to market their services through unsolicited phone calls.

“This penalty sends a clear message that this type of irresponsible marketing is totally unacceptable. Companies need to think about their responsibilities, the law and the consequences if they try to break it.”

Direct Assist is now in liquidation, so the ICO will need to register as one of the company’s unsecured creditors and see if it can recover the amount that way.

The law regarding the TPS is clear and unambiguous. Individuals that have registered with the TPS should not receive marketing calls unless they have explicitly agreed to receive them.

The ICO can now take action and impose fines if marketing communications cause ‘annoyance, inconvenience or anxiety’. There is no longer a need for the complainant to demonstrate that their nuisance calls caused ‘substantial damage or substantial distress’, however the ICO did impose this fine under the old rules, and is satisfied that the calls made by Direct Assist did indeed cause ‘substantial damage or substantial distress’.

Fines of up to £500,000 can be imposed for breaches of the regulations.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


Advisers warned over insistent pension clients

One of the main financial advisers’ trade associations has called for advisers to steer clear of ‘insistent’ clients seeking to utilise the new pension freedoms against the advice of their adviser.

Keith Richards, chief executive of the Personal Finance Society, has advised his members not to process insistent client cases. He has called on the Government to guarantee that advisers would not be held liable for any future complaints from insistent pension clients, and that such clients would not be able to access the Financial Services Compensation Scheme; and only if this guarantee is received would he change his advice. Mr Richards said:

“If the government expect advisers to facilitate transfers, irrespective of their advice to the contrary, there must be a change of process to further protect the client and guarantee that advisers will not be held liable if a poor outcome subsequently materialises.

“Until then, our advice to members is clear and unambiguous: do not facilitate activities which go against your professional advice and the best interests of the client.”

The Society has written to the Government and to the regulator, the Financial Conduct Authority (FCA), regarding its fears of a new mis-selling scandal surrounding the pension freedoms. It has cited examples from other countries that have introduced similar freedoms, such as the USA and Australia, of the possible pitfalls of such a system.

The FCA does not have an official definition of an insistent client, but it is generally held to be a client who wishes to disregard their adviser’s recommendation and pursue a different course. Advisers are already reporting that clients are contacting them seeking to withdraw more than the 25% tax free lump sum from their pension fund, regardless of the consequences this might have in terms of eroding the pension fund and/or pushing them into a higher income tax band.

One question that inevitably has to be posed is why would a client pay for financial advice and then disregard it? However, many existing clients of financial advisers will inevitably look to their adviser to process the transaction should they wish to take advantage of the new freedoms.

Mr Richards added:

“Problems will emerge where the client is not really interested in the advice and just wants the adviser to facilitate a transfer.”

The FCA has suggested that maintaining clear and comprehensive records of insistent client transactions is key when dealing with this issue. A spokesperson for the FCA said:

“Where an individual insists on going ahead with the transfer, even when the advice is against it, the adviser should set out their advice clearly in writing and keep it, along with a clear record that the customer has insisted on proceeding.”

The Financial Ombudsman Service (FOS), the independent complaints adjudicator, has highlighted that in the past it has found financial advisers to be liable for non-advised sales in only a few exceptional cases.

However, a guidance note to its members issued by compliance consultancy SimplyBiz refers to being “concerned about mixed messages from FOS and the FCA” on this subject. The company stopped short of calling on its members not to process insistent client cases, but the company’s joint managing director Matt Timmins commented:

“Regardless of the information contained in the suitability letter and a client’s signed statement, the FOS could uphold a claim if it felt the advice wasn’t in the best interests of the client. Everyone in the industry knows that pensions freedom is the next potential misspelling scandal and we need clear and consistent guidance across the FCA and FOS to protect against this happening and not just punish advisers when it does.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article


MiFID II may require advisers to record client calls

Some significant changes may lie ahead for the UK’s financial advisers as a result of the impending introduction of the European Union’s Markets in Financial Instruments Directive (MifID) II.

The most significant change could be a requirement for advisory firms to record all telephone calls with clients. Face-to-face client interviews may also need to be recorded. This could prove an extremely onerous requirement for some firms, especially those where the advisers operate remotely and not from the principal place of business.

MiFID II proposes requiring firms to record all conversations that involve client orders (instructions to effect a contract), but as legal experts have pointed out, in practice this means recording all conversations as the firm cannot know in advance if the conversation will involve a client order.

It has been speculated that a medium sized advisory firm could need to pay £2,500 to comply with these requirements, which is unlikely to be welcomed by firms already seeing significant rises in the costs of regulation.

The head of one of the main adviser trade associations suggested the UK regulator, the Financial Conduct Authority (FCA), was mis-interpreting the Directive. Chris Hannant, director general of the Association of Professional Financial Advisers, said:

“This aspect of MiFID II is aimed at monitoring firms like stockbrokers to prevent market abuse. It is not about investment advice and the FCA is going over the top by gold plating the rules. Firms need to keep a record of the advice they have given but to suggest a blanket requirement to record all conversations is not what MiFID II intended.”

The proposals may be designed to combat market abuse, but if recordings of client conversations are available, it is inconceivable that they would not also be used when assessing client complaints. So the Directive could, by accident, make it easier for firms to defend complaints.

However, it is possible that MiFID II could lead to a less onerous definition of independent advice being introduced. The FCA has already issued a discussion paper on some of the MiFID II proposals, including the independence definition. The UK regulator will then consult on required rule changes in December 2015, and confirm these new rules by July 2016, ahead of the introduction of MiFID on January 3 2017.

Besides call recording and independence, the discussion paper covers issues such as remuneration, inducements and cost disclosure.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


FCA fine Clydesdale Bank £20,768,300

Financial regulator the Financial Conduct Authority (FCA) has fined Clydesdale Bank £20,768,300 over a number of issues regarding its handling of payment protection insurance (PPI) claims. This is the largest fine imposed by the FCA to date for failings relating to PPI.

The issues continued for more than two years, affecting complaints closed by Clydesdale between May 2011 and July 2013. The bank closed some 126,600 cases during this period, and the FCA says that up to a third of these complaints (42,200) may have been unfairly rejected as a result of these failings. A further 50,900 customers may have received insufficient redress.

The issues uncovered by the FCA included:

• Clydesdale had a policy of not conducting any searches for relevant documentation where the associated loan or mortgage had been repaid more than seven years prior to the PPI complaint, even though it was aware that documentation may still be available. The FCA did not criticise the policy of destroying certain documents after seven years, but does note that it was not acceptable to have automatically assumed all documents had been destroyed

• Clydesdale submitted false information to the Financial Ombudsman Service (FOS). The FOS began asking for documentary evidence that the bank had searched for documentation in some of the older cases, so Clydesdale started deleting certain information from its systems and producing false screen prints to make it look like the searches had been unsuccessful. This is perhaps the most startling revelation in this case, and the conduct was described as “particularly serious” by Georgina Philippou, acting director of enforcement and market oversight at the FCA. However, the FCA has accepted that the practice was undertaken by one team within the bank’s complaint handling operation, and that management were unaware of the issue and had not approved its staff acting in this way. This perhaps explains the lack of any action against a named individual.

• Training provided to complaint handlers was inadequate, and they were failing to consider all necessary information when considering a complaint. In particular, staff were not giving due consideration to existing sickness benefits provided by customers’ employers

Clydesdale has undertaken to review all its PPI complaints up to and including August 2014. All customers will be contacted regarding the outcome of this review, and will be offered compensation where it is due, however this process could take as much as 18 months to complete.

However, the case must be regarded as another example of the lengths banks and other financial institutions sometimes resort in order to avoid paying PPI compensation.

Acting chief executive of Clydesdale, Debbie Crosbie, said:

“In 2011 we introduced changes to our policies and procedures that were designed to help us respond to PPI complaints. A number of these changes were inappropriate and have disadvantaged some of our customers. We got this wrong and I am sorry for that.

“We deeply regret any instance which led to the Financial Ombudsman Service receiving incorrect or incomplete information from us. These practices were not authorised or condoned by the banks.

“As soon as this issue was discovered, we took immediate steps to stop it; we made the regulator aware and rapidly introduced strict new monitoring procedures to prevent any recurrence.”

Gillian Guy, chief executive of consumer advice body Citizens Advice, called on the banking industry to “end the PPI scandal”, and added:

“Clydesdale has let down customers twice: by mis-selling PPI and by not giving people the compensation they deserve. By providing false information to the ombudsman the bank also showed contempt to its customers.”

National Australia Bank Ltd has set aside a combined total of £806 million to pay PPI compensation to customers of its two UK subsidiaries – Clydesdale and Yorkshire Banks. These PPI issues could have affected customers of both Clydesdale and Yorkshire, as the legal entity fined by the FCA is Clydesdale Bank Plc, which operates both banking brands.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


KPMG report reveals extent of compensation sums paid by banks

A report by accountancy giant KPMG has revealed that five of the UK’s largest banking groups have collectively paid some £38.7 million in customer compensation, fines and other costs of regulatory misconduct in the four year period from 2011 to 2014.

KPMG’s ‘Paradox of Forces’ report focussed on Royal Bank of Scotland (RBS) (which includes NatWest), Lloyds Banking Group (which includes Halifax and Bank of Scotland), HSBC, Barclays and Standard Chartered. Together, the banks have lost some 60% of their profits since 2011 as a result of their misconduct.

Products mis-sold by banks and for which compensation has been paid include: packaged bank accounts, mortgages, interest rate hedging products, card protection insurance, equity-based investments and payment protection insurance (PPI). The total PPI compensation bill for the financial services industry as a whole is expected to reach £25 billion, and Lloyds Banking Group alone has set aside £12 million to compensate customers who purchased this insurance. PPI complaint numbers are now falling, but complaints regarding certain other financial products, including current accounts, are on the rise.

According to the report, PPI costs accounted for approximately half of the banks’ 2014 misconduct costs. The total cost of their misconduct in 2014 was £9.9 billion, a reduction of 8% compared to the previous year’s figure of £10.8 billion and a fall of 19% since £12.2 billion was paid out for this in 2012. With regard to the high costs of misconduct, the report reads:

“This will act as a painful reminder that banks must put customer requirements ahead of short-term profits. Clearly cultural change remains an imperative. It took a generation to mess things up; will it take a generation to repair the damage?”

In addition to the mis-selling scandals, some banks have also received enormous fines for various market manipulation scandals. In November 2014, financial regulator the Financial Conduct Authority (FCA) imposed its largest ever fines on five banks, after they were found to have manipulated the foreign exchange markets. UBS was fined £233,814,000, Citibank £225,575,000, JPMorgan Chase £222,166,000, RBS £217 million and HSBC £216,363,000. This makes for a total fine of £1.1 billion for the five institutions combined from the UK regulator, and additional sanctions were levied against some of these institutions by overseas regulators.

The FCA has also handed out a number of fines in recent years for manipulating the LIBOR interest rate, including a £105 million penalty for Rabobank and a £59.5 million fine for Barclays.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


MOJ issues new bulletin to CMCs

Much of the information in the March 2015 bulletin issued by the Claims Management Regulator at the Ministry of Justice (MoJ) is not new. But the fact that the MoJ has seen fit to re-iterate these points suggests they feel these are areas where many claims management companies (CMCs) are not meeting their obligations.

Firstly, companies are reminded of the system for paying their fees. The deadline for payment of the Legal Ombudsman fee expired on March 31 2015, and payment of the MoJ authorisation fee must be paid within one month of the date of the invoice. Failure to pay either fee will result in suspension or withdrawal of authorisation.

Next, companies are directed to certain information published by the Ombudsman about its complaints handling regime. Information is available by following the link in the bulletin to the Ombudsman website, and it is also holding professional learning events in Bristol and Manchester during June.

Companies are then reminded that it is a breach of the MoJ rules not to establish the merits of a client’s case before making a claim, and that enforcement action can be taken in these circumstances. Mention is made here of companies who fail to gather sufficient information from clients, who contact financial providers without checking with clients first, and who contact providers even where clients do not believe mis-selling has occurred.

The next section deals with providers who make direct contact with clients of CMCs. Some CMCs have been instructing clients not to deal directly with providers, or have been issuing threatening communications to providers to try and deter them from contacting clients. Both practices breach MoJ rules, and CMCs are asked to ensure they provide accurate, client-specific information when submitting claims, to reduce the likelihood the provider will need to contact their client.

Finally, the bulletin makes reference to the recently issued guidance on transfers of clients between CMCs; and announces that guidance will shortly be issued about marketing of CMCs’ services and about the personal injury referral fee ban.

One of the key ideas in the special bulletin on transferring clients was the need to keep them fully informed as to the progress of the transfer. Where the agreement a CMC has with a client does not specifically permit such transfers, clients must be informed that they have three options: decide to do business with the new CMC, find another CMC to represent them, or stop using a CMC altogether. If a new CMC takes them on as a client, then it must ensure a new Letter of Authority is obtained. CMCs also need to ensure they communicate with the MoJ, the providers the CMC is dealing with and the Financial Ombudsman Service regarding the transfer.

CMCs are reminded that the MoJ now has the power to fine them up to 20% of turnover for breaches of its rules, and also that the Information Commissioner’s Office can now has greater powers to fine companies who make nuisance marketing calls or send nuisance marketing texts. It can impose these fines merely if the communications cause ‘annoyance, inconvenience or anxiety’.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


Advisers see fees and levies soar

Many financial advisory firms across the UK have been hit by several recent increases in the fees and levies they need to pay.

Firstly, the regulator, the Financial Conduct Authority (FCA), has seen its costs increase by 8% in a year due to an increase in staff numbers and additional investment in technology. The FCA has also decided that the largest increase in annual authorisation fee will be paid by firms in the A13 fee block – financial advisers that do not hold client money. Advisory firms will therefore see their FCA fee rise by 10.2% in 2015/16, with the regulator justifying these firms bearing the brunt of the increased costs on the basis they received a rebate in 2014/15 after Retail Distribution Review costs were over-estimated.

Although the Money Advice Service’s overall budget for 2015/16 remains unchanged, financial advisers will need to pay 16% more towards the costs of funding this service than in 2014/15.

At the end of March 2015, life and pensions advisers started receiving invoices for their share of a £20 million interim levy imposed by the Financial Services Compensation Scheme (FSCS), the body which protects customers from loss when financial firms cease trading. Many firms reported receiving an interim levy bill of £1,000 or more. The FSCS said it needed to impose the interim levy for 2014/15 as its costs of meeting self invested personal pension mis-selling claims had been larger than expected.

The FSCS had already hit advisory firms with the news that the share of the organisation’s regular levy they will pay in 2015/16 will be much higher. Collectively, life and pensions intermediaries will pay a levy of £57 million, up from £34 million in 2014/15; while investment intermediaries will pay £125 million, up from £112 million.

Furthermore, this financial year will see advisory firms pay a new levy to fund Pension Wise, the guidance service on the new pension freedoms. Advisory firms with annual turnover of £100,000 or more will collectively fund 12% of the cost of providing this service.

One small consolation might be that advisory firms are not expected to see an increase in the levy they pay to fund the Financial Ombudsman Service, the independent complaints adjudicator.

None of these organisations receive any funding from direct taxation, so are dependent on payments from regulated firms to cover their costs. Nevertheless, the head of one of the main trade associations expressed his dismay.

Chris Hannant, director general of the Association of Professional Financial Advisers (APFA), said:

“It is imperative that the FCA gets a grip on regulatory fees. It cannot just present the industry with an ever-rising inflation-busting bill.

“APFA’s 2014 report on regulatory costs shows they represent around 15 per cent of the cost of advice. This is a significant cost to the consumer and reduces access to advice at a time that pension reforms make affordable financial advice ever more important.”

After conducting a survey of member firms in spring 2014, APFA suggested that financial advisory firms are being forced to pass on soaring regulatory costs to the tune of a £170 fee increase for each client.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


Second charge mortgage sales at five year high

The volume of second charge mortgage lending has risen sharply, and now stands at its highest level for five years.

Data from broker Enterprise Finance, which publishes the Secured Loan Index, show that £75.5 million worth of second charge mortgages (sometimes known as secured loans) were taken out in March 2015. This represents an increase of 13% on the £66.4 million figure recorded in February.

The annual total for the 12 months to March 31 2015 rose by 19% to £799 million.

The average size of loan was £61,347 in March, a rise of 14% since January and a 3% rise on the figure from March 2014.

The majority of borrowers (54%) take out their second mortgage to fund home improvements, while significant numbers continue to take out these loans in order to consolidate other debt.

Harry Landy, a director of Enterprise Finance, said of the figures:

“March’s secured lending activity represents the market shifting up a gear after a solid start to 2015 and shows that demand for consumer credit remains keen.

“Monthly and annual improvements of almost 14 per cent is further evidence that public attitudes to borrowing continue to improve as the economy recuperates to something resembling a clean bill of health.”

The market for these types of loans was badly hit by the credit crunch of the late 2000s, before which there was a highly competitive market and numerous lenders and brokers marketing these loans via television advertising.

Mr Landy does not expect market growth to be significantly affected by the forthcoming introduction of new regulation. However, lenders, brokers and other firms who deal with second charge mortgages need to ensure they are prepared for the introduction of new rules in March 2016.

From March 21 2016, the UK is required to comply with the requirements of the European Union’s Mortgage Credit Directive. This means that the UK regulator, the Financial Conduct Authority (FCA), will force second charge mortgage firms to abide by rules similar to those applying to first charge mortgage firms (the Mortgage Conduct of Business, or MCOBS, rules), rather than those which apply to consumer credit firms (the Consumer Credit, or CONC, rules). Firms will be subject to new requirements such as:

• Carrying out comprehensive checks of current and future affordability, including whether the payments would be affordable if interest rates rose
• Disclosing certain information to the client, both pre-sale and post-sale
• The need for advisers to hold a mortgage advice qualification such as the Mortgage Advice Qualification or the Certificate in Mortgage Advice and Practice
• Providing more comprehensive data to the FCA via regulatory returns

Firms who offer secured loans can now apply to the FCA for regulated mortgage permissions.

Christopher Woolard, the FCA’s director of policy, risk and research, spoke of the need for additional regulation of this market by saying:

“We recognise that second charge mortgages are beneficial for some customers but we are concerned that consumers can be put at risk by poor sales practices and ineffective affordability assessments. Given the risk of consumer detriment, we want to embed good practice and we believe that applying our mortgage rules is the best way to do this.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.