The National Audit Office (NAO) has highlighted issues with the way the Office of Fair Trading (OFT) regulates the debt management industry, and the resources available to it.
In a report published in December 2012, the NAO acknowledged that the regulator does a good job of monitoring the consumer credit industry considering the resources available to it, and that for every £1 spent on enforcement in the financial year 2010/11, consumers saved £8.60. However, they also estimated that consumers could have benefitted by at least a further £450 million during the period 2010/11 had the OFT addressed other instances of malpractice by firms, with the most vulnerable customers suffering disproportionately as a result of this shortcoming. This figure was based on an analysis of complaints made against firms over the 12 month period.
The OFT regulates 47,500 active consumer credit firms, but only has an annual budget of £11.5 million and has only 120 staff to oversee the sector. Fees from applications for Consumer Credit Licences are the only source of funding for consumer credit regulation. As a result it cannot conduct day-to-day monitoring of firms it regulates, and only has the resources to act when it receives indications of non-compliant behaviour.
Examples of enforcement action the OFT can take include issuing warnings, issuing fines of up to £50,000, imposing requirements on a firm, varying the terms of a licence or withdrawing a licence altogether. If common issues are identified in different firms carrying out the same credit activities, the OFT may also decide to conduct a thematic review of that business sector, as it did with payday lenders in 2012.
Having reviewed the OFT’s management information, the NAO has questioned whether sufficient resources are being devoted to high risk areas, and whether the OFT fully understands the costs of enforcement. In particular, the NAO highlighted that the OFT does not collect data on amounts lent by each regulated firm, and thus does not understand the level of supply in the market, cannot charge different levels of application fees according to the size of the firm and cannot identify the areas posing the greatest risk.
Comptroller and Auditor General of the NAO, Amyas Morse, said: “The OFT has achieved a good return for a small outlay, but has not been able to tackle the full extent of harm to consumers in credit markets. This is because it has not had enough resource to regulate effectively or the right kinds of powers. The government’s proposed new regulatory system will need to address these problems.”
Mr Morse’s last comment refers to the new Financial Conduct Authority, one of the successor bodies to the existing Financial Services Authority, which will take over regulatory responsibility for consumer credit in April 2014.