OFT increases scrutiny of payday lenders

According to law firm Pinsent Mason, the OFT carried out 68 property searches at the premises of payday lenders in the period January to May 2012, having only carried out one such exercise in the whole of 2011.

Property searches can take the form of a comprehensive audit of the firm’s practices, including inspecting documents, monitoring sales calls and online applications and assessing lending decisions.

Payday lenders lend amounts of up to £1000 for periods of up to one month. Opponents of payday lending argue that very high interest rates are charged, that disclosure of fees and charges is often less than transparent, that these loans can trap borrowers in a ‘debt cycle’ and that funds are sometimes advanced without adequate checking of the applicant’s circumstances.

Payday lenders must be licensed by the OFT, must comply with OFT guidance and must comply with the Consumer Credit Act.

The OFT is conducting a compliance review into the payday lending sector and is expected to report by the end of 2012. The OFT has particular concerns that lenders are offering loans without conducting affordability checks and without fully explaining the risks involved. Misleading advertising, the treatment of borrowers in financial difficulty and loans being ‘rolled over’ into subsequent months have also attracted the attention of the regulator. This review could lead to the OFT tightening its guidance for short-term lenders.

Pinsent Mason partner Ian Roberts made reference to “a few rotten apples who may give the OFT a genuine cause for concern”, but added that he believed the sector provided an important service.  “Licensed payday and other short term lenders play a vital role in the market by providing funds to borrowers who would otherwise be unable to borrow funds from legitimate sources,” commented Mr Roberts.

Following pressure from the Government, four trade bodies: the Consumer Finance Association (CFA), the Finance and Leasing Association (FLA), the British Cheque and Credit Association (BCCA) and the Consumer Credit Trade Association (CCTA) all agreed in July 2012 to improve their standards for payday lending and by 26th of November 2012 at the latest. Together, these four bodies represent over 90 per cent of the short-term lending sector. The agreement has given rise to a new Good Practice Customer Charter, which members of these four bodies will be expected to comply with.

This pressure from the Government is just one of many calls for payday lending to be subject to tighter regulation. After seeing a four-fold rise in the number of people contacting the Citizens’ Advice Bureau (CAB) with debt problems after taking out a payday loan, CAB spokesman Peter Turton said in late 2011:

“The sort of regulatory regime isn’t working to protect people. The government needs to look at consumer credit and get really serious about making it more effective. We need better sorts of messages to firms that it’s not acceptable to treat people badly.”


The Financial Ombudsman Service Question the problem of spurious complaints

The Financial Ombudsman Service (FOS), the independent body that adjudicates on complaints when the customer and the financial institution cannot reach agreement, has suggested that the problem of spurious complaints by claims management companies (CMCs) may not be as large as some reports indicate. In the United Kingdom, there are several hundred CMCs who handle claims of mis-selling of financial products, many of whom concentrate on payment protection insurance (PPI). Anecdotal evidence has suggested that CMCs are bombarding banks and other firms with claims for mis-sold PPI on behalf of customers who have never purchased the product.

Some financial advisers have suggested that they have been charged in excess of £100,000 in case fees by the FOS, in spite of not having any complaints upheld and that in some cases it has driven them out of business. The FOS currently charges the business a case fee of £500 for every case once they have had three complaints against them in a year (although this will shortly rise to 25 cases for smaller businesses) and levies this fee even if the complaint is rejected. Some have called for CMCs to pay a case fee every time the complaint is not upheld.

FOS said that only 5,667 of 222,333 complaints settled, around 2.5 per cent, during the period April 2011 to March 2012, were what it described as ‘vexatious or frivolous’. The 222,333 figure is the number of complaints settled about all financial products, and if just PPI complaints were considered the proportion classed as frivolous may be slightly higher. PPI complaints account for around 60 per cent of complaints to FOS. The FOS spokesperson went on to reveal that in one quarter of the cases where a bank says the individual did not have PPI, this was in fact untrue.

The main reason given for not charging CMCs a case fee is that they would probably pass the costs on to their customers.

The FOS re-iterated its call for tighter regulation of CMCs, which are at present subject to very light regulation by the Ministry of Justice. Some members of the House of Lords want CMCs to be regulated by the new watchdog the Financial Conduct Authority. CMCs contend that they provide vital specialist help to those without the time or confidence to complain themselves. However, some have questioned whether the fees CMCs charge are justified, sometimes retaining around a third of any compensation. FOS statistics suggest it is arguable whether using a CMC makes the consumer’s claim more likely to succeed.

Whatever the rights and wrongs of the debates surrounding PPI and CMCs, it cannot be denied that a great many people have successfully complained about this product. The number of PPI complaints being received by the FOS has exceeded all predictions, with up to 1,500 complaints every day and some 400,000 to date. Despite recruiting additional staff, the FOS is struggling to cope with its PPI workload. According to its 2012 annual report, 14 per cent of cases referred to the FOS take more than 12 months to settle.


MOJ rule changes consultation in particular signed contract to be in place before fees are taken

The Ministry of Justice is consulting on proposals under which claims management companies cannot take fees from customers until a contract has been signed.

The MoJ proposes to amend its rulebook to read:

CSR 11 – A contract between a business and a client must be signed by the client, and the business must not take any payment from the client until the contract is signed.

The business must provide the following information in writing or electronically before a contract is signed…

Research by the British Bankers Association has suggested that in 16% of cases received by banks from CMCs there is no written contract in place.

The MoJ suggests that the proposed change could reduce the number of customer complaints CMCs receive. It has also opined that the cost impact of the proposed change should be minimal, and that business volumes would not reduce as a result.

The proposal is contained in an MoJ Impact Assessment document that also proposes that CMCs should state their regulator as being ‘The Claims Management Regulator’ rather than ‘The Ministry of Justice’; and calls for CMCs who also represent clients to inform their clients of changes in their authorisation status.

Claims management firms should consider whether changes to their charging arrangements will be needed in order to comply with the new provisions which are likely to come into effect.


Personal Injury referral fee ban- April 2013

Referral fees for personal injury claims will no longer be permitted from April 2013 onwards, whether they are received from brokers, claims management companies, repairers, credit hire organisations, insurers or other organisations.This includes a ban on any non-monetary inducement as well as on cash payments. The ban will apply to any claim that has a personal injury element.

Provision for the ban is contained in the Legal Aid, Sentencing and Punishment of Offenders Bill, with the Government citing the adverse effect on consumers’ insurance premiums as a major justification for the move.

Failing to observe the ban will not be a criminal offence, but is likely to mean the firm is the subject of enforcement action from relevant regulators, such as the Solicitors Regulation Authority (SRA) or the Ministry of Justice. The SRA published a discussion paper on the proposals is June 2012, and received a number of responses expressing concern about whether it could effectively enforce the ban.

The SRA has now launched a consultation, which runs until December 18 2012, on how it should implement, supervised and enforce the ban.

It has been highlighted that the move is likely to mean that personal injury firms become takeover targets. Another consequence of the ban could be that personal injury firms will form partnerships with solicitors who practise this area of law by way of an Alternative Business Structure.

Those operating in the personal injury market should ensure they have a business model that will remain permissible after the referral fee ban.


OFT Gain Further Credit Licence Powers

From early 2013, the Office of Fair Trading (OFT) will be handed the power to suspend firms’ Consumer Credit Licences with immediate effect in certain cases. The OFT regulates consumer credit in the United Kingdom and requires all firms engaged in credit activities to hold a licence. The OFT can decide to revoke a licence in case of a breach of the Consumer Credit Act, a failure to treat customers fairly, or a criminal conviction. However, all firms are entitled to appeal to the First-Tier Tribunal against the removal of their licence. During the 28 day period in which they can decide whether to appeal and throughout the appeal process, the firm’s licence remains in force, even though the appeal process may take up to two years.

In July 2012, Treasury minister Mark Hoban and consumer minister Norman Lamb announced plans to allow the OFT to remove the licence immediately in cases where there is an urgent need to protect customers. Consultation will take place in autumn 2012 as to how the OFT’s new power will be applied in practice.

UK society does operate on an ‘innocent until proven guilty’ basis, however if the regulator has found such serious failings in a firm that it believes the licence should be removed, is it fair to customers to allow the firm to continue as if nothing had happened? Convicted criminals are often allowed to appeal against sentences for serious crimes, but they cannot postpone their custodial sentence until the appeal has completed.

“This will put a stop to those companies who exploit vulnerable consumers whilst dragging matters through a slow legal process,” said Mr Lamb. “It will also give a boost to legitimate businesses, with the swift suspension of unscrupulous traders. The new measure is part of a concerted approach to strengthen protection around consumer credit, including issues such as payday lending and debt management. We want to encourage, and give the tools to, consumers to take sensible decisions.”

Payday lender MCO Capital Ltd was stripped of its Consumer Credit Licence and fined £544,505 by the OFT in August 2012, yet continued trading for several weeks as it exercised its right to have 28 days to decide whether to appeal.

Other recent cases where the OFT has revoked a licence include Sunderland-based money lender Kevin Duke, who used the trading name ‘Mr Superloan’, in July 2012; and East London-based second charge mortgage lender Reddy Corporation, owned by Dharam Gopee, in August 2012.

The new OFT powers will be granted via an amendment to the Financial Services Bill, a Bill which will bring about wide-ranging changes in financial services regulation. It is highly likely that the Bill will result in the new Financial Conduct Authority (FCA)  taking over consumer credit regulation from the OFT, however the Government has said that this will only happen, “if and when it has identified a model of FCA regulation that is proportionate for the different segments of the consumer credit market.”


OFT Reveal Details of Disciplinary Action

The Office of Fair Trading (OFT) Annual Report, published in June 2012, details the extent of the disciplinary action taken against consumer credit firms.

The most striking statistic is that since the OFT conducted its review of the debt management sector in September 2010, 90 debt management companies have either been stripped of their Consumer Credit Licence or had applications for licences rejected. All 11 firms who appealed these decisions to the First-Tier Tribunal were unsuccessful. The report makes specific reference to the withdrawal of the licence from Parkgate UK Ltd, after it sent a threatening letter to a debt collection firm.

Enforcement action of one kind or another was taken by the OFT against 106 credit firms in the 12 months from 1 April 2011 to March 31 2012 – the period covered by the Report – which included further action against debt managers. Debt management companies exist to assist consumers in serious debt difficulty to improve their situation, yet at the end of 2010 the OFT felt it necessary to warn 129 such firms about their practices. Misleading unsolicited mailings and use of misleading trading names were some of the reasons the OFT intervened against debt management firms.

Revised guidance for debt management firms was issued in March 2012. This guidance spelt out that the OFT believed that the following practices were unfair:

  • Sending unsolicited marketing texts or e-mails
  • Having staff remuneration schemes that may encourage them to give unsuitable advice
  • Falsely implying that the firm was a charity or helpline

Enforcement actions in other areas of consumer credit saw Yes Loans, a large unsecured credit broker; and Log Book Loans, the UK’s largest logbook loan company, become of the biggest firms to lose their licence. 19 unlicensed lead generation websites targeting vulnerable and sub-prime credit borrowers were closed down by the OFT during the year.

The OFT also responded to a super-complaint from Citizens Advice, regarding the marketing and charging practices of credit brokers, where the key areas of concern were up-front fees and cold calling. This prompted the OFT to revise its guidance for credit brokers, imposing new requirements regarding fees, commission disclosure and the right to refunds; and to recommend new legislation prohibiting up-front fees.

New guidance for credit businesses when dealing with borrowers with mental capacity limitations was also published.

The payday lending sector has attracted much criticism from consumer groups and politicians, and the report revealed that the OFT has launched a compliance review of this sector, and threating to withdraw the licence of certain lenders. The OFT will visit 50 major payday lenders, and has already reviewed over 50 payday lending websites and written to relevant trade bodies requesting improvements to these sites.

According to the OFT, it delivered a benefit to the taxpayer over the year of an estimated £402 million, compared to a cost to the taxpayer of £49 million.

The report can be viewed at http://www.oft.gov.uk/shared_oft/annual_report/2012/OFT_Annual_Report_and_Resou1.pdf, with the main information regarding consumer credit on pages 21, 22, 25, 34& 35.


Who should regulate the consumer credit market and to what extent?

Who should regulate the consumer credit market and to what extent, has been the subject of much debate. Credit activities are currently regulated by the Office of Fair Trading (OFT), but the Government’s Financial Services Bill could result in the new Financial Conduct Authority (FCA) assuming this responsibility.

The Finance and Leasing Association (FLA) has been active in campaigning on this issue. In January 2012, FLA Director General Stephen Sklaroff suggested that the FCA might not be an appropriate regulator for the credit industry, by commenting that, “the regime which the FCA will inherit in the deposit and savings markets is not appropriate for credit, and would put at risk a significant amount of responsible and economically vital consumer and small business lending.”

However, it must be noted that the Financial Services Authority (FSA) has regulated the first-charge mortgage market in the UK since 2005, and that clearly many of the consumer credit activities currently regulated by the OFT bear similarities to the mortgage market. The FCA will be one of two successor bodies to the FSA when the Bill becomes law early in 2013.

Early in 2012 it seemed that the FLA may have earned a partial victory when HM Treasury issued a statement promising that, “The Government will exercise these powers if and when it has identified a model of FCA regulation that is proportionate for the different segments of the consumer credit market. The exercise of these powers will be subject to impact assessment and the approval of both Houses of Parliament.”

The Government’s Business, Innovation and Skills Committee has devoted a lot of time recently to the payday lending sector, one of the most controversial areas of consumer credit. Payday lenders say they are providing vital credit to those who would not otherwise be able to borrow; while opponents of payday lending comment on the very high interest rates and the lenders’ failure to check credit worthiness and affordability.

The Committee has been successful in getting four trade associations, including the FLA, to improve their Codes of Practice for payday lending. Together, the four associations represent around 90% of the payday lending market. These improvements will take effect from November 2012, and include commitments regarding increased transparency regarding repayments, restrictions on lenders’ ability to extend the term of a loan and commitments to carry out rigorous affordability assessments and credit checks.

In June 2012, the Committee suggested that its preference was for the industry to voluntarily improve its own standards, rather than have statutory regulation imposed. “The Government’s strong preference is to promote responsible corporate and consumer behaviour through a voluntary approach,” it said. “By working with industry, we can deliver real improvements for consumers far more quickly than waiting for legislation.”

The OFT will reveal by the end of 2012 the results of its comprehensive review of the payday lending sector. This could lead to tougher OFT guidance being issued and perhaps disciplinary action being taken. The OFT has the power to remove the Consumer Credit License of any firm it finds has acted improperly, and firms cannot operate in the credit markets without this licence.

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