Office of Fair Trading Credit brokers and intermediaries

Transcription

1 Office of Fair Trading Credit brokers and intermediaries Response from the Association of British Credit Unions Limited (ABCUL) Contact details Abbie Shelton Policy and Communications Manager Tel: Or Matt Bland Policy and Communications Officer Tel:

2 1. Introduction 1.1 We welcome the opportunity to respond to this consultation. ABCUL is the main trade association for credit unions in England, Scotland and Wales, and our members serve around 80% of Britain s credit union membership. Credit unions are not-for-profit, financial co-operatives owned and controlled by their members providing safe savings and affordable loan facilities. Increasingly credit unions offer more sophisticated products such as current accounts, ISAs, Child Trust Funds and mortgages. 1.2 At the end of March 2011, credit unions in Great Britain were providing financial services to 808,686 adult members and held more than 682 million in deposits with more than 586 million out on loan to members. An additional 114,709 young people were saving with credit unions At 30 September 2010, the 325 credit unions belonging to ABCUL were managing around 512 million of members savings on behalf of over 611,037 adult members. 1.4 The Credit Unions Act 1979 sets down in statute the objects of a credit union; these are four-fold: The promotion of thrift among members; The creation of sources of credit for the benefit of members at a fair and reasonable rate of interest; The use and control of their members savings for their mutual benefit; and The training and education of members in the wise use of money and in the management of their financial affairs. 1.5 Credit unions in Britain are small, co-operative financial institutions often extending financial services to those unfairly excluded from the financial services the majority take for granted. They are owned and controlled by a restricted membership and are operated for the sole benefit of this membership. The Credit Union Act 1979 sets down these operating principles in law. 1.6 In the past decade, British credit unions have trebled their membership and assets have expanded four-fold. As this growth has taken place, the role that credit unions can play both in providing equitable financial services to the whole of their communities and providing diversity in the financial services sector has been increasingly recognised by government and policy-makers. 1 Figures from unaudited quarterly returns provided to the Financial Services Authority

3 2. Credit unions and credit brokerage 2.1 ABCUL credit unions first contacted us with concerns about the activities of credit brokers in 2008, reporting very similar stories across the country. Consumers would phone or call into the credit union to arrange the collection of their loan. In the majority of cases they were under the impression that a loan had been prearranged. In a recent survey of ABCUL members (which received 55 responses or 20% of ABCUL s membership), 40% of respondents said they had received referrals from such companies. 59% of respondents said that more than 80% of those referred reported that they had been led to believe that a loan had been arranged for them in advance and was ready to collect. 2.2 In all these cases, for a fee, the consumer had been given contact details of a credit union and often had to be disappointed when, for a variety of reasons, the credit union was unable to grant them a loan. These referrals had cost the customer up to, and sometimes more than, 50. For this, they were provided with the contact details of their local credit union and, in most cases, the false impression that a loan is waiting for them. No approach has ever been made to a credit union nor to ABCUL prior to referrals beginning no credit union has ever made an referral agreement with a credit broker. 100% of respondents said that they have no relationship with any credit brokerage firm and 82% said that they did not want to receive referrals from credit brokers the remaining 18% being unsure. 2.3 In many instances, especially smaller, credit unions require members to save for a period of time before borrowing and all credit unions have common bond criteria which dictate who can and who can t join. More often than not, due to one or both of these factors (or because of a poor credit history) the consumer is unable to access the credit union s borrowing facilities. 45% of respondents to our survey said that 50% of referees or less meet their common bond with 36% saying that less than 20% of referrals meet their common bond. Similarly, 68% of respondents said that they are able to lend to less than 20% of those referred. 2.4 Our members also report that the vast majority of consumers referred to the credit union, on learning that they are unfortunately ineligible to join and access the credit union s lending facilities, then struggle to reclaim the referral charge minus 5 for administration that they have a right to under the Consumer Credit Act. Indeed, the vast majority are unaware, that they are entitled to claim the fee back. 67% of respondents said that in general those referred to them by a credit brokerage firm were unaware that they are entitled to reclaim the referral fee that they have paid should a credit agreement not ensue.

4 2.5 The information that credit brokers provided to potential credit union members is freely available via local advertising, local agencies such as local authorities, housing providers or via ABCUL and the credit union search site in addition, most credit unions have websites which publicise their operating details. 2.6 At the maximum credit union rate of interest (2% a month on the reducing balance, or 26.8% APR), if someone borrowed 200 over 6 months they would pay total interest. This is the nature of many credit union loans small amounts over a relatively short term. 2.7 The addition of a 50 referral fee increases the cost of the loan by more than 351%. An 85 cost-ofcredit on such a loan converts the APR from 26.8% to 168.8%; considerably raising the cost of an affordable credit union loan and damaging the best efforts of the credit union to make affordable credit available in its community. 2.8 When our members necessarily have to turn down many referees can become very distressed and disappointed this damages the reputation of the credit union and the emotional and financial wellbeing of the consumer. This has led some credit unions to refuse all referrals from credit brokers, regardless of eligibility to join the credit union or ability to repay. 3. The OFT judgement against the Post Net Ltd and its associates Haymarket Lending Ltd, Financial Processing UK Ltd, and RG Debt Management Services Ltd. (16 November 2009) 3.1 On 16 November 2009, OFT ruled against the above group of companies for various infringements of their consumer credit license and imposed a series of undertakings upon the company which had the effect of greatly impeding their previous practices in relation to credit unions. 3.2 The key undertakings of relevance here were: That the companies should not refer members of the public to credit unions where they do not meet the credit union s membership criteria; That the companies should clearly and fully disclose the nature of the service that they are providing; That the companies should willingly and promptly refund referral fees where a credit agreement has not been put in place under the required timescale; and That the companies should not misleadingly give the impression that credit has been preapproved on behalf of the referee. 3.3 The effect of this ruling has been to reduce the number of referrals that credit unions receive from credit brokers. Credit unions do however continue to receive unwanted referrals from credit brokerage companies.

5 41% of respondents to our survey said that they have received referrals from brokerage companies in the last year. One respondent in particular reports receiving more than 50 referrals in the last year alone with 20% of those respondents that have received referrals in the last year say they ve received more than 20 referrals in the last 12 months. 3.4 Given the continued activity of credit brokerage firms and the fact that they continue to infringe the spirit of the Consumer Credit Act we welcome the measures set out in the guidance under consultation which provide much-needed clarity to the credit brokerage sector about what is expected of it. We would, however, like to see further measures included in the guidance which we feel would improve still further the protection afforded to vulnerable consumers and would protect, also, the hard-won reputation of credit unions in their communities. 4. Further recommended measures for inclusion in credit brokerage guidance 4.1 In addition to the welcome tightening of expectations for credit brokerage companies provided by the guidance, we would like the Office of Fair Trading to consider several further measures which would have the effect of enhancing still further protection for vulnerable consumers against the actions of unscrupulous brokers: To put in place a requirement upon brokers that they should actively obtain the permission of creditors prior to making any referrals to them. 91% of respondents to our survey agreed that brokerage companies should be required to obtain the express permission of creditors before they begin referring the public to the creditor s services. To put in place a right on the part of creditors to request that a broker cease making referrals to them and for brokers to be obliged to comply with such a request. 94% of respondents to our survey thought that creditors should have the right to request that a credit broker ceases making referrals to them and that the broker should be obliged to adhere to such a request. To put in place a requirement in line with the precedent set by the ruling that brokers be required to be sure of a creditor s eligibility criteria such as a credit union s common bond and that a consumer meets that criteria before referring them to the creditor in question. 96% of respondents to our survey felt that credit brokers should not be able to refer people to creditors where they are not sure whether the referee meets the creditor s eligibility criteria. To put in place a requirement upon brokers which, in addition to requiring brokers to disclose any relationship they have with a creditor for conflict of interest purposes, requires brokers to disclose where no relationship or contact has been made with the creditor referred to and therefore that the broker cannot guarantee any aspect of the service they can expect to receive

6 as a result of the referral. Any such disclosure should be prominently displayed by the broker in its literature or online presence. 94% of respondents to our survey felt that credit brokers should be obliged to disclose, where appropriate, that they have no relationship with the creditor in question. Furthermore, 85% felt that credit brokers should be prevented from referring the public to a creditor that they have no relationship with. 4.2 We feel that the adoption of the 4 measures above would greatly strengthen protection for vulnerable consumers and the reputation of ethical creditors in the communities they serve. Given the testimony of our members, it is clear that there is a significant problem within the credit brokerage market that despite rulings and the setting of precedents continues to operate outside the bounds of both the letter and the spirit of the law. 4.3 The steps which the guidance under consultation takes are welcome ones and they will enhance the protection enjoyed by the most vulnerable in society however we do not feel that this goes far enough. Consumers using such a service should have a guarantee that the firm to which they are being referred is able and willing to lend to them. In large numbers of cases credit unions are not legally able to lend to an individual who is referred to them. In many other cases they are not able to lend to an individual because of a lack of ability to repay. 4.4 We understand that the business model of many lenders relies upon referrals from credit brokers, but the vast majority of credit unions do not wish to operate in this way. Consumers referred to them are faced with disappointment and frustration which is often directed at credit union staff and volunteers. Even if a loan is made, the member ends up paying a much higher cost for their loan than they normally would from a credit union the bulk of which is made up of the referral fee, and not interest charges. 5. Conclusion 5.1 Credit brokerage firms provide a service by finding their clients a source of credit where they otherwise may not be able to source one. In so far as brokers stick to this mission, their service is one which offers value to some consumers. It is also a service which some lenders value and they may pay for such referrals. So when consumers, brokers and creditors are all happy to seek, offer and receive referrals then we believe that the proposed guidance is fit for purpose. 5.2 In the experience of credit unions, however, referrals are unexpected and often inaccurate, meaning that the consumer is usually unable to receive a loan from the credit union. All that is received by the consumer is otherwise freely available information putting them in touch with a credit union from which they may or may not be able to access a loan, particularly so given that credit unions are responsible lenders. 5.3 The effect of this is to cause significant distress and disappointment to some of the most vulnerable people in society whilst feeding on the good reputation which credit unions have worked hard to build up with their members and communities. People understandably associate the

7 referral received with the credit union staff member or volunteer who has no choice but to turn away referrals that do not meet their membership and / or lending criteria. 5.4 Our proposed measures would act to ensure that referrals made are sound and inspire confidence in consumer and creditor alike by ensuring that they are welcome, accurate and trustworthy. 5.5 We urge the OFT to look closely at the measures we propose and we are happy to meet with any OFT officer to discuss in further detail the effect that credit brokers are having on our members and the ways in which our recommendations might be enacted. ABCUL August 2011