CP13/10 Detailed proposals for the FCA regime for consumer credit. Response from the Money Advice Service 3 rd December Consultation response

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1 Consultation response CP13/10 Detailed proposals for the FCA regime for consumer credit Response from the Money Advice Service 3 rd December 2013 Matt Hudson Policy Manager Matt.Hudson@moneyadviceservice.org.uk Colin Kinloch Debt Policy Manager Colin.Kinloch@moneyadviceservice.org.uk

2 About us The Money Advice Service is a UK-wide, independent service set up by government to improve people s financial well-being. Our free and impartial money advice is available online, and by phone, web-chat or face to face with one of our Money Advisers. We also work with the debt advice sector to improve the quality, consistency and availability of debt advice. Our core statutory objectives, as set out in the Financial Services Act 2012, are to enhance the understanding and knowledge of members of the public about financial matters (including the UK financial system), and to enhance the ability of members of the public to manage their own financial affairs. We work closely with others to achieve this. The Money Advice Service is paid for by a statutory levy on the financial services industry, raised through the Financial Conduct Authority. We are responding to this consultation in light of our statutory role to work with partners to increase the availability, quality and consistency of debt advice as well as our wider role to ensure that consumers are well informed and empowered to take action across the existing and emerging retail financial services marketplace. We welcome the opportunity to respond to this consultation. Executive summary The Money Advice Service welcomes the transfer of consumer credit regulation to the FCA and the move towards a more rigorous regulatory regime. Our consultation response focuses on the proposals around high-cost short-term credit and debt advice. We strongly support the FCA s aims for the high-cost, short-term credit market: to increase provider incentives to lend only to those who can afford it; to increase consumer awareness of costs and risks; and signpost consumers to sources of free debt advice. We suggest that the FCA should consider how these principles and the proposed regulations for high-cost credit could beneficially be extended across other areas of the consumer credit and wider regulated markets. We believe that the FCA has set out a strong package of proposals to meet these aims for high-cost short-term credit and needs to implement and enforce them robustly. o We support the principle of capping both rollovers and the use of CPA in order to protect consumers. However, we are concerned that there is a risk that capping could drive unintended consequences eg: an increase in the number of people taking out multiple loans and finding new forms of re-financing. We suggest that the FCA should monitor these risks, and the market developments, very carefully.

3 o A real-time high-cost credit database would go a considerable way to mitigating these risks and we think the FCA should urge the industry to deliver this. o We look forward to further discussions with the FCA as plans for a cap on the total cost of credit are developed. We would encourage FCA to set out a clear vision of a fit for purpose high-cost shortterm credit market that the effectiveness of this package of proposals can be evaluated against. We recommend the FCA apply the principles contained in the OFT s mental capacity guidance across all the markets it regulates. We strongly support the package of proposals for the regulation of not-for-profit and commercial debt advice providers and believe good progress has been made since the initial consultation. Further, we strongly support the draft rule requiring lenders to refer clients in financial difficulties to not-for-profit, independent debt advice and believe it provides useful clarification to firms on regulatory expectations. Response to specific consultation questions Q2 Do you agree with the updates to our draft Handbook rules for approved persons for consumer credit firms? We broadly agree and in particular support the creation of the client asset operational oversight function on a consistent basis for commercial debt management firms and notfor-profit debt advice providers Q6 Do you agree with our proposals to collect product sales data on high-cost short-term lending and home collected credit? Yes we strongly support these proposals because: Collecting product sales data will help the FCA better understand the needs of consumers, the market and the levels and nature of consumer detriment It puts the FCA in a strong position to monitor and regulate the market effectively. Collecting product data in this way will also constitute a significant step towards developing a real-time database We note that collecting this data from lenders means it is incumbent on FCA to use the data effectively to underpin robust monitoring and enforcement In addition, we believe this may be a useful point for the FCA to consider the benefits of sharing product sales data at an aggregated level on a more systematic basis 3

4 Q7 Do you have any comments on how we propose to carry across CCA and OFT standards, in particular in the areas highlighted above? Yes we support the proposal: We would like to see the FCA conduct more systematic and rigorous checks on lender affordability processes and practices. For example, checks on affordability processes could be undertaken as part of the authorisation process that all lenders will have to go through within the first 2 years of FCA regulatory responsibility We suggest that, as issues relating to mental capacity cut across all credit markets, the FCA should consider extending the OFT mental capacity guidance more widely beyond consumer credit to all regulated markets Q9 Do you agree with the definition of a high-cost short-term credit provider as set out at the start of this chapter? Yes we support the definition. However, we would encourage the FCA to carefully monitor other credit markets and products - including other high cost products such as guarantor loans and log-book loans as well as mainstream products such as credit cards- with a view to extending the definition if there is evidence of significant detriment in these areas that the regulations might address Q10 Do you have any comments on limiting rollover to two attempts? AND Q11 Do you have any comments on whether one rollover is a more appropriate cap? Yes, we believe that a cap of one rollover is more appropriate. In our view, one rollover gives consumers sufficient flexibility in case their circumstances change and they cannot repay as initially planned At the point of requesting a second rollover we think that an inability to pay is sufficient indication of underlying financial distress and the collections process, beginning with a period of forbearance, should commence We also think that the FCA needs to closely monitor for unintended consequences of the cap. For example, whether there is an increase in consumers re-financing existing loans through other means such as by taking out multiple, repeat loans with different providers. We also suggest that FCA explores how it can minimise the incentives for providers to develop new ways of re-financing existing loans Q12 Do you have any comments on our proposal to introduce a limit of two unsuccessful attempts on the use of CPAs to pay off a loan? We support a limit of two unsuccessful attempts to take full payment via CPA. This is consistent with our view that the cap on rolling over loans should be set at one. However we want to see the FCA require lenders to use a failed CPA attempt as a trigger for providing advice and support to consumers

5 We suggest that at the first failed CPA attempt lenders should contact consumers and refer them to debt advice, where relevant (as per the rollover referral proposal) The FCA should require lenders to treat the second failed attempt as a default so that the collections process commences and the consumer is treated with due forbearance Q13 Do you have any comments on our proposal to ban the use of CPAs to take part payments? Yes we strongly support this proposal. Banning providers from taking part-payment via CPA will give consumers in financial difficulty greater control over their finances, which will be particularly relevant if they have priority debts Q14 Do you have any comments on our risk warning? Yes, we strongly support the FCA s proposals for advertising to carry a risk warning that alerts consumers to the costs and risks of high-cost short term credit and links to more detailed information and advice provided by the Money Advice Service. We believe it is important that the risk warning targets all prospective payday loan customers and not just those who need debt advice. Based on our experience, we have some specific thoughts on the wording: We would suggest the call to action be more specific, and we believe that a shorter message would be more effective We suggest the url be more direct, rather than linking to our homepage. Instead we suggest that we create a specific url, taking customers through to a hub page for our content on payday loans. This is something we have done for the debt management companies who have signed up to the debt management protocol, as well as on interest-only mortgages We would suggest thorough testing of the url name to ensure that it resonates with consumers We would be happy to take this work forward in partnership with the FCA. Furthermore, we would encourage the FCA to consider applying a risk warning across other credit providers to ensure consistency across the market. Q15 Do you have any comments on our proposals to require high-cost short-term lenders to provide information on free debt advice before the point of rollover? We welcome this proposal and we believe for consistency - that the FCA should consider whether this requirement should be rolled out across all credit providers at a relevant point. We also suggest that the FCA replace the word free with not-for-profit and independent, which we believe to be more consistent with the draft rules. 5

6 Q16 Do you have any comments on the effectiveness of price capping? We look forward to continuing discussions with the FCA as plans for a cap on the total cost of credit are developed. We believe it should be made as simple as possible for consumers to understand and allow easy comparison across providers and products. We suggest that the FCA considers how to set the price cap at a level that does not to make the regulated market unviable as this could have the impact of pushing the short term loans market, for which there is a genuine and valid consumer need, into an unregulated space. We also recommend that the FCA considers whether the same principles should be applied more broadly across the whole credit market, in particular to overdrafts and revolving credit facilities. Q17Do you agree with our proposals on how to calculate our prudential requirement for debt management firms and some not-for-profit debt advice bodies? If not, what amendments would you suggest, and why? We are unconvinced by the rationale suggested for the proposals and would suggest, in particular, that at the level currently set the fixed minimum amount of 5,000 does not provide a meaningful degree of consumer protection. We believe that the proposals would provide greater consumer protection if both the minimum cash amount and minimum percentage were set at a higher level. Q18Do you agree with our proposal to apply a transitional approach to prudential standards for debt management firms and some not-for-profit debt advice bodies? We do not agree with this proposal and feel it would be more appropriate to apply prudential standards at the point of full authorisation. We see no clear evidence that this proposal would lead to a reduction in the ability of over-indebted people to access highquality debt advice.

7 Matt Hudson Tel: Colin Kinloch Tel: Published: December 2013 The Money Advice Service Holborn Centre, 120 Holborn, London. EC1N 2TD Tel: Contact 7