RESPONSE CONSULTATION CP13/10 BY THE FINANCIAL CONDUCT AUTHORITY ON DETAILED PROPOSALS FOR THE FCA REGIME FOR CONSUMER CREDIT

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1 RESPONSE CONSULTATION CP13/10 BY THE FINANCIAL CONDUCT AUTHORITY ON DETAILED PROPOSALS FOR THE FCA REGIME FOR CONSUMER CREDIT Yvonne MacDermid, Chief Executive, Money Advice Scotland and Sarah O Neill, Consultant to Money Advice Scotland December 2013

2 About Money Advice Scotland Money Advice Scotland is the national umbrella organisation in Scotland which promotes and champions the development of free, independent, impartial, confidential money advice and financial inclusion. Money Advice Scotland was set up in 1989, and has provided the following services to its members: Standards and quality framework development Qualifications Training Research and policy input Annual Conference Seminars and other events Publications Consultancy Organisational audits In terms of standards and quality framework development, Money Advice Scotland has been at the forefront of raising standards in Scotland, and beyond. The organisation was involved in developing a framework which underpinned the Debt Arrangement Scheme Regulations, and gave assurance that the advice being given to clients was of quality. The framework which was in place until 2011, the casework of which was assessed by competent advisers who were also approved advisers under the Statutory Debt Arrangement scheme. Due to a change in government policy the scheme was changed. Money Advice Scotland is an approved Centre for the delivery of Scottish Vocational Qualifications in Advice and Guidance. It is currently working with the Institute of Money Advisers in England and Wales to develop the Scottish version of the Certificate in Money Advice Practice, which is near completion. Money Advice Scotland is also working closely with the Money Advice Service in terms of the development of a national money advice quality framework. With regard to training of money advisers, the organisation has been using standards to underpin its training for almost 20 years. In more recent times, the Scottish Government in conjunction with the advice sector has developed the Scottish National Standards in Information and Advice (SNS), and Money Advice Scotland was a pivotal player in their development. These standards are enshrined in current training and also help shape the Certificate in Money Advice Practice, together with the National Occupational Standards in Advice and Guidance, and Legal advice. 1

3 General comments Money Advice Scotland welcomes the opportunity to respond to this consultation paper. We are particularly concerned about the consumer detriment which exists in the consumer credit market, and we welcome the approach taken by the FCA to treating customers fairly. We support the FCA s intention to ensure that consumers are protected, while ensuring that there is effective competition so that consumers have sufficient access to financial services, including consumer credit. We very much support the intention that not-for-profit firms will be subject to the same conduct of business rules as other debt management firms. Consumers should be entitled to the same level of protection when they seek and receive advice, regardless of the type of body they approach. We are, however, disappointed that the not-for-profit sector remains categorised as lower risk. We appreciate that there is a balance to be struck here in ensuring that the provision of free debt advice is not restricted as a result of the costs and other burdens on providers in this sector. Nevertheless, we maintain our position, as outlined in our response to consultation CP 13/7, that the risks attached to giving poor or incorrect money advice or debt counselling are high, given that many of these agencies deal with vulnerable people. As an organisation which works to raise standards in money advice, Money Advice Scotland would like to see continued improvements in this industry based on quality frameworks and qualifications. We also welcome the emphasis in the consultation document on payday and other high-cost short term lending, given the high levels of risk to consumers in this market. This is a particular issue in Scotland. Recent research from StepChange 1 found that Scotland had the highest rate of payday loan debt among the UK nations, with an average balance of It found that 20% of StepChange clients in Scotland had at least one payday loan in June 2013, representing a ten-fold increase since Information collected from our members to help inform this consultation response supports this, confirming that so called payday lending continues to be a significant issue in Scotland. Many agencies advised us of significant numbers of clients with sizeable payday loans, often reporting an average of 2 or more loans per client, and in some cases clients with 5 or more loans. We also heard from one agency that as many as 60% of payday loan clients had rolled over from the previous month. We heard about people who were up to date with their payday loan payments, but who were in arrears with their mortgage. 1 Step Change (2013) Scotland in the Red: 2

4 We recognise that high-cost short-term credit can help people to manage their cash flow when necessary, and can have advantages over some other forms of credit for some people. For example, they can be cheaper than unauthorised overdrafts, and are clearly preferable to illegal forms of money lending. Consumer Focus research found that pay day loans can be a positive experience for those who pay the loan off in the short term; these people were unlikely to suffer experience long-term difficulties. 2 That said, the same research found that others, generally those on lower incomes, had a negative experience in the longer term, usually as a result of rollovers, taking out multiple loans over a period of months and/or juggling multiple loans from more than one lender at a time. This could result in significant financial problems and emotional stress. We have concerns about the ease with which people are accessing these loans. There is no credit reference check in most cases, for example. We are particularly concerned that many younger people are opting for these loans rather than approaching the traditional market, due to the way they are marketed, online and via smart phones. On a different but important note, we are concerned regarding a possible loophole with regard to tracing agents where they are not engaging in other FCA regulated activities, e.g. debt collection, and who will not be licensed by any authority, and therefore no regulator with oversight of this activity. We believe there is potential for consumer detriment, and would urge you to take account of this and give it consideration. 2 Consumer Focus (2010) Keeping the plates spinning: perceptions of payday loans in Great Britain, London: Consumer Focus 3

5 Answers to the consultation questions Q1: Do you have any comments on the way our threshold conditions are being applied to consumer credit firms and/or the updates to our Handbook rules? We agree with the proposals. We consider that requiring firms to show that they have met the threshold conditions, rather than automatically grandfathering them into the new regime, is a sensible approach. This is an important means of ensuring that consumers are adequately protected. Q2: Do you agree with the updates to our draft Handbook rules for approved persons for consumer credit firms? Yes, we agree with these updates. We welcome the requirements which will apply to not-for-profit-providers of debt advice. These are important both in protecting consumers of such services, and raising standards in the not-for-profit sector. Q3: Do you have any comments on the updates to our draft rules regarding appointed representatives of consumer credit firms? We agree with these, although there may be issues here with regard to the vicarious liability of firms. Q4: Do you have any comments on the criteria that we are proposing a person would have to fulfil to be a self-employed agent of a principal firm (as set out in Appendix 2)? We agree that firms should take responsibility for the activities of any self-employed agents working on their behalf in the home-collected credit market. This is an important protection for consumers. We note that one of the proposed criteria is that the agent makes it clear to customers that s/he is representing a principal, and provides the name of that principal. We have some concerns about how this might apply in practice. There is no guarantee that an agent will always make clear to the customer either the fact that they are acting on behalf of a principal, or the identity of that principal. It is not unusual for a customer to receive another loan from the same person acting on behalf of a different principal. We would suggest that there is a need to consider ways of ensuring that there is sufficient transparency in the process, so that the customer is clear about this. 4

6 Q5: Do you have any comments on our proposed regulatory reporting regime? We support the proposed regulatory reporting regime. The data collected will help the FCA to assess both the risks posed to consumers and where its resources would best be targeted in order to protect consumers. Q6: Do you agree with our proposals to collect product sales data on high-cost short-term lending and home collected credit? Yes, we agree with these proposals. Given the particular risks to consumers in these markets, it would be helpful for the FCA to have a better picture of the levels of lending in these sectors. This should assist its understanding of the nature and size of the market and its customer profile, helping it to address any harm caused to consumers. We also think it is important in the interests of transparency that this data should be published, rather than simply collected, perhaps in the FCA annual report. Q7: Do you have any comments on how we propose to carry across CCA and OFT standards, in particular in the areas highlighted above? We agree that these standards should be carried over, and consider it helpful to have this set out in the new rules. There have been concerns about lead generators in Scotland in recent years, given their marketing of protected trust deeds to vulnerable consumers, whom they then refer on to insolvency firms for a sizeable fee. This may not be the best solution for the client concerned, however, and can lead to the arrangement failing when the client is unable to maintain the payments. We would point out that the Scottish Government has now addressed this issue through the Protected Trust Deeds (Scotland) Regulations 2013, which came into force on 28 November These provide that trustees may not recover pre-trust deed fees and outlays (including referral fees) as outlays in relation to a trust deed arrangement. Q8: Do you have any comments on our proposed approach to financial promotions? We agree with the proposed approach. Q9: Do you agree with the definition of a high-cost short-term credit provider as set out at the start of this chapter? Overall, we agree with the definition, although we would question the definition of short-term as a period of up to 12 months. The experience of our members is that such loans are usually taken out for significantly shorter period than this. 5

7 Q10: Do you have any comments on limiting rollover to two attempts? We would support this proposal, as continual rollovers can lead the initial debt to spiral out of control. There is clear evidence of the consumer detriment this causes to people who are already vulnerable and in financial difficulties. We note the OFT evidence referred to in the paper that 28% of loans are rolled over; one of our members has reported to us that as many as 60% of their payday loan clients had rolled over from the previous month. Qualitative Consumer Focus research found that borrowers themselves were often surprised by how few checks were made into whether they would be able to repay the loan, with some saying they believed their lender would lend to almost anyone. 3 The requirement on lenders under the Consumer Credit Directive to assess the creditworthiness of a customer before entering into a credit agreement with them is central to this issue. The experience of our members supports the OFT findings of poor affordability assessments across the sector. Lenders should be required to use the common financial statement as part of the affordability assessment. If someone is rolling over a loan several times, lenders should recognise this as an indicator that they are in financial difficulty. Lenders should be considering why people are continually rolling over, rather than giving them further payday loans. We believe that lenders should be obliged to refer consumers to independent advice and support to deal with their financial problems. Q11: Do you have any comments on whether one rollover is a more appropriate cap? While there is a difficult balance to be struck here, we would tend to share the concern expressed in the consultation paper that limiting rollovers to one could overly restrict access to credit for some borrowers who are ultimately able to pay off the loans. We therefore think that two rollovers would be a more appropriate cap, although we would suggest that the effect of this should be monitored in practice. 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 agree that CPA payments encourage insufficient affordability assessments, and that continued attempts to use them can also lead to further problems for borrowers, where they need the money for other priority expenditure. They do, however, provide flexibility and convenience for borrowers. If two unsuccessful attempts to use CPAs have been made, this suggests the borrower is in financial difficulty and that, again, 3 Consumer Focus (2010) Keeping the plates spinning: perceptions of payday loans in Great Britain, London: Consumer Focus 6

8 the lender should be looking to refer them to independent advice and support. On balance, therefore, we support this proposal. Q13: Do you have any comments on our proposal to ban the use of CPAs to take part payments? While we understand the reasons behind this proposal, we consider that the use of CPAs to take part payments may actually be helpful for some people, helping them to pay down their debt. We are not convinced, therefore, that such a ban should be introduced. Q14: Do you have any comments on our risk warning? We agree that advertisements for payday loans should be required to carry a risk warning, in the same way as other categories of financial products. The warning should signpost people towards sources of money advice. We do not consider, however, that the proposed risk warning is framed in the right way. We do not think that referring to the 2 million loans that were not paid off in time is the best way to get the message across to people, and make them think about the consequences. In our view, it would be better to make it more personal, warning them what taking out such a loan and/or failing to pay it off could mean for them personally. We would therefore suggest something along the lines of: this could make your situation worse. Q15: Do you have any comments on our proposals to require high cost shortterm lenders to provide information on free debt advice before the point of rollover? We strongly agree with these proposals. We would point to the existing legal requirement on creditors In Scotland to provide debtors with a Debt Advice and Information Package before carrying out diligence, presenting a petition for the debtor's bankruptcy or the signing of a trust deed. If someone is asking for a rollover, this may indicate that they are in financial difficulties, and lenders should be considering their need for money advice before agreeing another rollover. Advice agencies can play a critical role here. In some instances, advice agencies may be able to assist a client in such a way that they do not need to roll over after all. They can do this in various ways: carrying out a benefits check; considering possible adjustments to the client s income and expenditure; and looking at a debt restructuring programme. Advice agencies can also direct people to other appropriate sources of help, such as credit unions or Community Development Finance Institutions. 7

9 Q16: Do you have any comments on the effectiveness of price capping? While on the face of it, a price cap is an attractive option, we recognise that the benefits or otherwise of price capping is a difficult issue. The Government has of course recently announced that a price cap is to be introduced. While we recognise that greater transparency would help, we consider that whether a rate cap is the best approach depends on the particular marketplace at any given time. As the consultation paper notes, the academic and comparative evidence is inconclusive, and it is possible that rates in the wider market would drift towards the cap, at whatever level it was fixed. We would point to the experience in the credit card market, following the OFT s 2006 guidance that credit card default charges set at more than 12 would be presumed to be unfair. The result was that credit companies started to charge 12, but found other ways of recovering the money from their customers. We believe, however, that the rate is not the only issue to be considered here. Other measures such as greater transparency and limiting rollovers may be more effective in practice. The FCA should also encourage other forms of lending. Q17: Do 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? In general, we agree with the proposals to introduce prudential standards for debt management firms and some not-for-profit bodies. The FCA has clearly thought through this issue in some detail, and we believe the proposals make sense. We understand the need to balance consumer protection considerations against the risk of advice bodies withdrawing their services. We would, however, question whether 1 million is the most appropriate level for fixing this requirement. While some of the bigger not-for-profit debt advice bodies will hold in excess of this amount, there are many others which hold significant client funds and will not be caught by this requirement. We acknowledge that such organisations will be caught by the client money requirements, however. We would point to the prudential requirements which apply to credit unions, under which even small credit unions are required to have a capital-to-assets ratio of 2%, rising to 3% in September Prudential Regulation Authority CREDS Credit Unions Sourcebook CREDS and CREDS TP1.1. These apply to Version One credit unions, which must have both fewer than 5,000 members and total assets below 5m. There is no minimum threshold below which this does not apply. 8

10 Q18: Do 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? Yes, subject to our comments above in response to Question 17. Q19: Do you have any comments on our draft guidance on the debt counselling activity and our draft rules covering the provision of debt advice? We agree that the same conduct rules should apply to both not-for-profit advice bodies and profit-seeking firms. Consumers should be entitled to the same protections, regardless of the nature of the body they seek advice from. Q20: Do you have any comments on the rules that we propose to apply to peer-to peer lending platforms to protect borrowers? We welcome these proposals. While we appreciate this is a different type of lending which carries greater risks for lenders, we welcome any proposals designed to strengthen consumer protection. Q21: Do you agree with our proposals for debt management firms and not-forprofit debt advice bodies that hold client money? If not, which aspects of the regime do you disagree with and why? We agree that not-for-profit advice bodies which hold client money should be subject to the same requirements as fee-charging debt management companies. Consumers should not suffer detriment simply because of where they have chosen to go for advice. It is particularly important that money which belongs to clients is ring fenced in separate client bank accounts, and interest accrued on that money should be paid to the client. Q22: Do you agree with our proposed implementation timetable? If not, please give reasons. Overall, we agree with the proposed timetable. While we are aware that some within the industry feel it does not allow enough time to prepare themselves for compliance with the new rules, we would point out that industry has been aware this was coming for several years. We are also aware that the changes may be challenging for some advice agencies who were previously licensed though a group licence, but the system is being phased in gradually, allowing time to adjust prior to full authorisation. The previous guidance is now in the rule book, which allows the industry to start preparing for implementation now. 9

11 Assuming that the FCA has sufficient staff in place to deal with licence applications and approvals, we think the proposed implementation timetable should be achievable. Q23: Do you agree with our suggested amendments to the reporting requirements for second charge loans? We are content with these proposals. Money Advice Scotland does, however, have particular concerns about second charge loans, which we believe should be treated in the same way as mortgages, given that the consequences of default are the same for the customer, regardless of the size of the loan. The interest rate charged is often higher than that on the first loan, usually with a different lender. Second charge loans are often purchased through home improvement salespeople, giving the consumer little opportunity to consider other borrowing options. We look forward to the implementation of the Mortgage Credit Directive, which we hope will address these issues. Q24: Do you agree with our proposal to allow all microenterprises to complain to the ombudsman service? Yes, we agree that microenterprises should be able to complain to the FOS about consumer credit issues, as they currently can in the Compulsory Jurisdiction. There is not always a clear distinction between small businesses and the individuals who run them, particularly given the increasing prevalence of home working. Microenterprises can therefore suffer detriment in the same way as individual consumers. This proposal fits with the approach taken in the EU Directive on Consumer Rights, which will come into effect in Although this defines a consumer as any natural person who is acting for purposes which are outside his trade, business, craft or profession, its preamble states that where the contract is concluded for purposes partly within and partly outside the person s trade and the trade purpose is so limited as not to be predominant in the overall context of the contract, that person should also be considered as a consumer. Q25: Do you agree with our proposal to include not-for-profit bodies providing debt advice in the Compulsory Jurisdiction? We strongly agree with this proposal. We can see no reason why some consumers should be less well protected than others, simply because they went to a not-forprofit organisation for advice. 10

12 Q26: Do you agree with our proposals on recording, reporting and publishing complaints? Yes, we agree with these proposals. We particularly support the requirements to publish complaint data. While recording and reporting on complaints is important, the publication of information about the number and types of complaints received is vital in the interests of transparency and improving standards in the industry. Q27: Do you agree with the costs and benefits identified? No comments to offer. Q28: Do you agree with our assessment of the impacts of our proposals on the protected groups? Are there any others we should consider? No comments to offer. 11