Submission to the call for evidence in support of the Consumer Credit and Personal Insolvency Review from the Consumer Financial Education Body (CFEB) December 2010 Contact: Colin Kinloch, Policy Adviser Email: colin.kinloch@moneymadeclear.org.uk Tel: 0207 943 0481 www.cfebuk.org.uk
About CFEB The Consumer Financial Education Body (CFEB) is an independent body, created in April 2010 as a result of the Financial Services Act 2010. Our mandate is to develop consumer financial education in the UK, as well as to enhance the public s understanding and knowledge of financial matters and their ability to manage their finances. CFEB welcomes the opportunity to contribute to the Review at this stage and looks forward to commenting on detailed recommendations on this important subject in the New Year. 2
Summary of our response CFEB believes the review is timely and offers the opportunity to rethink the way that credit markets operate throughout product life cycles. Greater transparency in the sales process will allow for more effective competition through enhanced comparability. We are working with the UK Cards Association and the Government to ensure that consumers have access to useful information in the credit card market. More empowered consumers will be able to take more effective decisions about why to take out credit and what form of credit is most appropriate to meet their needs. We are developing a financial health check to support people to make these and other decisions across all aspects of personal finance. When debts become unmanageable most commonly due to unforeseen life events we want to see a fair and appropriate suite of options to ensure that creditors and debtors are equally well treated in the debt resolution process. We believe that highquality, impartial and accessible debt advice continues to have a role to play for significant numbers of people in the debt resolution process Introduction This call for evidence seeks views on how to implement the Government s commitments on regulatory reform, improved lending practices and enhanced consumer protection, particularly for the most vulnerable, in the areas of consumer credit and personal insolvency. CFEB is responding because we expect the subsequent recommendations to have a significant impact of the shape of consumer credit markets and thus impact on the manner in which we work to achieve our statutory function. CFEB s function is to enhance: The understanding and knowledge of the members of the public of financial matters (including the UK financial system); and The ability to members of the public to manage their own financial affairs. We will publish this response on our website and are happy for it to be published by the Review team. 3
Our Response Credit is an important part of everyday life. While markets have tightened in recent years, levels of personal indebtedness remain high relative to other EU states. However for most people personal debt is manageable and serves a useful purpose. There is detailed regulatory architecture in place to promote and police responsible lending on both a secured and unsecured basis and we expect that current developments, including the FSA s mortgage market review, will lead to a further strengthening of that regime. We look forward to responding to the consultation on the future of consumer credit regulation in due course. A great deal of work has been done in recent years by many organisations and partnerships in the public, private and voluntary sectors to improve the financial capability of the UK. As part of the FSA and now as an independent body we have played a significant role in that project and aim next year to take another step forward with the launch of a national financial advice service. This will ensure that everyone can access free, impartial advice on managing their money online, over the phone and face-to-face. Our response addresses those questions that are particularly pertinent to our remit. Q1. Should the Government extend regulations on advertising for credit products beyond the cost of credit? Many factors in advertisements impact on consumer choice other than the cost of credit and we believe that taking additional stylistic factors into account, such as the overall tone of the advert, would be appropriate when considering the regulation of advertising for credit products. It is unclear whether compulsory additional text has an impact on consumer behaviour but presentational factors are important particularly when the product is marketed in an overly positive or light-hearted context. Further regulatory requirements on advertising particularly for unsecured credit products - could have an impact on reducing the likelihood of irresponsible lending. Q2. Should consumer credit advertising rules be aligned with those which the FSA applies to secured credit? Given the potential outcomes if things go wrong we see no reason why the rules governing the advertising of unsecured credit should not be aligned with the rules the FSA applies to the advertising of secured credit. Q3. What would be the impact of a 7-day cooling off period for store cards on consumer behaviour? The over-the-counter, opportunistic nature of much store card marketing targets impulse sign-ups, in circumstances where consumers are unlikely to have applied much forethought or consideration to the decision to take out what can be an expensive and often less appropriate form of credit for their needs than may otherwise be available. If a 7-day cooling off period was introduced it would be reasonable to assume that people who act impulsively would be less likely to sign-up 4
for store cards whereas those who had planned to use store credit to buy something they really want and need are unlikely to be put off by having to wait a week. Q4. Views on OFT recommendations a. That the Government works with lenders to provide information on high-cost credit loans to consumers through price comparison websites. We believe this would be a useful step. We are taking part in discussions with Consumer Focus, OFT, FLA, Citizens Advice and others facilitated by the Consumer Finance Association to make progress on this recommendation. The Lenders Compared website has proved useful in the home credit market and the comparative tables on our Moneymadeclear website are popular with consumers and help them make more informed decisions. c. That the Government works with credit reference agencies to explore ways in which payday lenders and rent-to-buy suppliers could provide suitable information to credit reference agencies about the payment performance of their customers, in turn allowing those with good payment records to use mainstream lenders more easily in the future. There are a number of specialised credit reference agencies that gather information from payday lenders and rent-to-buy suppliers and provide it to the major agencies that are consulted by mainstream lenders. It would be useful if this information was available on a consistent basis but the most relevant point is how mainstream lenders use the data they request from reference agencies. There is no guarantee that a good repayment record on a pay-day loan, for example, would indicate a customer that would be attractive to a mainstream lender drawing the opposite conclusion would be equally possible. d. That the OFT collects essential information on the high-cost credit sector, such as the volume, value and pricing of credit, levels of repeat business and defaults among customers as needed. This will help OFT understand the effect of its recommendations and provide better evidence for future policy making. Data collection is a key aspect of the supervisory approach of many regulatory bodies and extending comprehensive data collection to the high-cost credit sector would be a welcome development that could allow the OFT to respond in a more agile fashion to market realities. e. That the relevant trade associations for home credit suppliers, payday lenders and pawnbrokers establish a code or codes of practice covering best practice policy including on: complaints and advice to customers, policies on rolling over of loans, limits for amounts to lend to consumers, avoiding misleading consumers through advertisements and ensuring that consumers are aware of the ultimate owners of brand names. This would be an excellent idea and we are taking part in a working group established by the Consumer Finance Association to take forward this recommendation. While one code of practice for the high-cost credit sector would be ideal we expect that given the diversity of the sector there may be a requirement for multiple codes. 5
These codes should all build on existing regulation and law in the relevant areas of the market. Self-regulation can play an important role in improving standards in particular markets. We welcome the initiative of the CFA and look forward to the outcome. Q5. Is there a need for greater sharing of data between the consumer credit industry and other bodies, including utility companies, local authorities and HMRC? We see benefits in wider data sharing between the financial and non-financial sectors. It could lead to more informed lending decisions being made by financial services firms and would provide non-financial sector creditors with a wider understanding of an individual s position were they undertaking or considering collections activity. Q9. Should interest rates on credit and store cards be subject to a cap? If so, should this apply to all interest rates or only those which apply to existing borrowing? Our view is that there are occasions, particularly in uncompetitive markets, where to prevent consumer exploitation there should be caps on the total costs of borrowing. Caps on interest rates alone will not necessarily lead to the desired outcome of a limit on the costs of borrowing given other methods of increasing the costs of particular credit products. Given the diversity of the credit market, it would seem unusual, were any caps to be introduced, to limit them to credit and store cards, which are certainly not the least competitive aspects of the market. Q10. Are there any alternative measures which would reduce the scope for consumers to be exposed to higher interest rates on credit and store cards? Providing examples of the total cost of credit given different borrowing scenarios may be a useful measure for providing consumers with the information they need to make effective comparisons between credit and store cards and avoid rates they felt were higher than they felt willing to pay. Cooling off periods for credit and store cards, as suggested in Q3, could also reduce the scope for consumers to be exposed to higher interest rates. Q15. How can debtors be encouraged to seek early support to help manage their debt problems? There are many good examples of early intervention by creditors both in the identification of borrowers at risk of financial difficulty and subsequent referrals to appropriate sources of advice. These approaches could arguably be brought forward in the product life-cycle and best practice could be more widely shared through bodies such as the Money Advice Liaison Group. One of the ways that we feel debtors can be encouraged to seek early support is via the financial health check that we will be launching in the spring of next year. The health check will enable people to holistically review and improve the way they manage their money. We will provide users with practical advice and straightforward 6
steps to take immediately and in the longer term. Where appropriate, this advice will include referrals to services that will help people manage debt problems. Q17. What problems are encountered with the current range of debt solutions and how could they be improved to ensure all debtors have an option and that the options are clear? A key challenge we see in the debt resolution environment is the lack of clarity amongst debtors of the options that are open to them. This is why high-quality, impartial and accessible advice is crucial to the smooth resolution of debt issues to the benefit of both creditors and debtors. Recent research published by the Money Advice Trust indicates that there are a great many people who could benefit from debt advice but are not accessing it. Not everyone will need to contact an advice agency and a problem that some people trying to use debt solutions themselves report is that creditors are unwilling to deal with them unless they make offers of repayment via a debt advice agency. This is problematic for a number of reasons, not least of which is that it suggests systematic breaches of the Lending Code. It also means that advice agencies that could be working with more vulnerable clients need to divert resources to supporting people who are willing and able to help themselves. Q20. Do the current options allow a person to deal effectively with a temporary income shock and if not, what is needed? A contrast has emerged in the credit market between the treatment of consumers with mortgage debt and those experiencing difficulties with other forms of borrowing. Forbearance has become the norm for people in mortgage arrears owing to Government, industry and regulatory initiatives. However borrowers with other forms of arrears can not necessarily feel confident that forbearance will be exercised when they experience an income shock. It would be useful for this anomaly to be addressed with a wider notion of appropriate forbearance becoming the norm across credit markets. Q22. How does a person find out where to go for debt advice and assistance? What are the advantages and disadvantages of each method? People find out about different forms of debt advice in different ways. CFEB refers people to free-to-client debt advice providers on its websites and via its own advice service on the phone and face-to-face. It is good practice amongst the financial services industry to refer to free-to-client advice providers and many other organisations, such as housing associations, have referral arrangements in place to local sources of advice. Many fee-charging advice providers advertise widely on television, online and in the press. We take seriously the results of the recent OFT report into the fee-charging debt management sector and do not refer to any fee charging advice providers. It is our understanding that clients who have financial situations such that they would be profitable customers of fee-charging advice agencies would be in a position to access the services provided by free-to-client agencies such as CCCS and PayPlan - that receive payment from the creditor sector under the Fair Share scheme. 7
The gap between those who could benefit from advice and those who access it, illustrated in Money Advice Trust research, suggests that levels of awareness of debt advice services are low. Advertising by the fee-charging sector drives demand for their services however if there was wider awareness of free alternatives that people were comfortable accessing then they may be able to resolve their debt problems more quickly as they would not be increasing their indebtedness by paying a fee. Q23. How does a person know that he/she has been given the right advice? A person should be able to feel confident they are receiving high quality advice if the individual or organisation providing the advice is accredited by one of the existing accreditation schemes such as that offered by the Institute of Money Advisers. Membership of a body such as Citizens Advice or AdviceUK would also indicate that the organisation is subject to a particular level of oversight and needs to adhere to certain quality standards. Similarly if an advice provider was operating to a Legal Services Commission contract a person should feel confident that the advice given was quality assured to an appropriate standard. Whether it is reasonable to assume that clients will be familiar with the accreditation schemes and what they mean is perhaps a greater difficulty. The question pre-supposes that such a thing as the right advice exists. This is uncertain as the phrasing of Q25 suggests. Q25. Is it clear in all circumstances what the right solution should be? It will not always be clear what the right solution is to a person s debt issue. The role of an adviser is not necessarily to provide the right solution but to work with a client to help them form a decision about what the best option is for themselves from the various options available. Uncertainty requires good judgement and it is important that the individual with the debt problem, whenever possible, feels empowered to take the decision about how to act themselves. It will often be difficult to judge whether an income shock will be temporary or more long-lasting, someone may return to work quickly following loss of employment or they may never return. There will be occasions however when particular options are inappropriate and where conflicts of interest could arise. For example, if a fee charging advice provider has a business model which sees them paid up-front if they arrange a debt management plan then their employees may feel compelled to recommend, before other options, debt management plans, which could in the long term prove to be unsustainable. The high number of failed Individual Voluntary Arrangements also suggests that misguided advice is leading people to take inappropriate courses of action. Q27. Should there be more consistency on how a debtor s income, assets and expenditure are calculated and treated in different procedures? It is our view that the Common Financial Statement should provide the basis of all calculations of income and expenditure made by advisers, the Insolvency Service and the Courts. 8
It is also our view that when a procedure requires a view to be taken on assets this assessment should be made in a consistent fashion. We were pleased to note the change in the law that will take place from April next year whereby pension assets will be treated in the same way for the purposes of debt relief orders as they are for bankruptcy. This sets a useful model for the treatment of assets in debt resolution procedures. It would be useful if there was greater clarity and understanding of how income should be allocated between priority debts. There appears to be little consistency in this area and it may be useful for the creditor and advice sectors to agree a common approach. Q31. Is there a role for a gatekeeper to provide a common entry point to all formal insolvency procedures? If so, what would be the benefits and costs, who would perform such a function and how would the system operate? It would be helpful if, building on Q27, there was a standard way to calculate income, expenditure, assets and debts such that a recommendation for a particular solution could be possible. In most cases this solution would not involve a formal insolvency procedure and so if the options open to a gatekeeper were simply the formal ones it would be limited in the role it could play. However a method for making that assessment would be useful and as we have indicated in our answer to Q27 it already partially exists. Our answer to Q25 sets out our view that there will not always be a right answer as individual circumstances and preferences will vary. This would make it difficult for a gatekeeper to make standardised recommendations even if they could include the full breadth of debt resolution procedures both formal and informal. 9
Colin Kinloch, Policy Adviser colin.kinloch@moneymadeclear.org.uk Tel: 0207 943 0481 Published: December 2010 Consumer Financial Education Body (CFEB) 25 The North Colonnade Canary Wharf London E14 5HS Tel: 0207 943 0500 External Affairs team: externalaffairs@moneymadeclear.org.uk 10