Consultation response: FCA Consumer Credit- proposed changes

Response by the Money Advice Trust

Date: May 2015

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Contents

Page 2 Contents

Page 3 Introduction / About the Money Advice Trust

Page 4 Introductory comment

Page 5 Responses to individual questions

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Introduction

About the Money Advice Trust The Money Advice Trust is a charity founded in 1991 to help people across the UK tackle their debts and manage their money wisely. The Trust’s main activities are giving advice, supporting advisers and improving the UK’s money and debt environment. We help approximately 1 million people per annum through our direct advice services and by supporting advisers through training, tools and information. We give advice to around 200,000 people every year through National Debtline and around 40,000 businesses through Business Debtline. We support advisers by providing training through Wiseradviser, innovation and infrastructure grants. We use the intelligence and insight gained from these activities to improve the UK’s money and debt environment by contributing to policy developments and public debate around these issues.

Public disclosure Please note that we consent to public disclosure of this response.

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Introductory comment We welcome the opportunity to comment on the proposed changes to the FCA rules and guidance in relation to consumer credit. We support many of the proposals outlined. However, we have some concerns and have set out the details in our response below. In particular we would support the following measures.

• A further strengthening of the rules regarding credit broking, cold calling and lead generation.

• A thematic review of guarantor lending to decide if the product is fit for purpose, alongside further strengthening of the rules in relation to this area.

• Further action on debt management companies and lead generation companies who

misrepresent their services online and masquerade as free debt advice providers. We support the removal of the requirements for not-for-profit debt advice agencies to provide advice in a durable medium where there is no contract, and the changes to the complaint requirements on first contact. However, we have some queries about how the FCA intends to look at and monitor the length of time a DMP is set up to last in cases where only token payments can be made. Whilst we welcome the clarity on how to interpret the guidance on referrals to sources of free and independent debt advice to make it clear that where lenders wish to refer to another source that this should be in addition to, and not instead of, directing the customer to free debt advice. However, we believe the FCA should strengthen this provision to make it clear that lenders should not give any greater prominence to signposting their own commercial arrangements with debt management companies over free debt advice. We have serious concerns about the proposals to allow lenders to use a CPA as a payment mechanism where customers are in arrears. We believe that there will be problems where a lender’s interpretation of forbearance will not coincide with good practice in debt advice. In relation to the Mortgage Credit Directive, we propose that the FCA should review the impact of the Consumer Credit Act changes to secured loans and in particular whether MCOB rules should be strengthened further to reflect the loss of fundamental protections under the CCA relating to time orders and unfair relationships.

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Responses to individual questions Question 1: Do you agree that the rules in PS14/18 should be retained? If not, please explain what changes you would propose and why. We certainly support the rules for credit brokers. Our concerns are that the new rules do not go far enough. We note that it is suggested in the paper that the FCA intends to review the impact of the rules to see if further changes should be made. We have listed our concerns and some proposals in our response to question 4 below. Question 2: Do you agree with our proposed minor amendment to the reporting requirements? Yes, we would agree that the amendments to the reporting requirements are sensible. Question 3: Do you have any comments on our proposed minor changes to the CONC rules on credit brokers? We do not have any specific comments to make. We would support the proposed changes in particular in relation to the clarification that brokers must respond promptly to requests for refunds. We also support the clarification that the requirement that fees must not be taken from accounts without express authorisation by customers applies to all forms of payment account. Question 4: Do you have any views on remuneration processes for brokers, or on the specific issues raised in this chapter? We understand the intention is to delay further substantial review of the rules relating to brokering pending an evaluation of the impact of the newly introduced broking rules. We remain concerned, however, over credit brokers’ fundamental business model, which can see borrowers charged a fee even in cases where no loan is arranged. We are also concerned that fees amounts are not sufficiently transparent. We are not convinced that the FCA have as yet fully addressed the concerns raised by consumer groups such as in the recent Citizens Advice Scotland report1 have been fully addressed. The FCA should also look at the sale of customer data between firms without clear customer consent, which is another area of bad practice in this market.

1 http://www.cas.org.uk/news/borrowers-beware-online-trap-will-fleece-you-you-even-take-out-loan

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• Credit brokering companies often charge up-front fees and this can exacerbate the difficulties of prospective borrowers who are often desperate to secure credit after being refused for one or more loans.

• We note that there has been a rise in complaints to FOS about credit brokering

(particularly in relation to payday lending) – this is something that concords with the experience of National Debtline advisers.

• We suggest that the FCA should amend the rules to prohibit cold calling for credit

broking and lending purposes. This should help to deal with problems of aggressive marketing.

• We suggest that the FCA should amend the rules to prohibit lenders and brokers from

charging any upfront payment for arranging or setting up a loan. Fees should only be charged in the event of a borrower securing a loan. Firms should be prevented from taking money from bank accounts using continuous payment authority (CPA) mechanisms.

• High-cost short-term loan companies should refer applicants for free debt advice – not

to brokers – if they are turned down for credit.

• We strongly support any measures that would require credit-brokers (and other intermediaries such as lead generators) to state explicitly the nature of their business and the commercial relationship that they have with lenders in the market. We do not agree that existing regulation is sufficient to ensure that consumers are aware of the relationship between brokers and lenders. FCA rules should be strengthened in this area.

Cold calling and texts National Debtline clients and indeed most people in debt are often bombarded by cold-calling and nuisance text messages, from credit brokers alongside others such as high cost lenders, and this has the effect of exacerbating their distress. Calls and texts can also lead distressed consumers to take decisions, such as taking on more credit that are not in their best interests. We would like to see an outright ban on cold calling and texting by lead generation companies and credit brokers. In the Money Advice Trust response to the DCMS “Lowering the legal threshold” consultation 2 we included as an appendix, a set of text messages sent to one mobile phone which we set out as illustrative of the problem. There were 112 texts sent over a 12 month period. We would also reference the report by StepChange on this subject that echoes our concerns, calling for a ban on the unsolicited real time promotion of high-risk credit products.3

2 http://www.moneyadvicetrust.org/SiteCollectionDocuments/Policy%20consultation%20responses/Unilateral%20responses/Money%20Advice%20Trust%20response%20to%20the%20DCMS%20Lowering%20the%20legal%20threshold%20consultation%20plus%20appendix%20final.pdf 3 http://www.stepchange.org/Portals/0/Documents/media/reports/got_their_number.pdf

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Question 5: Do you have any comments on our proposed changes to CONC rules in relation to guarantor lending, or suggestions for further changes? We are very pleased to see the proposed changes to CONC rules in relation to guarantor lending. It is vital that the guarantor is given the same protections under the rules as the borrower. We are particularly pleased to see the proposal that guarantors should be treated in the same way as the borrower in relation to forbearance and financial difficulties. We would also support the proposal in the paper to consider introducing additional requirements on guarantor lending. We would particularly welcome clear rules on when a guarantor can be approached for payment. It should also be made clear what steps the lender must take before calling upon the guarantee. We also believe that the FCA should look at whether the guarantor was vulnerable and how coercion or undue influence could affect their agreement to act as guarantor. What is in place to make sure the lender evaluates this before granting the loan? We believe that the rules should be changed to ensure that potential guarantors are directed to seek free independent advice before signing up. Whilst we support a plan to issue further consultation in this area we are not convinced this will go far enough to reform the market. Consumer groups have raised concerns about consumer detriment in this market for some time. Sample National Debtline case study The guarantor was aware of the loan but no affordability checks were done. Our client has now been contacted by the lender advising that full payment of £200 will be taken. The client cannot afford to pay this. We would strongly support a further investigation into guarantor lending perhaps by way of a thematic review with the aim of evaluating whether the product is fit for purpose as it stands. Question 6: Do you have any comments on our proposed changes to CONC rules in relation to joint borrowers? We support the proposed changes to the CONC rules in relation to joint borrowers. However, we would suggest that the rules could be strengthened. The suggested wording in 4.2.7AG only asks that a firm considers whether it may be appropriate to give separate pre-contract explanations to each borrower. Although the lender is then asked to consider the factors set out in 4.4.7G when deciding whether to do this, there is no clarity given in relation to the circumstances where a firm could safely decide against doing so. Question 7: Do you agree with the deletion of CONC 9 on credit reference information? This seems to be a sensible proposal. We cannot see any reason for retaining this rule.

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Question 8: Do you have any comments on our proposed changes to other rules for lenders and guidance for firms? We do not have any comments on these changes. We have already set out our concerns in relation to CONC 4.4.7G above. Question 9: Do you agree with the removal of the exemption from the HCSTC risk warning requirement? We strongly support the proposal to remove the exemption from the HCSTC risk warning requirement. We see no reason to allow an exemption from the risk warning in financial promotions for this market, on the grounds of space constraints on advertising. As pointed out in the paper, this can only serve to encourage bad practice where firms are tempted to include so much marketing information that there is “no room” for the risk warning. As the risk warning is there to protect consumers from possible detriment, this message should take precedence over marketing messages. Question 10: Do you have any comments on our proposed changes in relation to ‘clear, fair and not misleading’? We support the proposals in relation to the requirement on firms to provide information and communications to customers in a way that is “clear, fair and not misleading”. It seems totally appropriate to us as a consumer body for this to constitute a rule rather than guidance and to match the mortgage MCOB proposals. Question 11: Do you have any comments on our proposed changes in relation to prominence? We have no comments to make on these changes. Question 12: Do you have any comments on our proposed changes to the triggers for a representative APR? We welcome the FCA clarification on the triggers for a representative APR. As far as we are concerned any rules that make it clearer what products are on offer for consumers and at what interest rate, are to be supported. Question 13: Do you have any comments on our proposed changes to other rules and guidance on financial promotions? We support the proposal to remind firms that provide debt adjusting or debt counselling that they must follow CONC 3.9 in relation to financial promotions. We particularly note the proposal to strengthen references to CONC 3.9.5R to clarify that a claim that a firm is or represents a charitable or not-for-profit or governmental department may be either express or implied.

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We still regularly report online advertising on Google and other search engines to the FCA that we have concerns about. These concerns can arise because a debt management or lead generation firm or appears to be masquerading as a free debt advice agency. It can also arise over concerns that the name of the website, the name of the company or the wording of the advert implies that the service is free when it is not, or that the company is a free debt advice agency when it is not. We hope that the strengthening of this section will assist the FCA in taking action against such activities. Question 14: Do you have any comments on our proposed changes to guidance regarding referrals to debt advice? The FCA FAQ on how to interpret the guidance on referrals to sources of free and independent debt advice makes it clear that where lenders wish to refer to another source that this should be in addition to, and not instead of, directing the customer to free debt advice.4 However, we are concerned as to why a lender would wish to refer a customer to a source of advice that is neither free nor independent and question the reasons that the FCA’s guidance has been “subject to some discussion”. Furthermore, we are concerned that if a lender has some sort of commercial arrangement with a debt management company that any signposting will be made more prominent or that the customer will be persuaded to go down that route instead of sourcing free advice. As a result, we would urge the FCA to strengthen this provision, to spell out that firms are not to favour their own commercial arrangements with debt management companies in this instance. Question 15: Do you have any comments on our proposals to allow the introduction of CPA without a modifying agreement in certain circumstances? We have some serious concerns about these proposals. We see that the proposals are to allow a CPA in circumstances “where the customer is in arrears or default, and the firm is exercising forbearance”. This is a definition that is open to a great deal of interpretation by the firm. Whilst from a debt advice perspective, we might expect forbearance to mean accepting a reasonable offer of payment from the client based on what they can actually afford; this might not be the interpretation by the firm. If the lender is allowed to set up a CPA for a slightly reduced payment, with the inducement to the client that they will agree to reduce payments only on the condition that a CPA is set up, what is the protection for the client if they cannot afford the payments at the level they are set?

4 http://fca.org.uk/firms/firm-types/consumer-credit/faqs?category=debt-advice

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In addition, what will happen once the CPA is put in place and the lender decides to increase or otherwise vary the payments? The criticisms of CPAs as a method of payment have been made many times. This proposal seems to us to put clients back in the same position of disadvantage as they were in when the loan was taken out using a CPA. The lender has unfettered access to the money in the client’s bank account. Question 16: Do you have any comments on our proposal to add guidance on the duration of debt management plans? We understand the intention is to add guidance for “firms to take into account the expected term of the proposed debt management plan, having regard to the Principles of business”. We also understand this will apply to debt management companies and not-for-profit debt advice bodies. We would expect most free debt advice providers would only refer on to a company that offers a free debt management plan. There is usually a lower limit for how much available income a client must have each month before they are eligible for a plan. However, how long the plan will go on for, is clearly dependent also upon how much is owed in total and the circumstances of the individual concerned. It would be extremely helpful for the sector to have clearer guidance as to the length of time the FCA has in mind when stating that it is unacceptable for a plan to last for “many years”. This could take the form of example scenarios to help inform advice providers as to what is expected. We would suggest the FCA rules to require a firm to demonstrate that where a client is initially making small or token payments, that there is a requirement to make a clear record of why their circumstances can expect to improve in a set period e.g. 6 or 12 months. Firms could be required to record the reasons why a DMP is set up in these circumstances in preference to an option such as bankruptcy or a DRO. We have assumed that the FCA intention is to change the guidance for formal DMPs where the client has entered into a contract with a particular provider. Clearly there are many informal payment arrangements made with creditors either via an adviser casework service or through self-help. In many cases these payment arrangements may be for token payments to creditors. However, it is accepted in money advice practice that token payment arrangements do not resolve the debt problem and should only be offered where there is no other suitable debt strategy. In the longer term, such arrangements must be subject to review, as they are not sustainable and will not clear the debt. The difficulties faced where clients have no available income or a deficit budget but no recourse to alternative debt remedies, have led to the Money Advice Trust alongside our advice partners, calling for a scheme similar to the Debt Arrangement Scheme in Scotland coupled with an extended statutory breathing space scheme to help those in such situations.

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Question 17: Do you have any comments about our proposals to amend rules relating to not-for-profit debt advice bodies and referring customers to information about complaints procedures? We welcome the changes to the rules to confirm that it is not required for not-for-profit debt advice bodies to send written information about complaints processes on first contact. This is particularly helpful for services like National Debtline and Business Debtline that provide debt advice primarily over the telephone. However, we also agree that the new right for clients to complain to the Financial Ombudsman Service should be promoted. We therefore support the proposal that information on complaint processes should be provided on the first occasion that a not-for-profit debt advice body communicates in writing with the client. Question 18: Do you have any comments on our other proposals relating to debt? These proposals all seem sensible. We are pleased to see the requirement to provide debt advice in a “durable medium” will be removed where there is no intention to enter into a contract with the client. This will make it much clearer and more straightforward, particularly for telephone advice where no further casework interaction will be undertaken. However, in 5.31 of the paper there is reference to an expectation on firms “to consider whether it may be appropriate to provide advice in a durable medium in the particular case, for example where complex advice is given.” Whilst we will of course endeavor to comply if this amendment is put in place, we would point out that it is difficult to define “complex advice”. It could be argued that any debt advice session will contain elements that could constitute complex advice. This will make it difficult for any advice provider to decide when it is appropriate to confirm the advice in a durable medium. It may lead advice providers to the conclusion that all advice needs confirmation which rather undermines the aim of the change to the rules. Furthermore, confirming advice in writing that has already been provided over the telephone, for a not-for-profit telephone advice charity, could represent significant extra cost implications for the service, as the advice would effectively need to be provided twice. Question 19: Do you have any comments on the proposed changes to CONC resulting from the transfer of the second charge regime? As we have said in our response to the FCA consultation on the implementation of the Mortgage Credit Directive,5 we are extremely concerned that the protections afforded by the Consumer Credit Act in relation to second charge mortgages have been lost. 5 http://www.moneyadvicetrust.org/SiteCollectionDocuments/Policy%20consultation%20responses/Unilateral%20responses/Money%20Advice%20Trust%20response%20to%20the%20FCA%20Implementation%20of%20the%20Mortgage%20Credit%20Directive%20consultation%20paper.pdf

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In relation to the Mortgage Credit Directive, we propose that the FCA should review the impact of the Consumer Credit Act changes to secured loans and in particular whether MCOB rules should be strengthened further to reflect the loss of fundamental protections under the CCA relating to time orders and unfair relationships provisions. As far as we can see, the protections under MCOB do not match those afforded by time orders and unfair relationships under the CCA. We cannot therefore agree that MCOB 13 provides “adequate and appropriate protections for customers in payment difficulties.” 6 We are strongly supportive of a revised and more flexible equivalent to the time order provisions. There needs to be a mechanism in place to allow consumers to reschedule payments under an agreement when a borrower has financial difficulties in relation to not just the monthly payments, but the terms and conditions, and consequent interest rate and charges. Whilst we appreciate that this consultation paper does not deal with amendments to MCOB to address the loss of protections we have identified, we would urge the FCA to look at this area as soon as possible and consider amending MCOB 13 accordingly. We do not think that the amendments proposed to the Perimeter Guidance Manual are sufficient. Question 20: Do you agree with our approach to implementing the MCD for lending not secured on the home? As this type of lending is commonly outside our remit, we do not have any substantial comments to make. The proposals seem sensible, given that the decision has already been taken by HM Treasury to remove this type of agreement from the remit of the Consumer Credit Act. Question 21: Do you agree with the additional MCD changes proposed? We do not have any comments to make on these proposals.

Question 22: Do you have any comments on the cost benefit analysis? We do not agree that the cost benefit analysis has taken into account the effect on borrowers in financial difficulties of allowing lenders to use CPAs for repayments without a modifying agreement. We believe there is a high risk that lenders will not be setting up a CPA for an affordable amount, worked out using the common financial statement. The impact on borrowers’ finances, bank accounts and the risk of overdrafts, charges and further debt if the CPA is set too high has not been factored in. There are not sufficient safeguards in place to stop this practice from occurring. We do not have any other comments on the cost benefit analysis.

6 PS15/9: Implementation of the Mortgage Credit Directive and the new regime for second charge mortgages, feedback to CP14/20 and final rules http://www.fca.org.uk/static/fca/documents/ps15-9.pdf

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Question 23: Do you agree with our initial assessment of the impacts of our proposals on the protected groups? Are there any potential impacts we should consider? We agree with the FCA initial assessment of the impacts of the proposals on protected groups. We have not identified any potential impacts that should be considered at this stage.

For more information on our response, please contact: Meg van Rooyen, Policy Manager meg.vanrooyen@moneyadvicetrust.org

0121 410 6260

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The Money Advice Trust 21 Garlick Hill London EC4V 2AU Tel: 020 7489 7796 Fax: 020 7489 7704 Email: info@moneyadvicetrust.org www.moneyadvicetrust.org