OFT Annual Plan consultation - 2012 - 13
The Annual Plan 2012-13
We support the priorities which the OFT sets out in its Annual Plan for 2012-13. Given the tough budget settlement of a 25% reduction in funding that the OFT faces, it is extremely welcome that high-impact consumer credit and consumer enforcement have been prioritised alongside exerting influence over the process of moving consumer credit regulation from the OFT to the proposed Financial Conduct Authority and targeted market studies.
Credit unions, in their work to promote fair and ethical financial services, come across a significant level of consumer detriment which is only increasing with the age of the internet and modern telecommunications in addition to the prevailing economic situation. Some examples of such detriment are:
- PPI and other claims scams which harvest vulnerable people’s information with the promise of securing compensation for their clients in respect of mis-sold products. Credit unions have been approached by claims companies seeking compensation for PPI mis-selling despite having never sold PPI. Many of these companies charge extortionate administration fees or simply demand payment upfront and provide no service at all.
- Companies that falsely advertise themselves on the internet as credit unions – which is a term protected by the Credit Unions Act 1979 – in an attempt to lure vulnerable consumers into taking out high cost loan products in the knowledge that many people are looking for credit unions as an escape route from high cost, unmanageable debts.
Consumer credit enforcement
As responsible lenders, it is no surprise that credit unions come across a significant amount of non-compliant and unethical trading in financial services, also. Again, the economic situation has exacerbated this problem as an increase in vulnerable individuals, struggling to manage their finances – after the loss of employment, for instance – increases the opportunities for unscrupulous financial service providers to benefit. Examples of such activity include:
- Credit brokerage firms which make referrals to credit unions which amount to nothing more than providing the contact details of a credit union for a fee in the region of £50. Often the misleading impression is given that a loan has been arranged for the individual despite, in many cases, the individual not being eligible for a loan at all. Furthermore, these companies often refuse to cease making referrals to credit unions despite repeated requests and are reluctant to abide by their legal obligation to refund the referral fee as they are required to do under consumer credit legislation.
- Mis-selling of credit products. Too many customers are not provided with a full explanation of the products they are purchasing and the agreement that they are signing when they take out a credit agreement. This is especially true in the high cost credit field.
- Unscrupulous debt management companies and insolvency practitioners. Credit unions find increasingly that there are a growing number of fee-charging debt management and insolvency practitioners who will not clearly explain the service that they are providing and leave individuals paying enormous fees out of funds they believe are being distributed amongst their creditors. This often results in a breakdown in the agreement and the individual being left no better off despite having paid a significant amount of money that they can ill-afford in fees.
Influencing the process of consumer credit regulation moving to the FCA
We have some concerns around the proposed move of consumer credit regulation from the OFT to a rulebook-based regime under the Financial Conduct Authority.
- Firstly, credit unions are currently exempt from the requirement to hold a consumer credit licence for creditor-debtor agreements by virtue of being the only lending institution in the UK which operates within an interest rate ceiling (2% per month on the reducing balance of a loan or 26.8% APR). This exemption arises from an appreciation that credit unions operate within a restricted membership and exist only to provide services to their members and in particular to extend inclusive financial services to those without fair access, within an interest rate cap. It is important that credit unions are not overly-burdened by extra regulation and therefore prevented from providing a vital lifeline to those in need of financial assistance.
- Secondly, the process of abolishing the Financial Services Authority and replacing it with the Prudential Regulatory Authority and the Financial Conduct Authority is an extremely complex undertaking and we have significant concerns about the potential for this to increase the costs and burden of regulation upon credit unions which are regulated by the FSA as deposit-takers. To add to this the undertaking of repealing the Consumer Credit Act, reviewing it in its entirety and replacing it with a rulebook-type regime will increase still further the complexity of the situation and without the OFT’s input it would be difficult to see a successful transition being achieved.
- Thirdly, consumer credit lending is a distinct area of financial services with its own set of pressures and tensions and a whole host of unique enforcement challenges. Without the proactive and constructive input of the OFT in imparting the knowledge of its years of experience in this area to the FCA, we are concerned that the consumer detriment cited above could be exacerbated by a lack of effective enforcement from the FCA.
Targeted market studies
Given that credit unions are often competing directly with high cost lenders our sector has a specific insight into the detriment that this lending can cause for some of the most vulnerable consumers in society. The economic situation has seen an explosion of these companies with the latest being pay day lenders whose activity is massively controversial as press reports in December 2011 showed.
We welcome the Government’s move to commission a new study into the case for capping the costs of credit in this area and it will be interesting to see the study’s findings when published. However, given the profile of this issue, and the fact that reportedly millions of people are falling into unmanageable levels of debt in part due to their activities, we would like to see the OFT again look at the issue and to study the market in detail to ensure that consumer detriment is minimised.
We welcome the OFT’s prioritisation of consumer enforcement, consumer credit enforcement, influencing the process of regulatory reform and targeted market studies which, as we have set out above, are all key areas of concern for the credit union movement and our members.
We would be happy to discuss with the OFT any ways in which we might be able to assist in the progression of its Plan.
ABCUL – January 2012
The full response is available to download on the right hand side of the screen.