The report highlights shortcomings and areas of concern with regards to this industry and makes recommendations for future Government action.
The Chairman of the BIS Committee, Adrian Bailey MP, said:
"During these difficult economic times, increasing numbers of people up and down the country-not least some of the most vulnerable members of our society-are relying on the provision of consumer debt management services and payday loans to make ends meet.
"And yet this industry remains opaque and poorly regulated. Despite a Government consultation that ended almost a year ago little has been done to remedy the situation.
"The Government must take swift and decisive action to prevent firms from abusing the needs of such a vulnerable customer base."
The report highlights four main areas of ongoing concern:
1. On the regulation of Consumer Debt
- The Government should-within 6 months-outline a timetable and methodology for how and when a decision will be made on whether the power to transfer consumer credit from the OFT to the FCA is to be exercised.
- The Government should put in place the following reforms
- Higher licensing fees be charged for higher-risk credit businesses
- A fast track procedure be put in place to suspend credit licenses
- The regulator be given the power to ban harmful products
Adrian Bailey, said:
"The Financial Services Bill did little to clarify the way in which the consumer credit market is to be regulated.
"In the meantime, almost a year after the Government consultation closed, consumers and industry operators remain in limbo. This is clearly unacceptable."
2. On Payday Loans
- The Government must act to limit the rolling over of payday loans and the switching between payday loans and the subsequent rolling over of loans.
- The Government should ensure payday providers record all of their transactions on a database.
- The Government must make clear that unless payday loan companies demonstrate a commitment to moving away from the continuous payment authority as the method for receiving payments, the new regulator will be asked to address this as a priority.
- The Government should provide the Committee with an update on the development of the industry codes of practice by the end of 2012.
- The Government must act swiftly to counter any evidence of non-compliance contained within the OFT report.
Adrian Bailey said:
"Payday loans, by their very nature, appeal to those in serious financial need, some of whom will have low levels of financial literacy.
"We must be certain that this industry adheres to the highest standards - either through the codes of practice that are currently being developed or, failing that, by the new regulator.
"Consumers must have a clear idea of the cost of this form of credit and of the realities and penalties of late payment."
3. On Debt Management Companies
- The Government must work to phase out up-front fees - the provision of guidance on this point by the OFT is inadequate.
- The Government introduce the necessary regulations to ensure companies publish the cost of their debt advice and their outcomes, if an agreement cannot be reached during discussions with the industry.
- The Government should establish effective auditing of Debt Management Companies' client accounts.
Adrian Bailey said:
"Greater transparency in the commercial debt advice market will benefit consumers hugely. The Committee feels that voluntary codes of practice are highly unlikely to achieve this aim.
"The Government must be prepared to regulate if consumers are to receive the protection and the level of information they require."
4. On the Money Advice Service
- The Money Advice Service should provide details of its business plan.
- The Minister's assertion that there will be no diminution of face-to-face debt advice is confusing given that the legal aid budget for such services is being cut by 75%.
"The Money Advice Service will be up and running by April and yet its remit, and in particular its relationship with highly respected brands such as Citizens Advice, remains unclear.
Adrian Bailey said:
"Equally unclear is the future of face-to-face advice. The Minister assured the BIS Committee that this would not be cut and yet worryingly the evidence points to the contrary."
Which? chief executive, Peter Vicary-Smith, says:
“Which? has regularly highlighted the shortcomings of the debt management and pay loans industries and has been calling for better regulation of these markets for some time. This report shows yet again why it’s vital that the new financial regulator is a strong, open and proactive watchdog that works in the interests of consumers, and not industry.”
On the regulation of Consumer Debt
“In order for this market to function effectively, the Government must go ahead with its plans to move regulation of consumer credit to the Financial Conduct Authority. The regulator needs to use these new powers to encourage responsible lending, but it must also be given the power to protect consumers by banning harmful products.”
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