In addition to ongoing robust, targeted enforcement action, including the revocation of consumer credit licences where appropriate, the OFT is publishing two new pieces of guidance: on the standards it expects of credit brokers, and on debt management.
The OFT is also asking the Government to consider whether new legislation is needed to address problems in the sub-prime unsecured credit brokerage market, including a possible ban on upfront fees. These measures are detailed in the OFT's response to a super-complaint from Citizens Advice, published today.
The OFT estimates that 270,000 UK consumers paid an upfront fee to a sub-prime, unsecured credit broker in the last 12 months, typically between £50 and £70, on the expectation of being offered an unsecured loan. Complaints to Consumer Direct about these upfront fees more than doubled between 2008 and 2010.
The OFT's super-complaint response suggests a number of businesses in the sub-prime, unsecured credit brokerage market, have business models based on taking upfront fees for a service they are unlikely to provide.
Consumers are often not introduced to a loan in exchange for the fee or are offered loans that are different from those they expected. The evidence suggests some brokers also often fail to pay refunds to consumers who are entitled to them.
The new credit brokerage guidance, published today for consultation, sets out:
- that consumers may have a right to a refund of the upfront fee, under general contract law, where no introduction to a lender is made, and
- that the OFT expects brokers, six months after introducing a consumer to a lender, to advise any consumer who has not entered into a relevant agreement of their statutory right to a refund of the upfront fee.
The OFT also intends to publish revised debt management guidance later in June 2011, designed to tackle a range of bad practices it has identified. This follows a period of high profile enforcement action following a warning to 129 debt management businesses in September 2010.
The OFT's super-complaint response also considers other possible problems in these sectors, including cold calling.
John Fingleton, OFT Chief Executive, said:
"The super-complaint from Citizens Advice has been timely given our ongoing work to protect vulnerable consumers from poor practice in the credit sector.
"Our evidence suggests some businesses are deliberately taking people's money upfront with no realistic expectation of finding them the type of loan they need.
"We will continue to take robust enforcement action against businesses using unfair or improper business practices and we are providing new guidance making very clear the kind of behaviour we expect from the industry. We are also asking the Government to look at the impact of a ban on upfront fees."
Citizens Advice Chief Executive Gillian Guy said:
"We are very pleased that the OFT agrees there is a serious problem and that action is needed to stop cold-call credit brokers tricking vulnerable people out of large sums of money for non-existent loans and other financial services.
"Rogue firms need to be stopped in their tracks before they get their hands on anyone's money. Current economic conditions are providing fertile ground for unscrupulous credit businesses and fraudsters and the problem is set to grow much worse. That's why we still believe there is a compelling case for a ban on cold calls to shut this gateway to scams."
"Looking at closing loopholes in the law, including a possible ban on upfront fees - and convening a round table between the industry, consumer groups and regulators to look at tackling cold calling are important steps towards tackling some of the problems we highlighted in our super complaint.
"We also welcome the OFT's consultation on new credit brokerage guidance and revised debt management guidance, and their pledge to take strong action against rogue firms."
Delroy Coinaldi, CCCS External Affairs Director, comments:
"These firms are taking people for a ride, persuading them to buy products and services they can ill afford. We must continue to be vigilant for, and deal with, these exploitative practices. There is no need for anyone to pay for debt advice when CCCS has capacity and all our services are free."
Kevin Still, Director, Atlantic Financial Management, says:
“There are many legitimate businesses such as Atlantic Financial Management in this sector, providing fair, transparent and ethical services to indebted and vulnerable individuals. We strongly support any moves to improve consumer trust in our service.
“We are pleased that the OFT feels initial (post contractual) arrangement fees as opposed to upfront fees (pre-contractual) are justified provided the fee is proportionate and transparent. We certainly support this view – initial arrangement fees are a legitimate way for debt solutions business to cover the costs of setting up Debt Management Plans and services for indebted consumers.
“We look forward to the updated OFT Debt Management Guidance and hope this will go further to improve standards in our sector and build consumer confidence to use reputable providers like Atlantic Financial Management. ”
