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The Consumer Credit legislation is designed to support people's access to credit, ensure fair treatment for consumers from lenders, and provide safeguards to help prevent people from getting into unsustainable levels of debt. The Consumer Credit Act 1974 established a fairer, clearer and more competitive market for consumer credit.
1. Consumer Credit Regulation now with the Financial Conduct Authority
The Finacial Conduct Authority's (FCA) aim is to provide stronger protection and better outcomes for consumers. There will also be tougher requirements for payday lenders, including a mandatory affordability check on borrowers, limiting the number of loan roll-overs to two, and restricting (to two) the number of times a continuous payment authority (CPA) can be used. There will also be tighter restrictions on what payday lenders can say in adverts, while the FCA will be able to ban any that are misleading.
FCA regulation now applies to any firm or individual offering credit cards and personal loans, selling goods or services on credit, offering goods for hire, or providing debt counselling or debt adjusting services to consumers.
The legislative changes see the FCA take on responsibility for more than 50,000 firms who have existing credit licences. The FCA wants to ensure that consumers are given enough information to make informed choices, that the market is competitive and offers loans that meet customer needs, and that those in difficulty are treated fairly. The key elements of the proposed consumer credit regime are:
- Affordability checks for every credit agreement to ensure that only consumers that can afford a loan can get a loan.
- All advertisements and other promotions must be clear, fair and not misleading. The FCA will be able to ban misleading adverts.
- Firms that do higher risk business and pose a greater risk to consumers will face a tougher supervisory approach. Specific rules for the payday sector have been proposed and include:
- Limiting loan rollovers to two;
- Limiting the number of attempts by a payday lender to use CPAs to pay off a loan, to two;
- Information on where to get free debt advice will be given to every borrower that rolls over a loan; and
- Clear risk warnings to be displayed on all adverts and promotions along with more information about debt advice.
- Consumers will continue to have access to the Financial Ombudsman Service, but there are currently no plans to include consumer credit in the scope of the Financial Services Compensation Scheme. The FCA will keep this under review.
- A robust authorisation gateway to ensure that any firm or individual authorised to do consumer credit business is fit and proper, and that firms have suitable and sustainable business models.
- Dedicated supervision and enforcement teams will crack down on poor practice, money laundering and unauthorised business. Firms that break the rules may face detailed investigations and tough fines.
Peer to peer lending platforms must give borrowers explanations of the key features of the loan - including the key risks - before an agreement is made, and assess the creditworthiness of borrowers before granting them credit. A 14 day cooling off period will allow the borrower to withdraw if they have a change of heart.
The FCA is already considering how competition is operating in these markets in the interest of consumers and will launch market studies as appropriate to explore this further. The FCA will also take into account the findings of the Competition Commission's study on payday lending when they are published.
Want to know more? There is more information about the changes and how they will affect businesses on the FCA website, where businesses can also sign up for email updates.
2. Office of Fair Trading Compliance Review Report on Payday Lending
On the 6 March 2013 the OFT published its Compliance Review Report on Payday Lending.
The OFT gave the leading 50 payday lenders, accounting for 90 per cent of the payday market, 12 weeks to change their business practices or risk losing their licences, after it uncovered evidence of widespread irresponsible lending and failure to comply with the standards required of them. The OFT also announced that, subject to consultation, it proposes to refer the payday lending market to the Competition Commission after it found evidence of deep-rooted problems in how lenders compete with each other.
Particular areas of non-compliance included:
- lenders failing to conduct adequate assessments of affordability before lending or before rolling over loans
- failing to explain adequately how payments will be collected
- using aggressive debt collection practices
- not treating borrowers in financial difficulty with forbearance.
The fifty leading lenders, each of which was inspected, will have to take rapid action to address the specific concerns the OFT identified with each of their businesses. They must demonstrate within 12 weeks that they are fully compliant, or risk losing their Consumer Credit licence. Failure to cooperate with this process will trigger enforcement action.
Lenders were found to compete by emphasising the speed and easy access to loans rather than the price and also to be relying too heavily on rolling over or refinancing loans. The OFT believes that both these factors distort lenders' incentives to carry out proper affordability assessments as to do so would risk losing business to competitors. Too many people are granted loans they cannot afford to repay and it would appear that payday lenders' revenues are heavily reliant on those customers who fail to repay their original loan in full on time.
The OFT believes that these fundamental problems with the operation of the payday market go beyond non-compliance with the law and regulations. It believes that a full investigation by the Competition Commission is needed to identify and, if appropriate, impose lasting solutions to make this market serve its customers better. The Financial Conduct Authority (FCA) will regulate consumer credit from April 2014 and it will be able to use the analysis and conclusions of the Competition Commission in developing its rules and applying its powers. The FCA will have significant powers and resources beyond those available to the OFT, including powers to cap interest rates and to impose a ban or a limit on the number of rollovers lenders may offer.
View a full copy of the OFT report (pdf 1.84 kb).
Statement on a Cap on the Cost of Payday Loans
On the 26 November 2013 the FCA announced that the cap on the cost of payday loans will be established through the Banking Reform Bill, which is currently going through Parliament.
This will be one of a number of measures that the FCA proposes to use to ensure consumers are treated better when applying for, and repaying, payday loans. As well as a cap on the cost of credit, the FCA has proposed to require a mandatory affordability check for every loan, capping the number of rollovers to two, and limiting to two the number of times a payday lender can dip into a bank account to seek payment. The FCA believes that these measures will protect consumers but also allow businesses to operate successfully.
3. Guidance on the Power To Suspend Credit Licences
On the 22 February 2012 the OFT published guidance which sets out how and when it can use its new power to suspend consumer credit licences. Under the provisions of the Financial Services Act 2012, the OFT can only use the new power where there is an urgent need to protect consumers from harm.
The guidance establishes that in the most serious cases, which include those where there is evidence of public harm, the OFT will suspend a credit licence with immediate effect. In other circumstances, businesses will be given an opportunity to make its case to an adjudicator before the suspension takes effect.
The OFT will use the power where there is evidence that the business has engaged in practices that cause, or have the potential to cause, physical, economic or other harm to consumers. These practices may involve violence, fraud or other forms of dishonesty or the targeting of vulnerable consumers with harmful practices. View a full copy of the guidance (pdf 328 kb).
4. Code of Practice: Bills of Sale
The Government announced in 2011 that the 'Bills of Sale' money lending industry is now working under a new Code of Practice. Lenders will also provide customers with a plain English information sheet explaining how bills of sale work, and what the customer can expect from the lender.
A bill of sale is used to secure a loan on a consumer's personal property, typically a car. Concerns were raised that this form of loan could lead to consumer harm. As a result, the Government consulted on whether any action was necessary.
Added consumer protections from the new Consumer Credit Act came into force on the 1 February 2011, and the OFT will monitor the industry under the Irresponsible Lending Guidance, which will have a positive impact on consumer rights for bills of sale loans. In summary, the Code of Practice says:
- borrowers who are in arrears will be able to hand over the car in full settlement of their debt and will not be liable for any shortfall between the outstanding debt and the value of the vehicle;
- the option of making balloon payments* will only be available to business customers who can provide evidence that they will have funds to make the final repayment;
- the bill of sale must be registered with an asset finance register so that the public can check whether a vehicle has a bill of sale registered against it;
- charges to be imposed on borrowers in arrears must be disclosed at the pre-contractual stage and must only cover the lender's costs;
- if a borrower gets into difficulty, lenders must consider proposals for alternative payment arrangements and will repossess the car only if attempts to arrange alternative payment arrangements fail; and
- lenders will take all reasonable steps to ensure that repossessed cars are sold for the highest obtainable market price.
Balloon payments are small initial repayments covering only the interest, with the capital to be repaid in a single final payment.
New regulations implementing the Consumer Credit Directive will apply to a loan taken out under a bill of sale. They will give consumers new rights and impose new requirements on lenders:
- Lenders will have to make a reasonable assessment of whether a borrower can afford to meet repayments in a sustainable manner.
- Lenders will have to explain the key features of the credit agreement to enable the borrower to make an informed choice.
- Prospective borrowers will be given an information sheet setting out all the relevant information about the credit agreement.
The information sheet will be in a standard format for all lenders so borrowers can easily compare the costs of different loans. (The proposed new information sheet for bills of sale will complement this by setting out the key features of a bill of sale).
Consumers will have an absolute right to withdraw from a credit agreement within 14 days, paying back only the money lent and any interest accrued over that time.
5. Consumer Credit Act 2006
The Consumer Credit Act 2006 updates and amends the Consumer Credit Act 1974, establishing a fairer, more transparent and competitive credit market. It does this by:
- Strengthening consumer rights by enabling consumers to challenge unfair lending agreements and making it possible for disputes to be resolved more easily;
- Improving consumer credit regulation by strengthening and improving the licensing system fo consumer credit businesses, requiring consumers to be provided with minimum standards of information, and through targeted action to tackle unfair practices; and
- Increasing the effectiveness of regulation by extending protection to all types of consumer credit and creating a more suitable regime for business.
Please note: This information has no legal force and is not an authoritative interpretation of the law, which is a matter for the Courts. It is intended to help businesses to understand in general terms, the main features of the legislation. The information is not a substitute for the legislation and you should refer to the text of the legislation for a full statement of legal requirements and obligations. Where appropriate, you should seek your own independent legal advice.
For further detailed information go to the Financial Conduct Authority's website.
Alternatively contact the Trading Standards Service, Public Safety and Regulation, Room 703 Civic Centre, Newcastle upon Tyne, NE1 8QH.
Phone: 0191 211 6121