Conclusions and recommendations
Regulation of Consumer Debt
1. The
consultation closed on 21 March 2011. The Treasury Committee said
in January 2012 "[we] are disappointed that 7 months after
the consultation closed, the Government has yet to make up its
mind". We are concerned that the introduction of the Financial
Services Bill has changed nothing by announcing the need for further
consideration. In the meantime consumers and the industry are
left without clarity on how the consumer credit market is to be
regulated in future. We expect the Government—within six
months—to 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. (Paragraph
10)
2. It is clear that
improvements should be made to the regulation of the debt and
credit industry. The Government's review of consumer credit regulation
should be seen as an opportunity to address the many current shortcomings.
In framing its new approach we recommend that the Government put
in place the following reforms:
- That higher licensing fees
should be charged for higher-risk credit businesses to allow for
greater levels of assessment of competence and fitness to operate.
- That a fast-track procedure be developed to suspend
credit licences; and
- That the regulator be given the power to ban
harmful products. (Paragraph 29)
3. We
welcome the Government's proposals for Christmas campaigns on
debt amongst young people and illegal money lending. That said,
we do not believe that the timing of these campaigns—which
only started in December—gave sufficient time to gain traction
with the public and we recommend that future campaigns start in
October. We further recommend that the Government, in its response,
sets out the measurable impact on consumers of last year's campaign.
(Paragraph 31)
Payday Loans
4. We
were pleased to hear that the OFT will be carrying out a compliance
review of payday loan companies early in this year. In view of
the rapid proliferation of payday loan companies, the Government
will need to act swiftly to counter any evidence of non-compliance
reported in the OFT's review. (Paragraph 44)
5. The evidence we
heard has left us in no doubt that the Government must act to
limit the rolling over of loans in its review of this sector.
(Paragraph 48)
6. We do not see the
need for Government to commission research, with all the associated
costs, from the University of Bristol on the capping of total
credit costs given the amount of evidence and research available
on the Canadian and US market. If Government continues to believe
that new research is necessary, it will need to set out which
specific areas lack existing data. (Paragraph 52)
7. It is clear that
credit checking is a key factor in ensuring appropriate lending
to consumers. We are therefore deeply concerned with the evidence
that payday providers are not recording all of their transactions.
Examples of credit databases that do capture payday lending are
available in other countries and we recommend that the Government
require industry to introduce similar models in the UK as a matter
of urgency. (Paragraph 58)
8. In addition we
further recommend that payday lenders be required by law to record
all loan transactions on such a database so that consumers' credit
histories can be accurately monitored. We further recommend that
the Government explores how this mechanism can be used to limit
the practice of switching between payday loan companies and the
subsequent rolling over of loans. (Paragraph 59)
9. We recommend that
the Government studies the Florida example to see what lessons
can be learned for the UK market on successful regulating of the
payday loans market. (Paragraph 64)
10. Whilst we recognise
that although the use of continuous payment authority is legal
in the payday loans market its use must be carefully monitored.
We welcome the OFT's consultation on this matter and recommend
that clear rules be put in place to outlaw companies accessing
funds without prior agreement. We further recommend that the Government
make clear to payday loan companies that if they do not 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 matter as a priority. (Paragraph 67)
11. For self regulation
to be effective it has to include transparent and enforceable
sanctions. We understand that more vigorous codes of practice
are under development by the industry. The Government must ensure
that self regulation can deliver the necessary enforcement sanctions
and demonstrate that they are sufficient to protect consumer interests.
Therefore, we recommend that the Government provide us with an
update on the development of the codes of practice by the end
of 2012. If it cannot be demonstrated that self regulation can
deliver the necessary protections then the Government will need
to intervene with statutory regulation. (Paragraph 73)
12. We recommend that
APR should no longer be used to measure and compare the cost of
payday loans. Instead, the total cost of the loan should be made
clear; for example if £100 is borrowed and £150 is paid
back including interest and fees then this total amount is the
figure that should be advertised. It also should include how much
it costs if paid back a week late, 2 weeks late and so on, so
consumers are clear of the reality and penalties of late payment.
(Paragraph 79)
Credit Unions
13. Credit
Unions have a valuable role to play in this market and their role
needs to be highlighted by Government. We support the argument
that the Post Office network has huge potential to work with the
Credit Unions to provide short-term loans at a lower cost than
commercial pay day lenders. We recommend that the Government set
out in its response, how it proposes to use Post Offices as a
vehicle to expand the Credit Union market. (Paragraph 88)
Social Fund
14. We
are concerned by anecdotal evidence which suggests that the removal
of the Social Fund will push people towards payday and other high
cost lenders. In its response to this Report, we will expect the
Department to set out what meetings—at Ministerial and Official
level—have already taken place on this issue; and to set
out what joint plans Ministers from BIS and the DWP have put in
place to ensure that the Social Fund and the proposed 'local welfare
assistance' will protect the most vulnerable from payday and other
high cost lenders or loan sharks. (Paragraph 95)
Debt Management Companies
15. While
we acknowledge that the OFT has provided guidance on up-front
fees we do not believe that the Minister's assertion that such
guidance will drive out the abuse of such fees goes far enough.
We recommend the phasing out of up-front fees and look to the
Department to set out how this will be brought forward. (Paragraph
107)
16. We conclude that
greater transparency in the commercial debt advice market, including
a requirement that companies publish figures on the cost of their
debt advice and their outcomes, would benefit the consumer and
benefit the market. Such information could lead to a comparison
website to help consumers chose whether a commercial debt management
company is worth paying for as opposed to going to a free debt
adviser. We recommend that the Government consider this in its
discussions with the industry and introduce the necessary regulations
if this is not achieved through voluntary agreements. (Paragraph
110)
17. We are sceptical
of voluntary codes of practice in the debt management industry
given the absence of proper sanctions against companies which
either do not abide by the Code or are not members of trade associations.
If self regulation is to be credible, the Government's proposals
for a strong code will need to deliver effective enforcement,
address the problems of excessive management fees and provide
a simple mechanism for comparing paid-for advice and the availability
of alternative free debt advice. These issues need urgent attention
and we recommend that in its response, the Government sets out
the detailed timetable for reform, how these issues will be addressed
and when the new, strengthened code will be introduced. (Paragraph
114)
18. Effective auditing
of Debt Management Companies' client accounts should be established
as a matter of urgency. We recommend that the Government include
this in any discussion it has about the industrys' proposals for
self regulation, together with the establishment of an industry
guarantee fund to protect the consumer in the event of company
failure or fraud. (Paragraph 117)
19. We do not believe
the Minister's reliance on internet search providers 'corporate
social responsibility' to provide an adequate solution to the
problem of commercial debt management companies dominating searches
for debt advice to the detriment of free debt advice services.
The Government must act on this now so that free debt advice is
clearly shown as an available option for debt advice. In this
respect, we encourage the Government to consider the feasibility
of a traffic light system which would help consumers recognise
more trustworthy sources of information. (Paragraph 123)
Money Advice Service
20. Without
sight of the Money Advice Service's business plan it is difficult
to accurately assess the impact of the Service and how it will
operate. This is particularly worrying given the fact that it
will be up and running by April of this year. At present, it appears
to have a confused remit and one which overlaps with existing
and highly respected brands like Citizens Advice. We do not believe
that the Money Advice Service should enter into competition with
Citizens Advice. It would better serve the public by supporting
and promoting Citizens Advice. (Paragraph 130)
21. We are confused
by the Minister's assertion that there will be no diminution of
face-to-face debt advice when the legal aid budget for debt advice
is being cut by 75% and the Government appointed debt advice coordinator,
the Money Advice Service, is advocating moving people away from
face-to-face advice provision to web-based help. Web-based advice
is better provided by existing free providers—for example
Citizens' Advice or moneysavingexpert.com—both of which
have high levels of brand awareness. We believe that Government
funds would be better directed at highlighting and supporting
those services, leaving the MAS to concentrate on telephone and
face-to-face support. (Paragraph 137)
22. The future funding
of the Money Advice Service through an industry levy will reduce
government expenditure, but it runs the risk that industry may
be unwilling to fund both the Money Advice Service alongside its
existing financial support for the fair share model. The Government
needs to be alert to any withdrawal of financial support for the
fair share model. (Paragraph 140)
23. We are concerned
by the high salary of the chief executive of the Money Advice
Service. At a time of pay restraint we do not believe that the
head of a comparatively small organisation should receive a salary
£100,000 in excess of the Prime Minister. We look to the
Government to raise this with the FSA as a priority. The perception
of such extravagance does not sit easily in an organisation tasked
with helping those in debt. (Paragraph 143)
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