Appendix 2: Response from the Financial Conduct Authority
We welcome the Business, Innovation and Skills Committee's
report on Payday Loans.
We consulted on our high-level consumer credit regime
in March 2013, and published our response alongside the consultation
on the detailed proposals on 6 October. The consultation on the
detailed proposals closed on 6 December. Today we have published
our policy statement on the detailed regime for consumer credit,
ahead of regulation transferring from to the Office of Fair Trading
(OFT) to the FCA on 1 April.
Today's policy statement summarises the responses
to our consultation, and sets out our final position on our proposals.
The policy statement is available on our website: www.fca.org.uk/news/policy-statements/ps14-3-final-rules-for-consumer-credit-firms
We have listened to the responses from consumer groups,
industry, and others who responded to the consultation. The Financial
Services and Markets Act requires us to demonstrate that any new
rules are proportionate through cost-benefit analysis and consultation.
While debate has naturally focussed on our proposed
rules, we have also been considering how we exercise our supervisory,
authorisation and enforcement powers. We have today published
a guide for firms which explains how our approach to regulation
is different and more proactive than the OFT's: www.fca.org.uk/your-fca/documents/consumer-credit-being-regulated
We appreciate that public interest has been focussed
on high-cost short-term credit (HCSTC) including payday lending,
and this will remain an important area for us in the foreseeable
future. We will also look in more detail at other regulated consumer
credit activities after the transfer: we will set out our priorities
in our Business Plan, which is due to be published in March 2014.
Responsible lending and credit checking
We welcome the FCA's proposals to adopt the OFT's
affordability guidance. However, we remain concerned that payday
loan companies will continue to be allowed to adopt an affordability
test suitable to their business. While the FCA is right to concentrate
on "higher-risk" firms we recommend that all payday
loan companies should be required to resubmit their affordability
test to the FCA for approval before they can continue to work
in the sector. (Paragraph 23)
We are pleased that the Committee has welcomed our
putting OFT affordability guidance into our rules. We agree that
we need to assess firms' affordability tests, and will do so through
our authorisations work. This is in addition to the ongoing supervisory
work set out below.
All firms with an OFT consumer credit licence must
register with the FCA for interim permission before 1 April. This
permission will allow a firm to lend legally until either the
firm's application for authorisation has been approved, refused
or withdrawn, or it does not apply for authorisation when requested
to do so. During an application for authorisation we have powers
to scrutinise individual firms more closely than the OFT did.
We are managing the process of making all firms with
interim permission apply for authorisation by instructing firms
when to apply over an 18 month period beginning October 2014.
We will set out when different types of firm will have to apply
for authorisation in March.
Our authorisations teams will look at every individual
higher-risk firm, and assess it against the threshold conditions.
As part of this, we will consider a firm's affordability assessment.
This will include both the actual procedures and the customer
outcomes this has delivered to date.
Real-time data
It is clear that for short-term loans a real-time
database is a key tool for assessing affordability of loans and
whether individuals are applying for multiple loans. It is also
possible that this greater transparency will increase competition
in the sector and drive down costs for the consumer. Despite the
sector's apparent support for real-time data-sharing, little progress
has been made. We recommend that the FCA make clear to the sector
that if real-time data-sharing has not been established by July
2014, the FCA will mandate its use as a condition of trading in
the sector. (Paragraph 29)
We agree that better data-sharing would be good for
consumers. It would allow lending decisions to be based on more
up-to-date information and support more effective affordability
assessments; in turn this should enable lenders to make better-informed
and more accurate lending decisions. This could also help borrowers
who are trying to improve their credit rating by providing more
up-to-date information.
We have said that this is an area of interest to
us. We have also said that we would like the industry to identify
and remove any blockages to real-time data-sharing as a matter
of urgency. There have been a number of developments in relation
to real-time data-sharing by credit reference agencies since the
Committee's report was published including announcements by Callcredit
and Experian of products that for the first time update credit
information daily or more than daily. We welcome any moves by
the industry to overcome the technological barriers to real-time
data-sharing, but we are aware that other obstacles remain.
We strongly encourage action by the industry to improve
data sharing, but we are also aware that this approach has not
succeeded in other areas such as SME lending. We are prioritising
discussions with the industry about whether they can overcome
the obstacles to effective real-time data sharing, in particular:
· how to ensure the necessary participation
to make this effective; and
· what is a reasonable timeframe to make
clear progress.
We will conclude these discussions in the summer.
If the industry cannot overcome the obstacles, and
we are best placed to bring about data sharing, we will not hesitate
to act.
Six-monthly activity reports from payday lenders
will help the FCA assess the market and the working practices
of companies. However, we believe that more up to date data is
necessary for the FCA to discharge its duty of oversight. We therefore
recommend that the FCA has full access to any data-sharing programme
established by the sector. (Paragraph
30)
In our consultation we proposed collecting product
sales data from high-cost short-term lenders. This includes information
on the type, amount, term, interest rate and fees of the loan,
as well as rollover information, the reason the loan was taken
(if known) and some information about the customer. Following
authorisation firms will have to submit this information to us
every six months. This is the first time that high-cost short-term
lenders will have had to report such information to a regulator
on a regular basis.
Most respondents to our consultation were supportive
of our proposals and agreed that they are necessary to help us
effectively monitor and supervise the high-risk lending activities
of high-cost short-term credit providers.
Our overall aim is to ensure that providers of consumer
credit or related services have well-controlled and sustainable
business models, underpinned by a culture based on doing the right
thing for their customers. We currently believe we can meet our
operational objectives using the supervisory tools and resources
already available to us, without the need for real-time monitoring
of sales data. We believe that this approach has the benefit of
enabling us to dedicate resources to forward-looking supervision
which seeks to identify and pre-empt emerging problems.
It may be helpful to set out some background our
approach to supervision, which applies to all consumer credit
firms:
Pillar 1 - Proactive firm supervision
Engaging with individual firms to assess whether
they have the interests of their customers and the integrity of
the market at the heart of their business. We do this by taking
a forward-looking approach and using our judgement to address
issues that could lead to damage to consumers or markets, with
clear personal accountability for the firm's senior management.
Pillar 2 - Event-driven, reactive supervision
When we become aware of significant risks to consumers,
or when damage has already been done, we will respond swiftly
and robustly.
We can identify risks or problems through a number
of sources, including information from firms, data analysis, whistle-blowers,
consumer complaints and referrals from partners such as local
authority trading standards services and consumer groups. Firms
also have a duty to tell us about any risks or problems that emerge
that may have an impact on our objectives.
We will ensure firms mitigate risks, prevent further
damage and address the root causes of problems. If necessary we
will use our formal powers to hold a firm and individuals to account
and gain redress for those who have been treated unfairly. Occasionally
we require firms to appoint a skilled person (such as a qualified
independent auditor) to look into a matter for us and produce
a report.
Pillar 3 - Issues and products supervision (known
as thematic work)
We look at each sector as a whole to analyse current
problems and investigate potential causes of poor outcomes for
consumers and markets through thematic reviews. We do this on
an ongoing basis, so we can address risks common to more than
one firm or sector before they can cause widespread damage. These
could be issues like a trend for a particular business practice,
or a problem with a certain product.
Key to deciding priorities will be the potential
harm to consumers in a particular activity, the number of consumers
affected and how vulnerable we believe they are. Where we find
a significant risk, we will establish a thematic review project
to take an in-depth look at the issue in a number of firms to
assess the issues, and respond appropriately. We will address
our responses to the industry at large, and expect all relevant
firms to consider and act as necessary on our findings. We will
be announcing the subjects for our first thematic work shortly.
Rolling over of loans
Payday loans should only be considered as a solution
to a short-term financial shortfall. A limit of two roll overs,
while a welcome development, is not a short-term fix as it would
represent a 3-month loan. Therefore we recommend that the FCA
sets a limit of one roll over for each payday loan.
(Paragraph 38)
We are pleased that the Committee welcomes limiting
rollovers, however following our consultation we have maintained
the proposed limit of two rollovers. In addition, we are introducing
a requirement that a loan should not be refinanced unless the
firm reasonably believes that it is not against the customer's
best interests to do so. This provides the appropriate degree
of consumer protection whilst enabling firms and customers to
respond flexibly where the customer is unable to repay as a result
of unanticipated circumstances.
It is clear to us from the responses to the consultation
that there is a consensus that some sort of restriction on rollovers
is necessary, but there is a debate centring on how many should
be allowed. We understand the concerns raised by consumer groups
about the impact of rollovers on consumers, and in particular
the negative effect on consumers of loans that were not affordable
at the start being rolled over numerous times.
We also recognise that there is a need for some flexibility
for consumers to rollover their loans if they are unable to repay
on time as a result of unexpected circumstances, such as being
paid late. However, it is clear to us that the benefits of this
flexibility diminish rapidly and the cost to the consumer increases
sharply. Repeated rollovers can exacerbate financial difficulties.
If a customer has run into unforeseen financial difficulty which
prevents repayment even after a rollover then the best way to
address it is forbearance and the agreement of an affordable repayment
plan, not extending the loan and increasing the debt.
Our rules dictate that firms should treat customers
fairly if they default or require forbearance. This will be an
area of significant interest to us in the future.
Continuous Payment Authorities
We agree with the FCA's proposals to limit to
two the use of Continuous Payment Authority by payday lenders.
We recommend that payday lenders be required only to give three
working days' notice before using a CPA and that each notice sets
out at the start, the right of a customer to cancel the CPA.
(Paragraph 51)
We welcome the Committee's support for limiting the
use of Continuous Payment Authorities (CPA). The Committee may
note that, in response to feedback, we have clarified our rules
about how CPAs should operate. We have addressed concerns about
the impact on instalment loans, and allowed consumers to 're-set'
the CPA when a loan is rolled over. We have maintained our overall
approach, limiting CPA to two attempts and banning lenders from
automatically taking part payment, which together will stop firms
repeatedly accessing a customer's bank account as some have in
the past.
Several consumer groups argued that CPA should not
be used unless a consumer is warned in advance. Several firms
highlighted that the Consumer Finance Association Lending Code
requires their members to inform the customer three days before
attempting repayment about the use of CPA and encourages the customer
to contact the firm if the customer is in financial difficulties
and cannot make the payment.
In October we did not consult on introducing a requirement
for firms to inform consumers before they use a CPA, although
we can see that there are potential benefits to consumers. We
will consider consulting on such a rule after the transfer of
regulation.
Firms are required to explain how they will use a
CPA, and that a consumer can cancel it, in the pre-contractual
information they supply to the consumer.
Advertising
We welcome the FCA's proposals to require all
payday adverts to include both a "risk warning" and
directions to debt advice services. We recommend that these warnings
be subject to the same requirements for prominence as APRs and
that the "risk warning" should be repeated at every
stage of the application process.(Paragraph
64)
We welcome the Committee's support for a warning
on high-cost short-term credit adverts. The Committee should note
that, in the light of feedback that the warning should be shorter
and sharper, we have worked with the advertising and standards
authority and modified it so that it now reads:
"Warning: Late repayment can cause you serious
money problems. For help, go to www.moneyadviceservice.org.uk"
We have stated that firms must display the warning
in a prominent way. We have decided not to give any further guidance
on how the risk warning should be displayed. We expect firms to
reflect how to make the advertisement work in line with our principles
and in accordance with established processes in each medium; for
example for television there are rules around how to ensure a
risk warning works - in the Broadcast Committee of Advertising
Practice guidance. We are able to take enforcement action against
firms that do not display the warning prominently. Firms must
use the warning on online and email adverts from 1 April, and
on other adverts from 1 July.
We further recommend that the FCA include the
warning that the use of payday loans could affect an individual's
credit rating for other financial products, including mortgage
applications, should evidence support that position.
(Paragraph 65)
In general, the feedback on our risk warning was
that a shorter, sharper warning will be more effective. Therefore
we do not feel it is appropriate to include additional information
in the warning. There is evidence to suggest the more information
you put in a warning of this nature the less a consumer takes
out of the message.
We want mortgage lenders to properly assess affordability,
and for people to take out mortgages they can afford to repay.
For mortgages that we regulate, we set the framework for lenders
but do not set the individual lending criteria that they use when
assessing affordability and creditworthiness, such as whether
or how they should consider payday loans. Instead, firms make
their own commercial decisions around their lending criteria.
The approach taken will vary between lenders, according
to their own individual assessment of risk. Consumers who cannot
get a mortgage with a particular lender for any reason may find
it helpful to discuss their circumstances with different providers,
or using a mortgage intermediary to identify lenders who may be
willing to consider their application.
Research undertaken by Ofcom has shown that payday
loan adverting is prevalent on daytime television and children's
channels. We do not believe that these are appropriate channels
for payday loans. We recommend that payday loan adverts are banned
from programming aimed at children. (Paragraph
66)
We are not best placed to ban advertising on children's
or daytime television.
Any ban on adverts for high-cost short-term credit
would need to comply with Article 10 of the European Convention
on Human Rights which extends to commercial advertising by firms.
Article 10 sets out the right to freedom of expression.
The article states that any restriction would need
to be prescribed by law, necessary in a democratic society so
that it is proportionate, and in pursuit of national security,
territorial integrity or public safety, prevention of disorder
or crime, the protection of health or morals, protection of the
reputation or rights of others, prevention of the disclosure of
information received in confidence, or maintaining the authority
and impartiality of the judiciary.
Our financial promotions supervision team will be
focused on using the powers and resources available to us to ensure
that adverts are clear, fair and not misleading. All Consumer
Credit firms will have to comply with our rules on financial promotions.
Referrals and marketing
Anecdotal evidence from consumer groups and others
has demonstrated that unsolicited marketing or brokering of payday
loans through texts and emails is an increasing problem. However,
there is not yet a sufficient evidence base to understand who
is driving this market or which groups are being targeted and
when they are sent. (Paragraph 74)
We recommend that the FCA highlights the '7726'
short code in all its literature on payday loans and discusses
with the ICO how text on payday loans could be disaggregated to
establish the extent of bad practice in the sector. If this evidence
base demonstrates inappropriate targeting or marketing we recommend
that the FCA moves quickly to ban the brokering of payday loans
through email, texts and other personal mobile devices. We also
recommend that the FCA devises and issues a guidance note for
payday lenders along similar lines to that established by the
Claims Management Regulator in its Marketing and Advertising Guidance.
(Paragraph 75)
We further recommend that the FCA conducts a holistic
review of the impact of payday loan advertising, the practices
of referrals companies working in the payday loan sector, and
their use of websites advertising payday loans. That review should
inform a stricter code of practice in the advertising and marketing
of short-term loans. (Paragraph 76)
We agree that this is an area that needs careful
consideration, and will be looking at regulated firms' financial
promotions from 1 April. This includes lenders and credit brokers.
We understand that the Committee has concerns about
the suitability of some advertising for high-cost short-term credit.
We have powers to ensure that adverts are clear, fair and not
misleading, and all consumer credit firms will have to abide by
our rules on financial promotions. For television, this is in
addition to the Broadcast Committee of Advertising Practice guidance.
Our requirements on financial promotions—which
apply across all media—comprise both rules and associated
guidance. We keep the effectiveness of our rules and guidance
under review, and look to amend or update these when we see the
need. We will outline our wider approach to promotions in text
messages, social media, and other digital media before the summer.
The Committee will be aware that brokering credit
is a regulated activity. Our rules therefore extend to credit
brokers as well as lenders, and there are specific requirements
in relation to how firms market products or services, including
the use of unsolicited calls or texts.
We will monitor digital, broadcast and print financial
promotions from 1 April, to ensure that they comply with our rules.
Where we see a non-compliant promotion, we will contact the firm,
asking them to amend or withdraw it. For repeat breaches, we may
also ask them to provide us with a signed statement that they
have effective governance in place for the approval of compliant
financial promotions. In cases where the firm does not co-operate,
we can issue a supervisory notice banning the promotion. In the
worst cases, enforcement action may also be appropriate.
In addition, as part of assessing whether or not
we should authorise a firm, we will look at their advertising
and sales process. This includes making sure that firms' promotions
meet our requirements and that they do not unfairly market products
or services to vulnerable consumers. All advertising must be clear,
fair and not misleading.
We understand that some firms use lead generators.
Where lead generators effect introductions to lenders or brokers
or act as credit intermediaries they will be regulated as credit
brokers. We expect lenders and brokers to take reasonable steps
to ensure that all persons acting on their behalf comply fully
with the law and our rules.
We will require that regulated firms using lead generators
have additional controls to ensure that they provide products
and services that are in the customer's best interest and that
they exercise appropriate influence over the firms they work with.
Regulated firms must comply with data protection and Telephone
and Mail Preference Service requirements.
We are giving further consideration to our relationship
with the ICO and whether the mobile phone network's 'spam text'
short-codes can provide intelligence that is useful to us. In
the meantime, we ask that consumers who want to report a misleading
financial advert or promotion for any regulated firm contact our
consumer helpline on 0800 111 6768 or email finprom1@fca.org.uk.
During oral evidence the Committee expressed concern
that some credit brokers may be referring consumers to unauthorised
money lenders: this would be a clear breach of our rules and we
will take swift action if we find any examples of this behaviour.
Debt Advice
Debt charities and consumer organisations have
made clear that the number of people seeking debt advice for payday
loans is increasing at an alarming rate. When payday loans come
under the authority of the FCA, they will be subject to a levy.
This must be additional the existing levy and not used to off-set
the level of payments other financial organisations. We recommend
that the levy paid by payday lenders is ring-fenced by MAS solely
for the funding of front-line debt advice services.
(Paragraph 80)
The budget for debt advice is put together by the
Money Advice Service (MAS), which the FCA Board must then approve.
We collect the MAS' levies alongside the FCA levy, which pays
for the cost of regulating firms, and the Financial Ombudsman
Service (FOS) levy, which pays for individual complaint resolution.
Consumer credit firms will start paying the MAS,
FCA and FOS levies once they are fully authorised. They will not
pay anything whilst they still have interim permission.
All consumer credit firms, including high-cost short-term
lenders, will contribute to both the MAS' debt advice and money
advice levies.
However, MAS' budget for debt advice will be based
on what resources it needs to fund its partners to deliver debt
advice to help meet demand. The MAS have been surveying the supply
of, and demand for, debt advice which will inform the activities
of their debt advice partners in the year ahead. If, after its
budget has been agreed, MAS notify us that they require additional
funding we would be happy to consider this.
28 February 2014
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