FCA regime for consumer credit Response from the Association of British Credit Unions Limited (ABCUL) Contact details Abbie Shelton Policy & Communications Manager abbie.shelton@abcul.org Or Matt Bland Policy & Communications Officer matt.bland@abcul.org Tel: 0161 832 3694 www.abcul.coop
Introduction We appreciate the opportunity to respond to this consultation. The Association of British Credit Unions Limited (ABCUL) is the main trade association for credit unions in England, Scotland and Wales representing around 65% of British credit unions who in turn serve around 80% of credit union members. Credit unions are not-for-profit, financial co-operatives owned and controlled by their members and operated for their sole benefit. They provide inclusive financial services to the whole of their communities including safe savings and affordable loans. An increasing number of credit unions also offer more sophisticated products such as current accounts, ISAs and mortgages. At 30 June 2013, credit unions in Great Britain were providing financial services to more than 1 million adult members and held more than 891 million in deposits with more than 633 million out on loan to members. An additional 125 thousand young people were saving with credit unions. 1 Credit unions work to provide inclusive financial services has been valued by successive Governments. Credit unions participation in the Growth Fund from 2006 2011 saw over 400,000 affordable loans made valuing 175 million 2 and saving consumers between 119 million and 135 million. 3 The DWP recently announced that it has awarded a contract for the delivery of its Credit Union Expansion Project to ABCUL. The Project will invest up to 38 million in the sector. 4 We have limited our responses to proposals which have the potential to impact upon credit unions, or which we feel we are able to comment up given the experience of our members. Summary of response ABCUL would like to use the opportunity of this consultation to reiterate our support for the Government and FCA's continued support for the credit union exemption from consumer credit regulation. This exemption is grounded in recognition of the unique restrictions under which credit unions operate given their status as the only form of lending institution which operates under an interest rate ceiling. Incorporating as it does all costs associated with the making of a loan, the credit union interest rate cap is a significant restriction upon credit union operations, especially when considered in light of the interest rates charged by many other consumer creditors in operation today in the UK market. In light of this, historically the UK government has waived consumer credit regulation for credit unions and this has also been reflected by the European Union's Consumer Credit Directive. We are firmly of the opinion that there has been no significant alteration of these competitive circumstances that should induce a reassessment of the exemption. 1 Figures from unaudited quarterly returns provided to the Financial Services Authority 2 See DWP Growth Fund statistics, here: http://www.dwp.gov.uk/other-specialists/the-growth-fund/statistics/ 3 See Independent evaluation of the Growth Fund, here: http://www.hmtreasury.gov.uk/d/evaluation_growth_fund_report.pdf 4 See DWP Press Release here: http://www.dwp.gov.uk/other-specialists/credit-union-expansion/latest-news/
The waiving of the interim permissions fee is welcomed. This is a welcome acknowledgement of the fact that the 350 proposed fee would have exceeded the entire FCA annual minimum fee for many credit unions and therefore does not represent a reasonable charge. In general, we are supportive of the approach that has been proposed for transferring consumer credit firms into the FCA's regime. We feel it is appropriate for the FCA to require the same threshold conditions to be met for consumer credit firms as it currently does for other regulated financial services. Credit unions have been subject to a form of regulation of this sort since being brought under the Financial Services Authority's remit in 2002 and, due to a broadly proportionate approach, have been able to adapt to its rigours despite their small size and reliance on volunteers. Some credit union lending which involves a third party supplier have also been subject, to OFT regulation, and we are generally content with the way this is set to continue. We do have some concerns that current exemptions may be interpreted differently under the new regime and that this may lead to credit unions inadvertently breaching regulations. A consistent approach and clear guidance is necessary to prevent this from happening. Please see the section below ( request for clarity on borrower-lender-supplier agreements ) for full details. We are supportive of the proposed reporting requirements for consumer credit which should radically improve the visibility of the sector. At present, there is a dearth of data available as to the scale and extent of activity in the consumer credit sector which makes it extremely difficult to reliably assess the impact of the sector and regulation of it. We support the general direction of travel proposed in relation to high-cost short-term credit. This is a sector that causes much consumer detriment which our member credit unions spend much time working to resolve. However, while steps such as requiring full affordability checks and limiting rollovers and failed CPAs should improve consumer protection, we have concerns about the limitations to the proposal. For example, while a full affordability check is required, there are no specifications provided as to what this might involve. Similarly, while the requirements limit rollovers, they do not account for the widespread practice of taking out simultaneous loans from multiple providers which is made possible by the time lag in credit reference data reporting by lenders. Also, while the proposals understandably focus on payday lending which has received a great deal of attention recently, the exclusion of home-collected credit and other forms of high-cost credit is misguided since payday lending still only represents a minority segment in the wider practice of harmful, expensive credit. Request for clarity on borrower-lender-supplier agreements Some credit union lending is regulated by OFT and is not exempt from the Consumer Credit Act. These include debtor-creditor-supplier or borrower-lender-supplier (B-L-S) agreements which involve a pre-existing agreement between the credit union and a supplier for the credit union to provide finance for the purchase of goods.
The main example of this activity is a partnership between credit unions and Co-operative Electrical, where a pre-existing agreement means that members purchase goods from the supplier by means of a loan supplied by the credit union. This is accepted by credit unions which understand that they need to apply for permissions and comply with regulations for these sorts of loans. Recent discussions with FCA supervisors have suggested that the FCA seems to be adopting a different interpretation of the definition of B-L-S agreements to the OFT. In particular, the FCA seems to consider that loans issued to credit union members by cheque written out to a retailer, for instance, to be classed as B-L-S even where the credit union concerned has no pre-existing agreement with the retailer. We believe that the FCA s interpretation conflicts with the wording of the relevant provisions in the Consumer Credit (Designation) Instrument 2013 Annex A. Writing out a cheque to a third party is a common practice among some credit unions, especially smaller ones, which use this as a tool to help members to manage their money. This also gives credit unions comfort that money is being used for the purposes given on the application form. Credit unions don t currently see this as a practice which is outside of their normal loan granting procedure so there is a risk that they could inadvertently breach rules without realising it. Where credit unions are made aware of this change in interpretation, this could also increase the compliance burden to such an extent that they would cease to offer this service and vulnerable members would suffer as a result. We do not believe that this practice does constitute a preexisting agreement and would appreciate if this was reconsidered and clarified in the Policy Statement. Consultation questions Q1: Do you have any comments on the way our threshold conditions are being applied to consumer credit firms and/or the updates to our Handbook rules? We are in broad agreement with the proposed approach here. While the application of the threshold conditions is likely to represent a significant increase in perimeter scrutiny for many consumer credit firms, we believe this is an appropriate level of attention provided that the conditions are applied in accordance with the principle of proportionality. Credit unions, as small, often volunteer-led firms, have had to comply with the threshold conditions proposed since regulation by FSA in 2002 and while at times presenting a challenge, the overall experience of this added scrutiny has been to enhance standards in the sector as long as they have been applied proportionately. A consistent approach and clear guidance has been important here and it is important that credit unions continue to benefit from this under the new regime. Q2: Do you agree with the updates to our draft Handbook rules for approved persons for consumer credit firms?
We are broadly satisfied with the proposals here which seem to strike a reasonable balance between the needs of protecting consumers and ensuring high standards in consumer credit firms and considerations of proportionality. Q3: Do you have any comments on the updates to our draft rules regarding appointed representatives of consumer credit firms? Q4: Do you have any comments on the criteria that we are proposing a person would have to fulfil to be a self-employed agent of a principal firm (as set out in Appendix 2)? Q5: Do you have any comments on our proposed regulatory reporting regime? We support the proposed regulatory reporting regime which we believe will serve to enhance visibility of the consumer credit industry and thereby enhance consumer outcomes by ensuring that the FCA has a full view of the sector's activity. At present, the OFT has a poor view of the sector and has struggled to analyse its scale and scope as a result. Q6: Do you agree with our proposals to collect product sales data on high-cost short-term lending and home collected credit? We support this proposal. The availability of full product sales data should further enhance FCA's ability to improve regulatory standards in the high-cost short-term and home-collected credit sectors. There would also appear to be a case for requiring the same data for any consumer credit firm which offers credit at interest rates in excess of 100% APR; there are a number of online firms, for instance, offering longer term loans at high rates which would be excluded from this proposal. We do have some concern about the limits to the current proposals in terms of their ability to facilitate a real time view of the short-term credit and other high-cost credit industries. At present, many people are able to access multiple payday loans at once due to poor availability of credit data from the mainstream credit reference agencies caused by the time lag that exists between taking a loan and its reporting to the CRAs. Similarly, there is a problem with the level of reporting at all from many high-cost, non-mainstream lenders. We urge FCA to look closely at this issue to ensure that the best possible data is available both to the regulator but also to other lenders. A lack of available credit data makes responsible lending very difficult in many cases. In the US and Australia, where significant success has been made in combating payday and other high-cost lenders, this has been predicated upon the institution of a real time credit database to enable all parties to see the true extent of consumers' borrowing. Q7: Do you have any comments on how we propose to carry across CCA and OFT standards, in particular in the areas highlighted above?
We are satisfied with the proposed approach to carrying across the OFT's guidance documents on various areas of consumer credit.. Clear guidance is also important to ensure that smaller firms can absorb the information and apply it effectively. Q8: Do you have any comments on our proposed approach to financial promotions? We are supportive to the proposed approach. There is a significant lack of meaningful oversight of consumer credit advertising oversight currently and the proposals should address some of these shortcomings. It will be vital that the FCA can effectively enforce its new standards if they are to have the desired effect on consumer behaviour and protection. Q9: Do you agree with the definition of a high-cost short-term credit provider as set out at the start of this chapter? We support the proposed definition as far as it is intended to capture the broad business model of payday lending. We are concerned, however, that there are other areas of high-cost credit which would benefit from some of the proposed measures such as affordability checks but the definition explicitly excludes many of these forms of credit. We would urge the FCA to broaden its definition so that some of these other expensive forms of credit are brought within its scope. Q10: Do you have any comments on limiting rollover to two attempts? We strongly support this proposal. However, we have concerns about its limitations given the fact that consumers often source multiple loans from multiple lenders and the rollover limit per lender will not impact upon this. Once more, we are keen to highlight the need to enhance the availability of credit data in this regard as currently it is often very difficult, if not impossible, to get an accurate real time view of a consumer s credit file since there are time lags in the credit reporting systems in place. In countries where short-term credit has been effectively tackled, compulsory real time data reporting has been a central element. This is true in Australia and parts of the United States, for instance. Q11: Do you have any comments on whether one rollover is a more appropriate cap? We do not have a strong view here. We are more concerned, as above, that the rollover cap does not address borrowing from multiple lenders. Q12: Do you have any comments on our proposal to introduce a limit of two unsuccessful attempts on the use of CPAs to pay off a loan? We strongly support this proposal. CPAs are central to the ability of payday lenders to make loans to those who otherwise ought not to borrow since they cannot afford to repay. Payday lenders are able to offset some of the risk posed by these borrowers by their ability to continually authorise CPA attempts until the account has the required funds. We feel that many of the worst excesses of the payday lending market will be addressed by this measure.
Q13: Do you have any comments on our proposal to ban the use of CPAs to take part payments? We support this proposal since, again, we are of the firm view that CPA activity is a key underpinning of the worst excesses of the payday lending market allowing borrowers to be lent to in circumstances where they really ought not to be. Q14: Do you have any comments on our risk warning? We support the concept of a risk warning for payday loan adverts. This should ensure better outcomes for consumers by prompting them to consider the risks associated with a payday loan if not repaid on time. We feel that further guidance should be provided as to how the warning should be displayed in different advertising formats since prominent can be interpreted in a number of different ways. Q15: Do you have any comments on our proposals to require high cost short-term lenders to provide information on free debt advice before the point of rollover? We support this proposal as, similarly to the risk warning, we feel that this should result in better outcomes for consumers by ensuring that they have the full information available to them when considering taking out a payday loan. Q16: Do you have any comments on the effectiveness of price capping? Q17: Do you agree with our proposals on how to calculate our prudential requirement for debt management firms and some not-for-profit debt advice bodies? If not, what amendments would you suggest, and why? Q18: Do you agree with our proposal to apply a transitional approach to prudential standards for debt management firms and some not-for-profit debt advice bodies? Q19: Do you have any comments on our draft guidance on the debt counselling activity and our draft rules covering the provision of debt advice? We support the general approach of basing this on the existing OFT guidance. Q20: Do you have any comments on the rules that we propose to apply to peer-to peer lending platforms to protect borrowers? Q21: Do you agree with our proposals for debt management firms and not-for-profit debt advice
bodies that hold client money? If not, which aspects of the regime do you disagree with and why? We agree that these proposals should enhance protections for consumers. Q22: Do you agree with our proposed implementation timetable? If not, please give reasons. Q23: Do you agree with our suggested amendments to the reporting requirements for second charge loans? The proposed approach appears sensible. Q24: Do you agree with our proposal to allow all microenterprises to complain to the ombudsman service? We have no objection to this. Q25: Do you agree with our proposal to include not-for-profit bodies providing debt advice in the Compulsory Jurisdiction? Q26: Do you agree with our proposals on recording, reporting and publishing complaints? As FSMA-authorised firms, credit unions are already subject to these requirements. Q27: Do you agree with the costs and benefits identified? We are broadly satisfied with the cost benefit analysis as presented. We do feel, though, that it may have underestimated the scale of exit from the market by smaller consumer credit firms, in particular, and the barriers to entry that the proposals erect. Of course, this should in many cases result in reduced detriment for consumers but an appropriate balance must be found. There are also potentially wider economic impacts resulting from a decrease in the supply of consumer credit and the knock-on effect this may have on consumer spending. This is something that the CBA does not seem to make any attempt to assess. Q28: Do you agree with our assessment of the impacts of our proposals on the protected groups? Are there any others we should consider? We are broadly in agreement. ABCUL November 2013