Committee publish report on regulating consumer credit

• Public Accounts Committee Report: Regulating Consumer Credit
• Public Accounts Committee

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, said:

“With money getting tighter and banks lending less, consumers are increasingly having to turn to alternative providers of credit. Some of these lenders use predatory techniques to target vulnerable people on low incomes, encouraging them to take out loans which, when rolled over with extra interest, rapidly become out of control debts.

“Such disgraceful practices by the shabby end of the credit market are costing borrowers an estimated £450 million or more each year.

“Meanwhile, the Office of Fair Trading, the regulator of this sector, has been ineffective and timid in the extreme. It passively waits for complaints from consumers before acting.  It has never given a fine to any of the 72,000 firms in this market and very rarely revokes a company’s licence.

“It doesn’t understand the market – how much each firm lends and who its customers are - and can’t be certain if directors of companies that have run into trouble are now running other companies.”

“Its investment in regulation is paltry. It could easily have increased its fees, especially to larger credit card companies who only pay a £1,075 fee, and used that income to raise its game as a regulator.”

“The regulatory regime must stop tiptoeing round the problem. The OFT and its successor as regulator, the Financial Conduct Authority, need better intelligence and a willingness, when hearing of poor practice by lenders, to crack down swiftly with tough sanctions.

“It is encouraging to see that, since our hearing, the OFT has announced plans to crack down on unscrupulous behaviour by the 50 largest payday lenders.

“We will be expecting the OFT to show that this marks the start of a genuine step up from the inadequate approach that was evident at our hearing—and to follow through on its threat to revoke licences if these lenders do not mend their ways.

“It would be a big step forward if consumers were given straightforward information on just how much loans are going to cost them. We would like to see the misleading APR rules ditched and replaced by a legally required statement of the Total Amount Repayable in cash.”

Consumer credit in the UK

Margaret Hodge was speaking as the Committee published its 8th Report of this Session which, on the basis of evidence from the Office of Fair Trading, the Financial Services Authority, and companies which lend to consumers, examined consumer credit regulation.

The consumer credit market in the UK is one of the largest in Europe—in 2011-12 £176 billion was lent to consumers. The vast majority of this lending is from credit cards and personal loans, but since the financial crisis less has been borrowed through mainstream lending and we have seen a significant  increase in other types of lending, such as home credit (where loans are purchased and payments collected in the borrower’s home) and payday lending. As banks lend less, and consumers are increasingly turning to other providers it is essential that the regulator is aware of emerging risks and is proactive in protecting the consumer from malpractice.

Office of Fair Trading

The Office of Fair Trading (OFT), the current regulator of this sector, has not been effective in regulating the consumer credit market, where unscrupulous behaviour by some firms is estimated to cost consumers at least £450 million a year. It has failed to proactively identify risks of malpractice, relying instead on complaints from consumers and information from other third parties. The OFT has been timid rather than tough in its enforcement, never having fined any of the 72,000 firms with licences.  It has revoked very few licences, and the process can take up to two years, leaving consumers unprotected from poor practice. It does not effectively prevent “phoenixing” whereby individuals set up new credit businesses under a different name when they have had a licence revoked.

The resources available to the OFT are based on the licence fees it charges lenders, which are ridiculously low and unrelated to the size of the business—for example a large credit card company will pay the same £1,075 fee as a small car dealer that provides credit. In 2011-12, the OFT spent just £11.5 million regulating a market which lent £176 billion to consumers, or £1 for every £15,300 in the market, which is low by comparison with other regulators in other sectors. If the OFT had raised its fees it could have raised its game as a regulator.

The OFT lacks basic information about the consumer credit market, such as the amount of lending by each firm, the products sold by each firm and the  types of consumers buying the products. It has not attempted to quantify the level of harm due to firms not complying with the Consumer Credit Act. This basic information, broken down by types of consumers and types of products, is essential if the regulator is to better understand the market and target its resources in the most effective way to protect customers. 

The regulatory regime is in a period of transition. In 2014 the OFT will cease to exist and consumer credit regulation will pass to the Financial Conduct Authority (FCA), one of the successor bodies to the Financial Services Authority (FSA). The FCA needs to have a fundamentally different and more robust approach, putting consumer protection at its heart. It needs better intelligence so it can prevent consumer harm and it should apply tougher sanctions more swiftly when it is aware of poor practice.

While we are encouraged by some of what we heard about the FCA’s emerging plans, we do not expect to wait until 2014 before we see any meaningful change in the regulatory regime to protect people from malpractice.  In their response to us, we expect the OFT and the FSA, on behalf of the new regulator in waiting, to set out their immediate plans for getting to grips with the problems we highlight in this report.  We plan to return to this subject and review progress in a couple of years. The Department for Business, Innovation and Skills (BIS) is responsible for tackling illegal money-laundering. BIS needs to work far more closely with the OFT and the FCA to identify and tackle those who do the worst harm to the poorest and least credit worthy borrowers.