FCA says logbook lenders must raise standards

Logbook lenders that want to continue operating under Financial Conduct Authority (FCA) regulation will need to dramatically raise their standards, as research published today lifts the lid on how these firms treat their customers.

The FCA has found evidence of poor firm behaviour, including little or no affordability checks with some applicants encouraged to manipulate details of their income on application forms. It also found some lenders pressuring people to take out a loan without being informed about a cooling off period, failing to mention the APR, total amount to be paid, or the potential consequences – including vehicle repossession - if consumers miss repayments.

Christopher Woolard, director of policy, risk and research at the FCA said:

“People who use logbook loans are often in difficult circumstances with few other borrowing options. The last thing that should be happening is for them to be squeezed yet more or even threatened, but that is what our research has found.

"Our new rules give us the power to tackle those firms found not putting customers’ interests first and remove them from the market if they don’t improve. Logbook lenders should consider this as fair notice to improve and put their customers first or we won’t hesitate to take action.”

The research, which was carried out in November and December 2013, also found:

• consumers who take out logbook loans often do so as a last resort, having exhausted other possible avenues for credit
• many borrowers are in vulnerable circumstances and are often unclear about important aspects of the agreement, such as the total cost of the loan or the fact that ownership of the vehicle transfers to the lender
• borrowers rarely shop around for the best deal and many people come across the product and the lender they choose at the same time.

Logbook loans range in size from about £500 to £50,000, with the average amount borrowed about £1,000 depending on the value of the vehicle. Loans usually last between six to 18 months, while a typical APR is 400% or higher. The time taken to approve a loan varies from a few hours to a few days.

The FCA took on responsibility for regulating logbook loans on 1 April 2014 as part of consumer credit. Every firm currently doing consumer credit business has to have an ‘interim permission’, but will need to become fully authorised by the FCA. Sector by sector, starting with those that pose the greatest risk to consumers, the FCA will be inviting firms to become fully authorised and in doing so will look closely at their business model, culture and management team. Logbook lenders will need to apply for full authorisation from 1 January 2015 and before 1 April 2015. Any firms that can’t meet the tougher requirements will not be authorised.

The FCA has also published research into consumer experiences of debt management and payday firms. The key findings include:

Debt management:

• consumers often have multiple debts that they can no longer manage, and only seek debt management providers when in urgent need.
• most research participants had debts of between £15,000 to £30,000, some people had multiple debts up to £100,000.
• consumers have limited knowledge of the market, place trust in debt management providers and don’t shop around.  This makes it hard for them to ensure they receive a high quality and value-for-money service.
• evidence of poor firm behaviour: advisers lacking necessary training, poor quality or incorrect advice, a lack of distinction between advice and sales, lack of clarity about the charges involved in a debt management plan
• consumer confusion on debt management providers’ actions after a plan has been set up, for example, on how their payments were being managed, with consumers receiving complaints from creditors that they were not being paid

Payday:

• the majority of research respondents accessed payday loans because they had few alternative credit options
• lenders often engaged in unwanted marketing practices, such as emails, texts and phone calls
• consumers’ shopping around was limited, with little attention paid to expense, and more focus on brand awareness, reputation and website look and feel
• accessing a payday loan was often described as ‘surprisingly easy’, with limited checks in place
• borrowers were often unclear about important aspects of the loan agreement, such as the cost of rolling over or extending a loan, and the role of continuous payment authorities
• lenders actively encouraged consumers to rollover/extend loans
• consumers were frequently surprised at how easy it was to rollover or extend their loan and the additional cost that this could incur. As a result, many ended up in ‘cycles’ that they struggled to break
• lender-borrower communication was often minimal, with consumers struggling to make contact and negotiate forbearance options

Notes to Editors

1. The full research report, which contains consumer experiences of dealing with logbook lenders, debt management firms, and payday lenders can be found on the FCA website.[1]
2. On 1 April 2014, the FCA took over responsibility for consumer credit and the regulation of 50,000 consumer credit firms, including logbook lenders, payday lenders and debt management firms.
3. On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
4. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
5. Find out more information about the FCA[2].