Member Article

Clampdown on Rogue Lenders

Trust in financial facilities has been waning ever since the banks’ fiasco in 2008, causing massive meltdowns the world over. Now, that faith is far from being restored following further detrimental exploits.

Over the last few weeks, the news in the UK has heavily featured payday loan companies and banks attempting to swindle customers out of money through fake debt collection letters. The national financial regulator has begun clamping down on such bodies as a result, as well as others who are also acting outside their moral grounds.

Areas such as the automotive, pensions and price comparison sectors have all had some sort of run-in with the regulator, which goes by the name of the Financial Conduct Authority (FCA).

Faking it

Guilty of the same charge, both Wonga and Lloyds were found to have been sending out letters to customers from fake or dissolved third party solicitors in order to collect owed debts.

As Britain’s best-known payday lender, Wonga sent out 45,000 letters over the two years between October 2008 and November 2010 to customers struggling to pay back their loans. These letters were headed with the bogus solicitor Chainey D’Amato & Shannon Barker & Lowe Legal Recoveries to make these customers believe their debts had been passed onto a third party.

The FCA declared Wonga had engaged in “unfair and misleading debt collection practices”, and as a result, related files to this instance have been passed onto the police and the FCA has ordered Wonga to pay out £2.6m in compensation to the customers affected.

Lloyds on the other hand was using what turned out to be a law firm that worked within the bank itself. Letters were sent to customers who owed the bank money from the 1980s to the present day under the name SCM Solicitors, which Lloyds admitted was a firm within the bank and had actually ceased business in 2011.

Barclays, Halifax, RBS and HSBC are among a group of banks who have been found to be guilty of such activities, but Lloyds has been singled out in-particularly and whose actions have been deemed as “calculated to mislead” by the chairman of the Treasury Select Committee.

Capping lenders’ interest rates

Such immoral actions will have consequences, with the FCA planning a cap on the amount that payday lenders can charge their customers in regards to APR (annual percentage rate). The proposed cap of 0.8% a day of the amount borrowed would mean payday loan companies would lose an estimated £420m a year as a result – 42% of their revenue. Wonga currently charges £37.15 to borrow £100 over one month, but under the cap this number would be cut to £24.

Research conducted by the FCA on other countries who operate caps has found negative results when a fixed percentage has been implemented. Australia operate an 4% cap per month with a maximum 20% up-front fee and it has been found that a lot have turned to illegal lenders and back-street loan sharks, causing the fear that lenders may search outside of the UK if such a limit is placed upon loans.

Conflict of interests

The FCA’s eyes are also focussed on insurance price comparison websites after it was found that some such comparison sites are in fact owned by an insurance company or broker.

For example website Gocompare.com subtly tells customers in its small print that it is 50% owned by Esure, an insurance company; meanwhile, the website Confused.com sneakily states that it is owned by Admiral Insurance.

However, Confused.com insists it is a “completely separate business” and aim for impartiality and independence. Additionally, while the FCA is worried about such arrangements, it is yet to find evidence of these companies profiting as a result of having such a potentially biased parent company.

Managing consumer expectations

Another issue with these comparison sites has found to be the lack of information given out to consumers being distributed by these firms and their general confusing nature.

According to the FCA, consumers’ expectations are not being met and the sites are actually confusing customers rather than helping them make a decision. The authority reviewed 14 sites, with most of them deemed “unclear” by the FCA and some were even failing regulatory standards.

The comparison sites were found to focus too much on the prices of potential insurance premiums and do not explain consumers about other important policy details, such as the excess costs in the event of a claim.

Attention has also been given to the pensions sector where the FCA has informed insurers that they should be notify customers approaching retirement that they are entitled to free and impartial advice and guidance. Such insurers should also be providing their customers with key information about their pension pot, how much they have and any market value reductions, says the FCA.

Where does this leave us as consumers?

Transparency is now the key issue when it comes to financial services, with companies being encouraged by such bodies as the FCA to be clearer on their facilities and to help the consumer to a more comprehensive degree.

In some areas, the FCA is feeling more optimistic about firms adhering to regulation; the automotive industry, for example, has reacted positively and the general feeling is that dealers and manufacturers are more engaged with the regulator with better outcomes for consumers as a result. Even car finance firms are being more open to factors such as bad credit, with websites such as the recently relaunched Clearwaycarfinance.co.uk being clear and transparent on what it means to get car finance with a poor credit history, with APRs in that area soaring up to 60%.

However, this follows the FCA raising £425m in financial penalties during the last 12 months, whilst it has also banned 26 firms and individuals in that time from operating in the regulated sector. Such a heavy number of sanctions could hinder that trust element between consumer and facility even further; but in truth, companies and firms will no doubt learn from their own mistakes as well as those of others, especially when their short-sightedness is as high profile as that of Wonga and Lloyds.

This was posted in Bdaily's Members' News section by Sam Bisby .