Lenders and brokers could face enforcement action by the Office of Fair Trading if government authorities decide they have used unfair and unnecessary practices to sell debt consolidation loans.
An OFT fact-finding study was conducted recently with consumer groups and trade bodies to ascertain whether marketing of debt consolidation products and loans could be fairer, cheaper and transparent.
However, details of the report published yesterday – as part of the Enterprise Act 2002 and reform of the Consumer Credit Act 1974 – suggests lenders are using unfair practices to tie consumers in, little independent advice offered to consumers on debt consolidation and consumers do not totally understand what they are signing up to when they take out a consolidation loan agreement so may not be aware debt consolidation in many cases actually increases rather than decreases the long-term cost of debt.
A separate OFT investigation will now consider whether lenders requirement on consumers, to use debt consolidation as a way of tackling debt problems, is above board and in accordance with their credit licences, and whether companies should therefore receive some form of enforcement action.
A second review later this year will also look into the marketing practices of companies as several are thought to have breached credit advertising rules too.
Some of those practices the OFT deem to be unfair include requiring existing customers to take out debt consolidation loans when there may be no need, intimating the loan needs to be signed immediately or is only available for a very short time period, sale of payment protection insurance (PPI) in cases where the holder may not be able to make a claim, and the adoption of volume override commission arrangements by some insurance brokers, because it pays a higher rate of commission for bulk loan business.
In particular, Jonathan May, director of the markets and policy initiatives division of the OFT, says part of the reason consumers know so little about the deal they sign up to is lenders tend to avoid dealing with difficult questions or do not give them information about their loan in a simple, accessible manner.
The OFT says the potential advantages of consolidation through a secured (mortgage-based) or unsecured loan and lower rate credit cards can in the long-term be overridden by any new deal as payments may look cheaper but are spread over a longer period of time and increasing the overall cost.
It is also only at the end of the sales process the consumer really knows the interest rate they will pay and the additional – sometimes very expensive - insurance cover some lenders require in order to complete the loan agreement.
There may also be signs of ‘churning’ by lenders towards the end of a consumer’s loan agreements, which benefits the lender but not the consumer, when the policyholders may benefit from a different course of action.
As a result, changes need to be made, says the OFT, as consumers taking out a loan need to know:
- what debt consolidation is and what the alternatives are;
- what the interest rate and APR is and whether it is variable;
- what the overall cost of the loan is;
- what the monthly repayments are:
- whether there are additional features which will change the rate at which the capital sum is paid back;
- what happens if they miss a payment;
- what happens if they want to repay or refinance early, and
- if the loan is secured on their home, the consequences of not keeping up with payments and what happens if they want to move.
As a results of the review now taken, the OFT will launch a consumer education campaign later this year about the different forms of credit and credit cards, which it hopes will eventually tie up to education presented by the Financial Services Authority.
Although the FSA is not responsible for all loan management at this stage, the report does tend to suggest the City regulator may be asked to take on that responsibility at a later date as the OFT is now considering.
The OFT intimates some lenders and brokers firms could face enforcement action - even though this industry is largely still self-regulated - as lack of information and explanation to consumers could be seen as tantamount to deception.
Data gathered by the OFT suggests 50% of all personal lending is actually carried out by the big four high street banks – Lloyds TSB, Barclays, HSBC and RBS/NatWest – while second charge or debt consolidation loans tend to be offered by brokers.
In a week where news surfaced of one man committed suicide because of his huge credit card debts, the Treasury Select Committee has also announced it will next week present a report in the charging activities and practices of credit card firms.IFAonline
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