New rules target credit brokers treating customers “in a blatantly unfair way”

New rules designed to protect borrowers when they are looking for a short-term loan are to be introduced from 2 January 2015.

The announcement from the Financial Services Authority (FCA) has been welcomed by Debt Advice Foundation, which has campaigned for stricter controls for online credit brokers and “lead generators”.

Brokers are being targeted by the FCA because, it says, they treat customers “in a blatantly unfair way”. 

More than 40 per cent of consumer credit complaints received by the FCA relate to credit brokers and 80 per cent of these relate to firms who charge upfront fees.

Credit brokers often advertise themselves as if they were lenders but in fact charge an upfront fee and then sell lists of customers' details to loan companies.  If no lender offers the customer a loan, the fee may still charged.

It is estimated that brokers have made as many as one million attempts a month to take fees from the bank accounts of people who thought they were applying to a loan company. While promising to find a loan, they charge a fee of £50 to £75, and then share the person’s bank details with as many as 200 other companies.

The FCA has set out a list of its concerns:

  • a lack of transparency, resulting in consumers often not realising they are dealing with a broker rather than a lender;
  • fees being taken without informed consent, for example where terms and conditions are hidden or misleading;
  • consumers being misled as to the purpose of giving their payment details;
  • firms passing on consumers’ details, including their payment details, without informed consent, to other firms who also take a fee;
  • consumers facing difficulty in identifying the firm that has taken a fee, and in obtaining a refund from the firm or a response to their complaint.

Under the new rules, credit brokers must:

  • include their legal name, not just their trading name, in all advertising and other communications with customers;
  • state prominently in all advertising that they are a credit broker and not a lender; and
  • report quarterly to the FCA listing their website domain names, if they charge fees to customers.

The new rules also state that consumers will also have a 14-day right of cancellation where credit broking contracts are entered into as “distance contracts”, for example online.

Debt Advice Foundation Chief Executive David Rodger commented: “We are very pleased that the FCA has focused on some of the worst practices in the consumer credit market. 

“Many credit brokers have been preying on the most financially vulnerable members of society.  However the new rules will still allow them to take fees upfront even if the customer does not find a loan – it remains to be seen whether this will be made perfectly clear on credit broker websites. 

“There is still a lot of work to do to protect people who are struggling with debts, and we are pleased to see that the FCA is continuing to investigate the disgraceful practices of some operators in the consumer credit market.”

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For the full FCA announcement, click here