Yesterday we published our response to the latest FCA consultations into high-cost credit, this time in relation to overdrafts and ‘buy now, pay later’ schemes.
The FCA’s focus on high-cost credit as part of its review of the sector is welcome, along with the action it has proposed in areas such as the rent-to-own market and with overdraft fees and charges.
However, another area of high-cost credit that continues to remain an issue and needs urgent reform is the detriment caused by so called ‘logbook loans’.
What is a Bill of Sale?
Bills of Sale are commonly used to secure a ‘logbook loan’ on goods you already own – usually a car – and are a form of high-cost lending based on legislation that dates back to the 19th century. This is a form of high-cost lending that has been a source of considerable problems for vulnerable borrowers and innocent vehicle purchasers. The advice sector has repeatedly raised concerns about consumer harm arising from this type of lending.
Whatever happened to the Goods Mortgages Bill?
Legislation to reform bills of sale was announced in the June 2017 Queen’s Speech. This legislation was drafted by the Law Commission following a comprehensive review commissioned by the Treasury in September 2014 and published two years later. The Goods Mortgages Bill had been expected to be passed into law via special Parliamentary procedures that exist for uncontroversial Law Commission bills of this kind.
Instead, back in May last year, the government announced it “will not introduce legislation at this point in time”, and will instead “continue to work with the FCA as they carry out their high-cost credit review, and then further consider government action on alternatives to high-cost credit” in light of its findings.
This was a deeply disappointing decision by the government. We worked closely with the Law Commission alongside our advice sector partners to develop the Bill, and felt that the proposed reforms were uncontroversial and would have had widespread support.
The timing of this announcement could not have been worse. The FCA at this point had already issued its feedback statement with the outcome of its high-cost credit review. In this it stated that it would not tackle bills of sale as a priority area specifically because of the expected Goods Mortgages Bill reforms.
So what next?
When the government announced that it was not introducing legislation in this area the FCA was already deep into its review of high-cost credit, of which logbook loans was not a part.
Now, 10 months on, it is up to the FCA to look again at the logbook loan industry. It needs to evaluate what powers it has to alleviate the detriment caused by the ancient bills of sale legislation and whether it can amend its own rules to tackle bad practice by individual lenders. In some cases, it may need to explore whether other legislative changes would help.
For example, it seems particularly unfair that people who have innocently bought a second hand car with no knowledge of an existing logbook loan attached to the car can still lose the vehicle. Rules need to be put in place to prevent logbook lenders from repossessing vehicles purchased in good faith by innocent third parties.
The potential harm caused by the loss of a vehicle for a loan that may only total a fraction of the value of such an asset is substantial.
Six possible steps
We have identified six areas where the FCA may be able to intervene.
- Make sure that proper affordability checks are carried out so people only borrow what they can afford to pay.
- Logbook loans are typically offered at very high interest rates. The FCA should consider whether a variation of the price cap for high-cost, short-term credit should be applied to the logbook loan industry.
- Ensure there are adequate explanations given about taking out a logbook loan.
- Ensure there is adequate information on the costs of borrowing as people do not understand how much they have to repay or that they run the risk of losing their vehicle.
- Take action in relation to default charges made by lenders.
- Enhance the protection of borrowers in debt in relation to forbearance and poor debt collection activities by lenders.
We are pleased to see that some of these issues are on the FCA’s radar. In a recent letter to heads of firms providing high-cost credit, including logbook loans, the regulator called on lenders to consider the risks their firms pose to consumers.
We hope this is an indication that the FCA plans to take robust action in this sector.
Keeping up the pace of change
Since taking over responsibility for regulating consumer credit, the FCA has built a solid reputation for protecting consumers – particularly in the area of high cost credit. Its successful payday lending cost cap and recent announcements on rent-to-own and overdrafts all represent real progress. We hope the regulator will continue to look at other areas – including logbook loans and guarantor lending – to keep up the pace of change.