Credit brokers 'prey on borrowers'

Tuesday 21 January 2014

Credit brokers are preying on cash-strapped borrowers by "posing" as payday lenders and charging unexpected fees for organising loans, according to evidence compiled by Citizens Advice.

The debt advice charity said consumers are being charged set-up costs of £70 on top of the expense of taking out a payday loan - and in some cases brokers are siphoning cash away from people's bank accounts without their clear permission.

Citizens Advice warned that borrowers using a broker often believe they are dealing directly with a payday loan company because websites and texts from some brokers do not make this clear. Borrowers are then hit with an unexpected fee for arranging the loan.

The charity analysed 490 complaints reported to it about credit brokers between June and July 2013.

Two-fifths of cases involved the up-front fees charged by these "middlemen" firms. Of these, 58% of cases involved people being hit with unexpected fees and the remaining 42% involved "deceptive practices" - including people being charged a much higher fee than agreed, fees being imposed for services they never signed up to and firms pretending to be the lender at the other end of the chain instead of the go-between.

One fifth of consumers who complained to Citizens Advice had their card details passed on to other brokers without their knowledge. Some people had not even completed the application process but still found their cards being charged.

Fees are refundable if a loan is not taken out - but Citizens Advice analysis of 228 cases where a customer attempted to get a refund found that 28% were refused, 14% were promised a refund which never appeared and 42% struggled to even get in touch with the broker.

Citizens Advice estimates 3,000 problems with credit brokers were reported to it over the last year. But the consumer body believes many more people who are having problems do not even realise they are dealing with a broker.

In one case seen by the charity, a young woman sought help after she applied for a payday loan and was bombarded with texts from other payday loan firms "within seconds".

She contacted two or three of them but decided not to take out a loan. Over the next few days she found that several sums had been drained out of her bank account from different brokers, despite the fact that no loan had been given.

The payday lending industry is facing a clampdown. Tough new regulator the Financial Conduct Authority (FCA) recently announced plans to crack down on the sector, including limiting the number of times payday lenders are allowed to roll over loans to twice, forcing them to put "risk warnings" on their advertising and limiting the number of attempts lenders can make to claw back money if there is insufficient cash in a borrower's bank account to two.

The FCA is also considering the fees charged by payday firms to borrowers who default as part of plans for a cap on the total cost of credit. The Competition Commission will produce a report into the payday industry later this year.

Citizens Advice wants the FCA, which takes over regulation of consumer credit in April, to take an equally tough stance with credit brokers.

Citizens Advice chief executive Gillian Guy said: "Credit brokers should not be making people's money problems worse by charging unexpected fees.

"In some cases, brokers are preying on people's need for short-term credit and adding to the pain of poor payday lending by posing as a direct lender."

Urging brokers to be more transparent, she continued: "The FCA needs to recognise the harm menaces in this industry can cause and come down hard on those who break the rules.

"Preventing unscrupulous brokers from entering the market in the first place, through a strict authorisation process, is essential.

"The FCA should also be seriously concerned about the prevalence of data sharing among brokers as money is being siphoned from people's bank account without clear permission."