Advice NI response to the Lending Standards Board Lending Code Review

Advice NI has published his response to the review of the Lending Code review.

Advice NI is a membership organisation that exists to provide leadership, representation and support for independent advice organisations to facilitate the delivery of high quality, sustainable advice services. Advice NI exists to provide its members with the capacity and tools to ensure effective advice services delivery. This includes: advice and information management systems, funding and planning, quality assurance support, NVQs in advice and guidance, social policy co-ordination and ICT development.

Membership of Advice NI is for organisations that provide significant advice and information services to the public. Advice NI has over 65 member organisations operating throughout Northern Ireland and providing information and advocacy services to over 150,000 people each year dealing with over 270,000 enquiries on an extensive range of matters including: social security, housing, debt, consumer and employment issues. For further information, please visit www.adviceni.net.

Advice NI manages the Department of Enterprise Trade and Investment’s (DETI) money and debt programme. Debt Action NI has been operating since 2009. Since then the project has helped over 19,000 people deal with over £298 million in debt.  Over 14,000 of these customers and nearly £200 million of debt were dealt with by the new integrated Debt Action NI service which has been operating across NI since August 2012.  The new service offers a number of access points and integrates telephone, face to face and web based advice services. For further information, please visit www.adviceni.net or www.debtaction-ni.net.

Advice NI also manages the NI Business Debtline which is a free telephone service offering tailored, independent and impartial advice for sole traders, partnerships and Limited Companies. It has been operating since 2013 and is currently part funded by the Money Advice Trust. Since June 2013 the adviser has helped over 700 businesses and has dealt with over 2,100 calls. For further information and to access our factsheets visit www.adviceni.net or www.businessdebtline.org

Response to consultation

General comments

To fully appreciate the purpose of the Lending Code (herein called the Code) it would be useful to understand why certain products are not included in the remit of the Code, for example, secured lending, store cards and insurance products. Many lenders, who subscribe to the Code, offer these other products and perhaps it is time to review these areas to ensure the Code remains meaningful to protecting customers.

Advice NI commends the Lending Standards Board (LSB) on the work they have done to date on getting high interest lenders to subscribe. We would recommend that this work continues and includes organisations such as Credit Unions. In Northern Ireland the Credit Union network serves approximately 34% of the population, while in Britain it is 2%[1]. We recognise that Credit Unions have an important role providing financial support especially to the lower income population. Many are developing new services and products to compete in mainstream banking. Since 2014, Credit Unions are now regulated under the FCA and will undergo more robust financial monitoring. However, we believe some of their practices are unreasonable, for example is how some Credit Unions refuse to offset savings against a debt for Debt Relief Order (DRO) purposes, which means the customer becomes no longer eligible to apply.  We consider this poor practice, as this means customers are either left in limbo or face the prospect of going bankrupt. Many of these customers are on low incomes and financially vulnerable. We believe Credit Unions would benefit from adhering to the Code’s good practice guidelines.

Advice NI believes that it would be beneficial to review some of the language used currently in the Code as it can be too vague, for example “in good time, wherever practical”. Where appropriate the LSB should be more specific in relation to time lines and communications. We would advocate for lengthening time limits to 45 days instead of 30 days, for those who are seeking advice, considering options or are vulnerable.

Similarly, under Key Commitments bullet point 7 we believe this statement is too broad and more guidance should be provided to lenders around what is good practice in the area of providing training to staff, for example, should this be bi-annually, annually, etc. The LSB should have some good examples of what constitutes good practice in this area.

The Code refers to a number of best practice guidelines issued by the UK Credit Cards Association. These guides refer to the Office of Fair Trading (OFT) and  should be reviewed and updated in line with Financial Conduct Authority (FCA) regulations, given that the OFT no longer exists.

Working with the free independent advice sector

On numerous occasions the Code refers to working closely with the free, independent advice sector. Advice NI would advocate that lenders should offer referrals instead of signposting and these should be provided at every appropriate opportunity from pre-arrears to court action. We believe this is vitally important, particularly for vulnerable customers.

Advice NI can see a role for lenders to champion the free, independent money and debt sector as it has proven real benefits for both the customer and ultimately the lender. These benefits were highlighted in the Money Advice Service report, the Effectiveness of Debt Advice in the UK[1]. The report highlighted that those who sought debt advice were twice as likely to start managing their debt within 12 months. In the longer term, they were more likely to continue to manage their debt and had a reduction in the amount owed compared to those who did not seek any advice. Also, Advice UK through their innovative pilot Sustainable Debt Advice Project[1] highlighted that when advice was given there was a higher recovery return for creditors.

It is our experience that lenders continue to contact the customer even though a third party adviser was identified and all relevant information was provided. We have had cases where advisers are negotiating with lenders, the lender ignores the amount offered and then proceeded to contact the customer directly. Often the customer agrees a new unaffordable higher amount due to the stress and pressure they feel by being unexpectedly contacted by the lender.

In one particular case, a customer approached the Debt Action NI service as she had separated from her husband and had been recently diagnosed with cancer.  The adviser started negotiations with the Bank to offer reduced payments.  Upon receiving the offer, the Bank contacted the customer directly to speak about the offer and the implications of making the reduced offer. We feel this practice undermines the advice giving process as it is standard procedure to make customers aware of all available options and consequences. This only serves to prolong the negotiation process which can increases the stress and anxiety experienced by the customer.

In relation to offsetting, when the customer is in financial difficulties and due to receive an amount from a claim then the lender should not automatically use offset to recover monies. A referral should be made for free independent advice, as the client may have a number of debts and this amount could be offered as a settlement which ultimately means the customer could become debt free.

Informed consent and terms and conditions

Advice NI would recommend reviewing how informed consent is obtained and ensuring the customer understands the terms and conditions. The process should be simplified and more meaningful for the customer. We believe this is vital especially with the growth of digital technology. In November 2014, a report was produced for the Science and Technology Committee called Responsible use of Data Fourth Report[1]. This report highlights a number of areas of concern around informed consent and social media but the same could be expressed for online products and sales. In the report, Dr Kevin Macnish, University of Leeds, commented on the problems in using this process for terms and conditions:

“It is widely known that these forms are rarely read in detail or understood. The print is small and the eventual use often obscure. Even if signing the form could be considered an act of consent, it is often not an act of informed consent.”

The same report also discusses the problems with length, language and complexity of terms and conditions. In 2013, the Organisation for Economic Cooperation and Development’s International Survey of Adult Skills for Northern Ireland showed that 18% of the adult population had low levels of literacy[2]. This is particularly worrying when customers buy financial products online, as there is limited opportunity for lenders to clarify that customers understand what they are committing to.

We also do not believe it is effective to resend terms and conditions to customers without highlighting the areas of interest. We would recommend highlighting these in an accompanying letter which would describe liability and changes in plain language with the appropriate section highlighted within the new terms and conditions.

Pre-arrears

Advice NI’s believes there is work to be done around pre-arrears and lenders. We believe the LSB should develop good practice guidelines for lenders to treat those in pre-arrears the same as those who are in difficulty. Our Debt Action NI service has experience of customers presenting before they have fallen into arrears and lenders being unwilling to help. Customers have had to default on payments before lender would begin to negotiate. We believe this is fundamentally wrong and customers should not be penalised when asking for help before they fall into difficulty.

Credit Reference Agencies       

Advice NI believes there is a major problem regarding Credit Reference Agencies (CRAs) as lenders prefer different CRAs to register their information. This means that no one CRA has full disclosure of a customer’s situation. This has caused us some concern in the past when assisting customers to apply for a DRO. Some debts have not appeared on the credit reference check we have obtained but it has on the DRO Units check. Our main concern is if a debt is not included and subsequently not identified throughout the DRO application process, then the customer remains liable for that debt.

 

Under Section 3 Credit Reference Agencies – paragraph 40 describes that

“Subscribers can give CRAs default information about a customer’s debts if: the customer has not made a proposal that satisfies the subscriber for repaying the debt following the subscriber’s formal demands”.

 

We would ask for clarification around this point in line with our previous comments about pre-arrears.  If lenders worked with us at an earlier stage and repayment proposals where agreed, albeit at a lower amount than the contractual, could this mean that lenders may not have to issue default notices? We believe this would be a very positive situation for the customers and may incentivise them to continue to repay the debt.

Lending

The Economic Advisory Group (EAG) reported the restrictions that businesses in Northern Ireland face when trying to access credit[1]. Through our experience of providing the Business Debtline service, we are aware of inconsistencies in lending to small businesses. Different lending practices and marked variations between lending decisions made by banks, has led to confusion for small businesses with many avoiding contact with their bank and being apprehensive when submitting an application for funds. There needs to be better communication from banks regarding the lending application process, as well as a commitment to increase transparency and consistency when it comes to decisions to reject applications for credit.

Under declining an application, paragraph 169, Advice NI is wary of the practice of lenders signposting customers to another lender. In our experience these other lenders are affiliated to the original lender and offer products at a much higher interest rate. How is the LSB monitoring these referrals and are they in line with treating the customer fairly?

Guarantor lending

Advice NI recommends that further work needs to be done to protect customers in relation to guarantor lending. We are concerned with the emergence of the guarantor lending market that some customers will not be protected, especially when applying online.

Our frontline services tell us they deal frequently with guarantor loans where the guarantor rarely seeks independent legal advice, with the majority of guarantors being family members. Our Business Debtline assisted a customer who encountered difficulty when he applied for further credit to a bank. He had been with the bank as a business and personal customer for over 30 years. During this time the customer had honoured all obligations in full. However, the bank insisted, as a condition of credit, the application had to be co-signed by the applicant’s wife and daughter, neither of whom had any involvement in the business. At no point during the application process did the bank insist that the co-signees seek independent legal advice on the matter. We would like to see more robust processes in relation to lenders confirming that third parties have sought independent legal advice and assessing their affordability to repay if the customer cannot pay.

Improving communications and information provided to customers

Under section 1 Key Commitments, we believe that bullet point 3 should be strengthened in light of the work undertaken by the Keep Me Posted campaign[1]. This campaign was established in response to businesses restricting access to paper bills and statements. Advice NI supports the ethos of this campaign and we believe customers should have informed choice about how they received their information. Independent research, carried out on behalf of the campaign, highlighted that it is the most vulnerable in our society that is affected by this loss of choice. Therefore this point could be strengthened by including the following,

“Regular statements will be made available to customers and by the most appropriate method for that particular customer”

We would suggest that the LSB consider adding other methods of communication such as letters, text, an app message, email and any other form of preferred contact that the customer has consented to. Also where possible, lenders should provide their information in an appropriate format for those who are disabled. One of our advisers recently assisted a customer who was registered blind with mental health issues. They submitted a mortgage PPI complaint and it highlighted that the lender never communicated with the customer in the appropriate format.  The complaint was not upheld as the lender said they had responded to a previous complaint in 2012 and that the right to appeal had lapsed. However, the customer was unaware of this due to the lender not communicating in the appropriate format as she was unable to read their letters. The adviser requested a copy of the original paperwork and they contacted Financial Ombudsman Service (FOS), who confirmed that a complaint can be re-submitted in exceptional circumstances i.e. the customer was unable to read the previous letters.  The complaint was resubmitted and the lender did not reply within the proper times, therefore the case has been referred to FOS.

Where a customer, including a micro business, has been refused any product whether it was based on information gained from a CRA or not, we believe that lenders should automatically provide a full explanation for the refusal, along with the details of the appropriate CRA used and how they can rectify incorrect information or dispute the decision. We do not think the onus should be on the customer to request this information. This change would not incur extra costs to lenders as they already have the information available to them.

In relation to rescue plans, Advice NI’s Business Debtline has assisted in a case whereby a bank has previously accepted a rescue plan and the customer has subsequently cleared the arrears and kept to the terms imposed by the bank to settle the debt arrears. However, the bank then decided to write to the customer over six months later giving notice that they are to close the account 60 days from the letter date. They cited the reason “due to your conduct with the account” and stated the total balance fell due within 30 days of the account close date. We deem this to be extremely confusing practice. This customer had taken sufficient steps to begin repaying his debts only to be told after six months the bank were going to close the account. The customer is still in a position to settle the agreed payments. We find the banks actions in this matter concerning especially as there was no warning or due diligence shown.

Under paragraph 129, regarding minimum payments, we believe that lenders should also include personal warning information, such as paying your current minimum payment means it would take XX amount of years to pay off the card.  At a recent event, one of the larger CRAs informed us that if a customer makes slightly more than their minimum payment (e.g. an increase of £1 per month) then this will have a more positive effect on their credit rating.  We believe that lenders should provide this information as it is vital to promoting better financial knowledge, skills and future resilience among customers.    

In relation to pre-notification of interest rate increases, information provided to the customers should always be personalised and information provided should be based on their balance. This will provide better customer understanding of the implications which will assist them to budget better and help them prepare for the change. We believe that lenders should always provide an explanation of the increase being made and this should be provided in user friendly language.

Under credit statements, paragraph 127, we have anecdotally been told by customers that you need to download paper statements to see full and proper information regarding interest rates. Full information should be made available on online statements as some customers may not have the facility to print these off conveniently.

Extending credit limits

Advice NI believes that extending overdrafts should not be automatic and only done when the customer has given explicit consent and that lenders should ensure the customer fully understands the risks involved. Advice NI supported a single parent who had her overdraft which she frequently used to support her income increased automatically a number of times. Suddenly, the bank called in the full overdraft which was nearly £1,800. The client was very distressed and was unaware the bank could do this. We were able to negotiate repayments which meant she gradually reduced the full amount but the customer had to severely cut back on her budget. This situation escalated due to the bank automatically increasing the credit then suddenly calling in the debt which left the customer in financial hardship.

Similarly, Advice NI does not advocate practices of unsolicited credit limit increases. We believe this is unfair practice and any increase should only be made upon the request of the customer. Lenders are placing the onus on the customer to opt out which means the customer may unwittingly accept something they cannot afford or are not fully aware of how to refuse the increase. Advice NI is aware of some circumstances where lenders have increased credit limits, and when the customer takes advantage of the additional funds the interest rate has increased a short time afterwards.

Where this happens the lender should carry out a new assessment of affordability to repay as initially the customer may only have budgeted for the increase on the current interest rate. The only current option available to the customer is to close down the account and pay off the existing debt, but this means that they can no longer access this line of credit and may lose the only access to credit they have. We would recommend that the Code introduce a stated timescale where credit card companies are unable to increase the APR on an account for a period after offering an additional credit limit, and this should be clearly detailed on the notice to inform of the new credit limit.

Under paragraph 122 we believe that the time period should be set at an eight week minimum limit to allow the customer to properly adjust, budget and we would recommend that lenders refer to the free, independent advice sector for support.

True cost of lending

Advice NI would recommend that lenders should emphasis to customers the true cost of credit card cheques. The interest rates charged on credit card cheques are much higher than a normal credit card rate. Also with credit card cheques it is not always noted that you will be charged interest from the moment the cheque is used until the entire balance is paid off unlike using a credit card where you have a grace period of up to 60 days before interest is added. Also, many people are unaware of the handling fees for credit card cheques and although the interest cost to the customer is usually noted, we feel that the cost per £100 should be noted on the correspondence so the customer can see a true reflection of the cost incurred.

 

We are also aware of customers applying for products as they seen a good rep APR, however in some cases customers have not actually received the products at the advertised rep APR but are actually paying at a much higher rate. Many have not realised that the advertising “rep” means representative and this may not be the rate applied to the credit. When queried with the lender, our customers have been told that it was due to their credit file and all information was in the terms and conditions. This again highlights the issue of lenders not providing appropriate information to customers or ensuring they have fully understood the product they are liable for. What is more, it is only once the customer’s application has been approved that they become aware of the actual rate of APR they have to pay. We find this practice unfair as customers are confused about what they actually have to pay.

Under Section 6 Credit Cards, paragraph 108, we would recommend the LSB also include bank and public holidays. There should also be allowance for payments to clear over holiday periods.  In one case a customer incurred charges on her credit card bill as the payment took longer to clear due to a Bank Holiday.

Improving the negotiation process

Advice NI supports the use of the Common Financial Statement (CFS) and we believe is a robust tool for the industry when assessing a customer’s financial situation. The CFS is currently under review and recent proposals were being consulted on to replace it with a new improved Standard Financial Statement (SFS). We would like to see the LSB champion the new SFS among its subscribers and incorporate it into the Code. We have found this tool invaluable as it makes the negotiation process more effective and efficient.

Advice NI advocate that lenders should stop interest and charges when a customer, or their advisers, evidences that they are in financial difficulties. Often customers are not in a position to repay the full amount and by continuing to add these on to an account only adversely compounds the situation. If the customer is able to increase their repayments then the lender could reassess the situation and consider re-applying interest but not backdate it. We believe paragraph 225 is too vague and is open to interpretation as it is the lender who decides the customer’s situation is becoming excessive. We would suggest that the lender automatically stops interest accruing until it is proven that the customer is in a position to repay the amount in full.

Under debt recovery procedures we are still experiencing lenders threatening bailiffs in Northern Ireland which is incorrect advice as bailiffs have no jurisdiction to operate in Northern Ireland. This should be rectified as it only confuses customers and heightens what is already a very stressful situation.

Under debt collection agencies and debt sales we believe the LSB should add in time lines for lenders to monitor debt purchasers. We would also recommend that if third party money and debt advisers are negotiating on behalf of a customer they should also be informed when a customer’s debt is being sold to a Debt Management Company (DMC).

An example of this poor practice is a Debt Action NI customer who had been through the DRO process.  A lender who was involved in the process had passed the debt to a DMC who continued to pursue the customer for the debt.  When the adviser lodged a formal complaint he was told by the DMC that the debt had been passed back to the original creditor.  When a complaint was made to the creditor they told the adviser that they would not deal with the complaint as the debt had been sold on. We find this behaviour as unacceptable due to the fact the debt was written off by the DRO.

Contact information on this consultation response:

Bob Stronge (Chief Executive) Email:  bob@adviceni.net

Fiona Magee (Deputy Chief Executive) Email: Fiona@adviceni.net

Sinéad Campbell (Head of Money and Debt Services) Email: sinead@adviceni.net

Advice NI

1 Rushfield Avenue

Belfast

BT7 3FP

Tel: 028 9064 5919

Fax: 028 9049 231

 Website: www.adviceni.net    

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