If you happened to be passing the offices of Talk Loans in early December last year you may have heard a heartfelt cheer escape from the office window, despite the gloomy weather and the pre-Christmas stress. Had you peeked through the window you would have found the reason for these high spirits was the FCA website, and in particular its announcement of new regulations to control the activity of charging upfront broker fees on an unsuspecting public.
Talk Loans was set up because we felt that the current broker models available to consumers were largely flawed and that we could do a better a job for the consumer – and yes, there is of course a commercial element to that, deliver happy consumers and they can deliver a successful business model. The vast majority of available credit brokers operated solely online and a significant number charged applicants an upfront broker fee for their services (I had to fight hard to stop myself putting ‘services’ in quotations).
The charging of upfront broker fees, whilst not new, has become much more prevalent in the post Credit Crunch, online broker world. The traditional model sees brokers doing their work on behalf of the applicants and being paid a commission by the lenders if their work is successful – in other words if the applicant actually takes out a loan. It works because it means the broker is only rewarded if their work produces the applicant’s desired outcome and as such the applicant is not out of pocket either way.
The upfront broker fee takes away all of the risk from the broker operation by rewarding the broker upfront, regardless of the outcome of their work. In my opinion, this shifting of risk (from success-based rewards to guaranteed rewards) encourages a lazy attitude in some brokers to actually finish the job they’re paid for and switches the broker’s attention from finding applicants a loan to simply finding more applicants.
So it was with relish that the new FCA rules were digested in the Talk Loans office as they outlined the regulator’s approach in tightening up how credit brokers who charge upfront fees operate. I won’t go into the details here – enough has been written about them in these pages and elsewhere and the FCA itself provides a simple summary here.
However the biggest, practical change is that if a broker wants to charge an applicant an upfront fee it will now need to write to or email them, individually, setting out the details of the fee and get an individual response from the customer before they can even ask for card details. This slows down the process, giving the applicant time to think and reflect on whether or not it’s a good idea to part with their money before the broker has done a stroke of work (the answer’s no in case you’re still in any doubt).
The other upside for consumers should be a move away from some brokers making outrageous claims about their ability to secure the applicant a loan – if they’d just pay the fee now. Consumers in the non-high street credit markets often don’t understand the products available and don’t know who to ask to find out more information. It must therefore be tempting to pay somebody who’s claiming that they can guarantee to get you a loan (just for the record those claims are inherently wrong or misleading for 2 reasons; firstly, the broker is a broker not a lender so can’t guarantee anything on the lenders’ behalf, secondly, they claim to get you ‘a loan’, not necessarily the loan you want. There’s a big difference between applying for a £2,000 loan to help your daughter have the wedding of her dreams and being offered £250 to be repaid next month).
So for Talk Loans, Christmas came a little early last year and the new rules came into effect this week. The rules could have gone further (there was no limit on the fees and no outright ban) but that is perhaps a little unfair of me – they are a massive step in the right direction and give a clear indication of the attitude of the regulators. It is telling that the FCA made these changes without first consulting with the market, a highly unusual step which emphasises their approach, as echoed by this statement from them,
“where we see evidence of customers being treated in a blatantly unfair way, we will move quickly to protect consumers from further harm”
Having said that, I’ll leave you with an anecdote which if nothing else shows the mind-set of some people operating in this market. A week or so after the announcement of the new rules, a very good friend of mine, who is the CEO of an instalment lender, was contacted by one of his brokers who did not charge upfront fees. The broker explained that having read the new rules he felt he was ‘missing out’ on charging upfront fees and would be switching to do so in the New Year. My friend was almost speechless but thankfully found enough of a vocabulary to explain to the broker that should he decide to do so, they would not be doing business together in the future.
Let’s hope that sentiment and message prevails, allowing ethical brokers to compete on a more level playing field which is far more in the best interests of the consumer.