Shape up or be closed down FCA warns logbook lenders
The Financial Conduct Authority (FCA) has criticised the logbook loan industry for “poor firm behaviour,” saying that many companies are failing in their responsibilities.
The FCA has threatened to prevent logbook lenders from continuing their operations if they do not “dramatically raise their standards”.
The announcement comes in the wake of an investigation into how logbook loan firms treat their customers – and the findings are not impressive.
What are logbook loans?
A logbook loan is where a customer borrows cash against the value of their car or other vehicle. You hand over the ‘logbook’ or V5 registration document to the lender at the start of the loan, and ownership of the vehicle is transferred to the lender until the debt is repaid.
It’s a secured loan where the customer's asset (their vehicle) is at potential risk of repossession, and the lender won’t even need a court order to do so if the borrower defaults on the loan.
The FCA took over regulation of consumer credit firms, including the logbook loan industry, on 1st April 2014 and are taking sector-by-sector action to improve the industry.
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The lowdown on logbook loans
Logbook loans range in size from around £500 to £50,000. The average amount borrowed is approximately £1,000, and the amount that individuals can borrow is affected by how much they can afford to repay and the term of the loan.
Loans are usually arranged to last between six and eighteen months, and APRs are typically 400% or more. Logbook loans can be approved in as little as a few hours to a few days.
The new research revealed that borrowers often take out logbook loans as a last resort and are often left not knowing the exact details of the loan, including the fact that ownership transfers to the lender during the loan period.
Borrowers were unlikely to shop around for the best deal, and frequently came across the product and lender they chose at the same time.
The FCA’s warning
The FCA found evidence of poor behaviour from firms that included little or no affordability checks – and some applicants were even encouraged to manipulate their income details on their application forms.
Lenders pressured borrowers to take out a loan without informing them about cooling off periods, avoiding discussing the APR or the total amount that would need to be repaid over the loan’s duration, or the potential consequences for the borrower (such as losing their vehicle).
Christopher Woolard, director of policy, risk and research at the FCA, said that people who use this type of loan are often already “in difficult circumstances” and have turned to it because they have few borrowing options left.
Logbook lenders will need to apply for full authorisation from 1st January 2014 and before April 2015, and Mr Woolard has warned that if firms don’t “put their customers first,” the FCA will not hesitate to remove them from the market.
The FCA will have the power to bring criminal, civil and disciplinary proceedings against companies who do not toe the line, and can also ban them from financial services, suspend firms and individuals for 12 months and issue unlimited fines.
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With the FCA looking on, will companies clean up their act? Should the Government have acted sooner to introduce stricter regulation of consumer credit firms? Let us know your thoughts in the comments below.
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