MSE News: Payday lenders face OFT crackdown over debt collection

Deceptive and/or unfair methods

3.8 Dealings with debtors and others are not to be deceitful and/or unfair.

3.9 Examples of unfair or improper practices are as follows:

.....

.....

m. misusing a continuous payment authority (CPA) 48 including by 49


(i) using the CPA other than as set out in the credit agreement or without the informed consent of the debtor or a relevant third party 50

For example:

• debiting a higher amount than agreed, or adding default fees or other sums unless specifically agreed
• debiting a lesser amount than agreed, unless it was specifically agreed that this could be done if the full amount was not available (or under a repayment plan)
• debiting an account before the due date for repayment (as specified in or under the credit agreement)
• debiting the account after the due date on a date, or within a period, or with a frequency, other than as specifically agreed
• debiting the account of a third party other than as specifically agreed with the third party or with the debtor acting with the consent of the third party. 51

By ‘specifically agreed’, we mean that the relevant account (and card details), the amount (or the basis on which part payments or default fees or other sums may be taken), the due date 52 (and an alternative payment date where applicable), the period within which attempts may be made and the frequency of such attempts must be specified in the credit agreement and included in a pre-contractual explanation (see below). 53

48 A continuous payment authority authorises the creditor to withdraw sums from the debtor’s account, subject to agreed terms, but not through a direct debit, standing order or similar payment mechanism.

49 In line with section 25(2A)(b)(iii) of the Act, in determining fitness the OFT will also of course have regard to whether the contractual terms or practices used in relation to a CPA contravene any enactment regarding transactions with individuals.

50 Signature of the credit agreement is not sufficient to evidence informed consent by the debtor. The debtor must also be given an adequate pre-contractual explanation.

51 This refers to the situation where a third party has agreed to make repayment of a loan that is subject to a CPA. The creditor should be satisfied, before using the CPA, that the third party has authorised use of their account. This may involve requiring the debtor to confirm that they have authority to use the particular third party account.

52 We would expect the agreement to stipulate a specific due date for repayment (or the basis on which this will be determined in the case of running-account credit). In the case of instalment loans, each due date for repayment should be specified.

53 See also point (iii) below regarding subsequent variations to the agreement.

(ii) using the CPA in a manner which is unreasonable or disproportionate or excessive in failing to have proper regard to the possibility that a debtor is in financial difficulties and the consequent need for forbearance

For example:

• seeking payment before income or other funds may reasonably be expected to reach the account
• seeking payment where there is reason to believe that there are insufficient funds in the account or that this would leave insufficient funds for priority debts or other essential living expenses 54
• continuing to use the CPA after the debtor has informed the creditor, or the latter has otherwise become aware, that the debtor is in financial difficulties and cannot afford to repay
• continuing to use the CPA for an unreasonable period after the due date without taking steps to establish the reason(s) for the payment failure
• seeking part payment before reasonable attempts to collect in full on the due date have been made.

54 For example, mortgage, rent, council tax, utility charges, food bills.

Whether use of a CPA is reasonable and proportionate, and not excessive (as regards the frequency or period of collection attempts), will depend upon the circumstances, including whether there may be evidence of actual or potential financial difficulty and whether the debtor has been notified of the failure to collect and has responded to contact from the creditor.

The OFT would expect creditors to exercise appropriate forbearance where there is evidence to suggest that the debtor is, or may be, experiencing financial difficulties.

If the creditor is unable to recover the whole of the due amount 55 by the end of the next business day after the due date, the OFT would generally regard this as indicating the possibility of financial difficulty. We would generally therefore expect the creditor to suspend use of the CPA until reasonable efforts to contact the debtor to establish the reason(s) for the payment failure and whether the debtor may be in financial difficulties have been made (unless this has already been done subsequent to the initial payment failure).

If the parties have agreed an alternative payment date, as a fallback if the full payment is not available on the due date, we would generally expect the creditor to suspend use of the CPA after the due date, and again after the alternative payment date (if the creditor is unable to recover the due amount by the end of that day), and make reasonable efforts to contact the debtor as above.

If there is evidence of financial difficulty, we would expect the creditor to reassess the position with a view to agreeing a revised payment schedule or alternative repayment arrangements where appropriate.

If reasonable efforts to contact the debtor are unsuccessful or the debtor refuses to engage (and there is no further evidence of financial difficulty), any subsequent use of the CPA should be reasonable and not excessive with due regard to the possibility that an unresponsive debtor may nevertheless be in financial difficulties and that a debtor not in financial difficulties at the time of contact may subsequently be in financial difficulties.

If attempts to recover payment continue to fail, we would expect the creditor to make periodic further reasonable attempts at contact, at reasonable intervals, to establish whether the debtor may be in financial difficulties. What is ‘reasonable’ will depend upon all the circumstances including information the creditor has on the debtor’s position, the result of previous contact attempts and the period over which payment attempts have been unsuccessful.

Part payments should be sought only following reasonable efforts to collect in full on the due date and having regard to the possibility that the debtor is in financial difficulties. Attempts at part payment, where used and whether successful or not, should be reasonable in number bearing in mind the possibility of such difficulties. For example, if part payment is taken to avoid a debtor incurring a default charge, we would generally expect that only one such payment would be required for this.

55 Whether by full payment or (subject to what is said below) part payments.

(iii) failing to document the CPA appropriately or to explain it adequately before entering into the credit agreement

For example:

• failing to include the relevant terms as part of the credit agreement, as presented to the debtor
• failing to set out clearly, and in plain intelligible language, the scope of the agreed authority and how it will operate
• using terms which are unclear or unfair or misleading, whether by inclusion or omission 56
• seeking to amend the terms subsequently without the debtor’s prior informed consent to the amendments or other than pursuant to a variation clause to which the debtor has previously given informed consent. 57

In addition, the creditor should use the correct category code and identifier when presenting a payment request to the relevant payment service provider.

We would expect the pre-contractual explanation under section 55A of the Act to at least include:

• what a CPA is and how it works
• how it will be applied by the creditor
• how it can be cancelled by the debtor
• whether alternative repayment options are available
• the choice of an appropriate due date for repayment
• the choice of an alternative payment date (if applicable)
• the consequences if sufficient funds are not available on the due date (or an alternative payment date if agreed)
• whether further attempts may be made to collect payment and, if so, on what basis, on what day(s) or over what period and with what frequency
• whether part payments may be sought and, if so, on what basis and with what frequency and whether this will be subject to a minimum amount or percentage
• whether default fees or other charges may be added and, if so, in what circumstances these may be incurred and the amount(s) of such fees/charges or the basis on which these will be calculated.

56 As noted above, in determining fitness the OFT will have regard to relevant legislation including whether terms used are unfair within the meaning of the Unfair Terms in Consumer Contracts Regulations 1999 and whether practices may contravene the Consumer Protection from Unfair Trading Regulations 2008.

57 This does not preclude the creditor from reducing or waiving payments unilaterally, for example under a repayment plan, provided that this is explained to the debtor. Any modifying agreement or unilateral variation should be documented appropriately and explained adequately to the debtor.

(iv) seeking improperly or unfairly to inhibit or discourage the debtor from cancelling the CPA

For example:

• misleading the debtor (by inclusion or omission) regarding the right to cancel and how this may be exercised 58
• putting obstacles in the way of cancellation by the debtor
• failing to respond promptly to requests by or on behalf of the debtor to amend or cancel the CPA
• failing to cease use of the CPA upon being notified that the CPA has been cancelled with the payment service provider
• seeking to intimidate a debtor who wishes to cancel.

58 Under the Payment Services Regulations, the debtor can cancel a CPA at any time up to close of business on the day prior to collection, and can do so either with the creditor or with the payment service provider. If monies are taken without informed consent, or otherwise in breach of the agreed authority, the transaction will be unauthorised and the payment service provider must refund the payment and any ancillary charges.

Consumerist wrote: »

The pay-day loan companies must be really quaking in their boots now the OFT has woken up. :rotfl:

Consumerist wrote: »

Unfortunately, what the OFT can do and what they will do (or when) are entirely different things. I reserve judgement.

antrobus wrote: »

Your original comment suggests otherwise, and clearly implies that you have already made your mind up as to what you believe the OFT will do.