More and more, UK consumers are taking out one loan to pay off multiple loans. But is the advertising for these services complying with the current regulations? A recent OFT report on the sector suggests not.
Topic: Consumer credit
Who: The Office of Fair Trading
When: March 2004
The Office of Fair Trading published the results of a fact-finding study of the advertising and selling practices of the debt consolidation industry.
Debt consolidation occurs where a consumer takes out a loan or other credit agreement in order to pay off two or more existing debts. In 2002, the OFT estimated that £32 billion of unsecured lending and £8.8 billion of secured personal lending were used for debt consolidation. This compares with an estimated £18.4 billion of unsecured lending and £2.4 billion of secured personal lending in 1999.
The OFT study was launched in June 2003 and was undertaken in the light of significant growth in the marketing and use of credit for debt consolidation. In the course it its study, the OFT consulted consumer organisations, lenders, brokers and trade associations. It also surveyed 250 consumers of such services and a cross section of advertising for the products and their providers.
Key findings of the survey were that borrowers did not shop around for credit for debt consolidation, that many borrowers, particularly those in financial distress, were unaware of the alternatives which were open to them, and that borrowers in the main did not give due weight to factors, such as the length of the term of the loan and the total cost of repayments, when deciding whether debt consolidation made financial sense for them.
In the marketing and advertising sphere, the OFT found a number of apparent breaches of credit advertising rules and will undertake a compliance review of credit advertising later in 2004.
The advertising review indicated that advertisements do not always give a clear message about what they are promoting and there is potential for confusion among consumers about what is on offer. This is disturbing given that it is a criminal offence to issue a false or misleading advertisement for consumer credit under section 46 of the Consumer Credit Act and there are also detailed controls over such advertising contained in the 1989 Consumer Credit (Advertisements) Regulations.
Some of the deficiencies found by the OFT were:-
- that some advertisements which needed to give a postal address failed to do so;
- that warnings about borrowers' homes being at risk if they did not keep up payments if the credit was secured on property were not always prominent and not always in the correct format;
- that certain types of ad which were required to include a statement to the effect that a written quotation was available on request failed to do so;
- that APRs were sometimes not prominent and sometimes had less prominence than the interest rate and on occasion were not quoted at all; and
- that businesses were claiming in some instances that they were "licensed by the OFT" when this wording should not be used, as it implied that the whole range of a trader's activity had been licensed/approved.
These apparent breaches were being pursued separately by the OFT but specifically in the context of the ongoing DTI review of consumer credit advertising regulations, the OFT also had a number of recommendations to make coming out of this study. These included:
- supporting the DTI proposals recommending that all financial information in ads is shown together as a whole, with no part of a credit offer being highlighted over others, for example, a low monthly payment cannot appear in the body of the advertisement when the length and term of loan appears separately in the small print;
- supporting the DTI and FSA view that the 'typical APR' must be the highest rate reasonably expected to be given to at least two thirds of borrowers who accept a credit agreement in response to the advertisement; and
- recommending that advertisements should, where issued other than by a lender, include a brief factual statement of the business's occupation in relation to which the advertisement is published.
Why this matters:
With consumer lending levels ballooning and debt consolidation and debt management services becoming increasingly popular, the OFT continues to devote a lot of attention to these sectors, where consumers are already potentially in a state of distress, semi-ignorance reigns and clarity and transparency about who is offering the product and on what terms is paramount.