State of the UK unsecured loan market post April 2014

The UK loan sector (including but not restricted to guarantor loans, second charge loans and
unsecured non-guarantor loans) was often referred to as the wild west by many industry
commentators. This was due in no small part to the quality (or lack thereof) of the firms
providing the loans - be they unsecured loans or secured loans and this lack of quality became
very apparent when analysing the individual firms approach to customer service.
We won't be drilling down into the individual firms that offer such loans currently as it would
serve no purpose for us to do so, however we will look at how the market has evolved and we
will also look at some of the current tactics being used by loan brokers and lenders today.
Upfront fees for non-existent loans
This tactic was a favourite of many loan brokers, particularly pre-April 2014 (I will explain
why things have changed later on in this article) and it caused untold distress to lots of people
whose only aim was to get a loan. The problem is that when someone is looking for a loan
and that person also has adverse credit and may not be a homeowner, it creates a perfect
storm of desperation where the customer will do almost anything to get their hands on some
cash.
Now it's not for us to pontificate on the morality of why someone needs a loan, the facts are
there and many hundreds of thousands of potential borrowers have been in this position
where the objective - the only objective - is to get a loan regardless of the circumstances.
And that is where the problem lies.
Brokers and lenders knew this so it was fairly easy for them to convince gullible borrowers
that the loan they have applied for was within their grasp. All the customer had to do was pay
68 to release the funds, or 79 to process the payment or 105 to guarantee the transfer of
money that very day.
You can see a pattern develop here. In a nutshell, the brokers and lenders (and yes there were
and still are lenders who originally started out offering unsecured loans with an upfront fee
but now try to distance themselves from that era) knew or could smell the desperation of their
borrowers and played on this very fact. It doesn't take much of an imagination to see how
easy it would be for these firms to make tens of thousands of pounds a month and in some
well known cases, Yes Loans anyone? (Yes Loans were stripped of their Consumer Credit
Licence by the OFT in 2012 and shortly before that happened, their founder and Chairman
Keith Chorlton died) , hundreds of thousands of pounds a month in upfront loan fees.
As I said earlier, I am not singling out Yes Loans at all. They were one of may firms that
were involved in this horrible practice and whilst it may be the case that a lot of people would
say 'well it was only 70, imagine how many 70 fees they received from people who had no
hope of getting a loan. i.e. the unemployed, long term sick, students, etc.
Interesting eh?
Then what happened is that in 2011 particularly, this practice suddenly went global. There
were Indian firms working out of Delhi who would masquerade as a British firm and buy a
British 0800 or 0845 number and call their staff names like Alan, Kevin or Samantha to fool
members of the public into thinking that they were dealing with a British based firm staffed
by British people.
And they were aided and abetted by the banks who would give merchant accounts to these
firms without ever really checking what they were up to. It's ok to discover after 3 years and
numerous charge backs (this is where the debtor complains to the merchant bank that monies
were taken unlawfully from their account when they had no idea this would happen) what the
company charging these fees were up to and then to remove their credit or debit card facility,
but it is again another glaring example of the sheer lack of any form of due diligence by the
banks who granted these merchant facilities.
By the time they grasped what was happening, this practice had made millionaires of a lot of
company directors who owned these loan firms.
Now, the title of our article is 'the state of the unsecured loan market post 2014' and this is
important to note because the Financial Conduct Authority (FCA) took over the regulation
and authorisation of unsecured and secured loans from the rather toothless Office of Fair
Trading (OFT). I call them toothless because what else can they be if they allowed the likes
of Yes Loans and their ilk to trade for years without any action and when it did come, it was
about 5 years later than it should have been.
What the FCA have done (apart from take over from the toxic legacy of the FSA) is make it
clear that unscrupulous firms that do not have the best interests of their customers at the very
heart of what they do will face ever increasing scrutiny about their methods and practices.
And this is how it should be.
So whilst it would be great to say that the FCA have stamped out the process of upfront fee
charging in the unsecured loans market, the reality is that they haven't. Not yet anyway
although I do believe they will given time. It also hasn't stopped the foreign firms I
mentioned from operating over here but it has definitely caused them issues because there is a
marked reduction in the number of firms we have come across that are based in India but
targeting the UK. They still do it without any form of regulation, authorisation or licencing
and they will continue to do it unless they are found out.
And we will make it our mission to expose them every time we come across unlicenced
firms.
Unsecured loan regulation - 1st April 2014
However, from the 1st of April 2014 the FCA came into power (so to speak) and it has made
a considerable difference because before then, the market was one of the last bastions of
unregulated financial activity.
Here's how it changed.
Every loan company that wanted to offer loan or lend their own money for loans, be they
guarantor loans, unsecured loans or second charge loans, would have to apply for what is
known as 'interim permission' from the FCA but only if they already had existing Consumer
Credit Licence (CCL) issued to them by the OFT. (A full glossary of the terms will appear at
the bottom of this article). If the firm in question did not have a CCL already, then they
would have to go straight to a full application with the FCA.
Now the important thing to remember about interim permission is that generally speaking,
most firms would get automatically approved for this, the only issue would be those firms
that were already being monitored by the old regime at the OFT for unscrupulous business
practices or had a history of complaints against them (upheld or otherwise). But generally
speaking, as long as historically you had not done anything wrong, you would get approved
and issued with an interim permission number by the FCA.
The FCA will then through a staggered approval process, inform each 'approved' firm of the
dates of when they can apply for full FCA authorisation - a much more vigorous, strict,
complicated and time consuming process and one which will require every firm to employ
the services of a compliance professional or at least have someone within their business who
has experience and knowledge of a regulated process.
So as you can see, the regulatory body has finally got teeth! And not before time.
Now as positive a move as this is, it still leaves a lot of questions unanswered such as:
How will the FCA demonstrate that they can stop these foreign based upfront fee
charging brokers?
A lot of these brokers are based in the UK as well, what about them?
Can you regulate an unsecured loan and a second charge loan in the same way
because they are markedly different?
And there is another great question. Namely:
How can you compare an unsecured loan to a second
charge loan?
There is a huge difference here between the two products and in how they are sold and
regulated and how the loans themselves impact upon the borrower in terms of their
responsibilities, repayments, etc.
First things first - lets look at each one in turn and for this, we are looking at the three most
popular products.
Guarantor Loans
Usually offered between 1,000 and 10,000. Applicant (borrower) does not have to be a
homeowner but the guarantor does. Loan terms between 12 and 72 months. Bad credit
acceptable.
Unsecured loans (no guarantor and we are not discussing payday lending here)
Loans offered between 100 and 10,000 usually although some high street banks may offer
more. Applicant can be a tenant or a homeowner. Loan terms between 6 and 72 months. Bad
credit is usually not acceptable and borrowers generally must have an excellent credit record.
Second charge loans (also known as secured loans)
Loans offered between 5,000 and 100,000 but again, there may be isolated exceptions to
this. Applicant MUST be a homeowner and apart from sub-10,000 loans, the homeowner
must have equity in their property. Loan terms between 24 and 300 months. Bad credit is
acceptable but depends on the level, how recent it is and the available equity in the property.
Now call us naive if you want but how can you possibly compare a guarantor loan or
unsecured loan where the maximum loan is 10,000 but the average is 5,000* to a second
charge loan where there are huge sums involved (remember, up to 100,000+) and the
average loan is approx.34,000.
Anyway, this is somewhat of a moot point because as I said earlier, regulation is here to stay
and the FCA are not going to backtrack on waht they have proposed - I guess a refining of the
processes, after they have had time to get to grips with what their role as the regulator
actually means in practice, is the best we could hope for but at the very least, I think it will
clear the cobwebs and more importantly, the scam merchants away and give consumers some
much needed protection. However, we believe light touch regulation is all that is needed as
long as we can all work to rid the industry of those firms that charge the aforementioned
upfront fee and the selling of personal data without the customers knowledge.
Lenders Vs Loan Brokers
We can speak from a position of strength here because we have been both and we still are
brokers.
The reason why we stopped lending is because we felt too restricted by this because if a case
did not meet our criteria then we couldn't really try and place it with another lender because
we would have been seen as a competitor to them and they simply wouldn't accept the loan
application from us - and to be fair we couldn't blame them. So, we stopped lending directly
and instead decided to place a customers application with our panel of lenders which
currently totals 6 guarantor lenders, 3 unsecured non-guarantor lenders and 6 secured loan
lenders. The beauty of our guarantor loan applications is that we can try it with the 6 different
lenders with just one credit search so this allows far greater flexibility for the client and most
importantly, a far greater chance of them getting accepted for a loan WITHOUT wrecking
their credit profile with too many necessary searches.
The same process applies to second charge loans and to the few lenders we deal with who
now offer unsecured loans without the need for a guarantor.
Our view is simple. If you want to deal with a lender directly and have a choice of their loan
and their loan only, then you should and reading this article probably won't change your
mind. There won't be a middleman involved and you can also be pretty sure that the lender
you are dealing with is based in the UK. All good.
However if you want the widest possible choice of loans, the best possible chance of getting
accepted for a loan, to preserve your credit rating and for someone else to do all the work for
you, then it really is a no brainer and you should absolutely use a broker (a regulated, UK
based broker of course)
Remember, if the lender you are accessing directly declines you, then you will have to go to
another lender and if they also decline you, that is two credit scores against you without you
even getting your cash. We, as a broker, can try 6 different lenders with just 1 credit score, so
I am sure we can be excused for this little piece of blatant self promotion when we know it
works so well!
Summary of the UK loans market in 2014
The change in regulation from the OFT to the FCA on the 1st April 2014 will have long term
effects. For the most part, this change to the regulatory regime for unsecured and secured
lending is and will continue to be a positive move. However everyone involved in the
industry will need to keep an eye on how this regulation manifests itself otherwise it may go
too far the other way and lead to delays and increasing numbers of declines due to the tighter
criteria, similar to what has happened recently in the mortgage market.
We will update this site as and when we have some real data to work with.