Business

Loan fee scams to be stopped by OFT

Mobile phone in hands
Image caption Rogue traders contact people initially through a phone call or text message

Dishonest credit brokers that demand upfront fees for loans they have no intention of arranging will be closed by the Office of Fair Trading (OFT).

The measure is part of a general crackdown by the regulator following a complaint from Citizens' Advice.

The charity said some unscrupulous firms were cold-calling thousands of potential borrowers and offering loans in return for hefty fees.

The OFT is making it mandatory for fees to be refunded if a loan is not agreed.

"Our evidence suggests some businesses are deliberately taking people's money upfront with no realistic expectation of finding them the type of loan they need," said John Fingleton, the OFT's chief executive.

'We will continue to take robust enforcement action against businesses using unfair or improper business practices and we are providing new guidance making very clear the kind of behaviour we expect from the industry."

In parallel, the OFT will bring in new rules later this month for debt management firms to stop them making misleading claims in adverts, charging expensive fees upfront, giving poor advice or posing as charities.

Law change

The OFT is going to ask the government to consider changing the law to ban outright the practice of credit brokers demanding upfront fees in exchange for arranging loans.

Citizens' Advice had complained, in a so-called "super complaint", that many people had received a text message or telephone call from these firms offering to find them an unsecured loan.

Those who accepted were then charged the fees for little or no service in return.

"They are getting cold calls from businesses they haven't asked to call them," Teresa Perchard of Citizens' Advice told the BBC.

She said an upfront fee of £70 was not uncommon, but the organisation had come across charges of up to £300.

New rules

The OFT estimates that 270,000 people had paid upfront fees to credit brokers in the past year, with complaints about them doubling between 2008 and 2010.

The firms in question typically specialised in arranging unsecured loans for people who found it hard to borrow money because of their low incomes or past problems repaying debts.

As well as threatening to close down rogue credit brokers, the OFT is consulting on changes to its own rules to make it clear that:

  • borrowers already have a right in law for their fees to be refunded if the credit broker fails to introduce them to a potential lender
  • if an introduction is made but a loan is not granted within six months, the fee must still be repaid.

Some victims, Citizens' Advice said, had been persuaded to hand over their bank details and later found that money had been taken from their account without their permission.

Victims struggled to get somebody to deal with the issue, and were charged a premium rate when calling to complain.

They also found that they were being inundated by calls and text messages offering loans or debt management services from other firms.

The consumer minister Edward Davey welcomed the OFT's proposed changes.

"We will give careful consideration to the outcome and take further action if required."

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