Précis - On 4 February 2013 PhonepayPlus (“PP”) published a consultation paper setting out its proposals in relation to the prior permission regime for consumer credit services using premium rate telephone services (PRS).
Consumer credit services operating on a premium rate number do not charge a commission or fee when a loan is arranged, as non-PRS consumer credit services do. In contrast to a commission-based service, by making an application through a premium rate number, consumers pay upfront charges for the cost of the call whether or not they have been approved for a loan. Consumers using these services are recognised as being likely to be vulnerable, and may be drawn into paying for a premium rate phone call in seeking loans.
In an attempt to protect consumers, PP has put in place a prior permission regime which requires any provider of a PRS-based consumer credit service to obtain prior authorisation from PP before they can operate on PRS and accept specific, pre-determined conditions in addition to their duties under the PP Code of Practice (the “Code”) as part of that authorisation.
PP now propose to make three sets of changes to the current regime:
- to reflect the new guidance from the Office of Fair Trading (“OFT”);
- to take into account new best practice measures outlined by the Department for Business, Innovation and Skills (“BIS”); and
- proposed conditions to address identified consumer risks.
PP is seeking views from the industry.
1. OFT guidance
Three new conditions are proposed to the Code based on OFT Guidance:
- Promotional material must state the total maximum cost of the call in addition to the price-per-minute and maximum duration of the call;
- Calls to the main credit brokerage service i.e. the application for a loan, must not exceed one premium rate call; and
- Callers must be provided with a non-PRS number for customer care purposes, and clear information that they have a right to request a refund if their application is unsuccessful, within the first minute of the call.
PP consider that a straight incorporation of OFT guidance into the Code is appropriate in order to avoid ambiguity, and that the new conditions will not place any higher regulatory burden on PRS-based consumer credit providers than that which has already been placed upon them.
2. BIS guidance
PP also propose to include the following measures in the Code to reflect best practices announced by BIS in May 2012:
- A requirement to display the repayment cost per £100 borrowed in addition to the annual percentage rate (APR); and
- A requirement to provide signposting to free and independent debt advice prior to the consumer being charged.
3. Emerging consumer risk
PP further consider that there is a good case for going beyond the OFT and BIS provisions and adding some further conditions for PRS consumer credit. In particular:
3.1 Transparency around rates of interest charged
In order to make consumers aware of and understand the likely APR of any loan they are offered, the new conditions state that consumers must:
- be informed of the average repayment cost per £100 borrowed (in addition to the average APR);
- be informed of the cost of borrowing in promotional material (in addition to when they are connected to the service); and
- be given an average APR and cost per £100 borrowed for those products specifically.
3.2 Transparency around acceptance rates
Evidence suggests that 83% of consumers who were charged for the premium rate phone call did not have their application accepted within the period February to May 2012. The new conditions therefore propose that average acceptance rates must be included in promotional material for PRS consumer credit services and also given upon connection to the call and specific information should be given to those consumers who are interested in applying for a short-term unsecured loan.
3.3 Transparency around cost of calls
PP consider that consumers should be made aware of the key information, particularly the cost of using the PRS. Current rules for permission to provide consumer credit by PRS require the provider to state the total maximum cost of a call, the cost per minute and impose a 15 minute duration limit in the promotional material only, whereas the new conditions propose to add conditions around cost transparency by imposing an obligation to advise consumers of this information upon connection to the call.
3.4 Total number of calls
Evidence suggests that 32% of applicants for a loan make a second call to the PRS provider at an average of around eight minutes per call, which PP consider is a cause for concern. The current regime requires PRS-based credit brokers not to do anything to encourage repeated use of the service, and in particular that consumers must not be encouraged to call the premium rate number again to seek updates as to the status of their loan application as this may represent a disproportionate financial burden.
PP now propose that providers must provide a non-PRS number during the initial call to enable callers to follow up with any queries about existing loan applications, and where consumers call up the PRS number for a second time to make an enquiry about their loan application, they must be directed to a non-PRS number.
The current regime provides that consumers who do not receive or take up the offer of a loan can claim a refund of all but £5 of the cost of their application via PRS. PP, however, note that there is a lack of transparency, or consumer confusion, around eligibility for refunds, or a lack of awareness that they can exercise this right. PP therefore fully promote the implementation of the OFT requirement that consumers must be informed of their right to a refund of all but £5 of the call cost within the first minute of their call.
Consumer credit services are recognised to have value to consumers, particularly those who might otherwise not be able to access credit offered by banks or building societies. PP believes, however, that in charging upfront for the premium rate call, whether or not the consumers application for a loan is eventually approved, does present risks to consumers that do not exist for other payment mechanics.
PP are seeking views from the industry, consumer groups, and parties with an interest in the proposals to be received by 2 April 2013.