The Financial Conduct Authority (FCA) has warned that logbook lenders will need to ‘dramatically raise their standards’ if they are to continue operating.
A logbook loan is the term for a bill of sale securing a loan on a debtor's vehicle (with the lender retaining the vehicle's "logbook", or vehicle registration certificate). The structure of the loan means that the lender can repossess the debtor's vehicle without a court order.
The FCA has found evidence of poor behaviour, including little or no affordability checks with some applicants encouraged to manipulate details of their income on application forms.
It also found some lenders pressuring people to take out a loan without being informed about a cooling off period, failing to mention the APR, total amount to be paid, or the potential consequences – including vehicle repossession - if consumers miss repayments.
Christopher Woolard, director of policy, risk and research at the FCA said: “People who use logbook loans are often in difficult circumstances with few other borrowing options.
“The last thing that should be happening is for them to be squeezed yet more or even threatened, but that is what our research has found.
“Our new rules give us the power to tackle those firms found not putting customers’ interests first and remove them from the market if they don’t improve. Logbook lenders should consider this as fair notice to improve and put their customers first or we won’t hesitate to take action.”
Logbook loans range in size from about £500 to £50,000, with the average amount borrowed about £1,000 depending on the value of the vehicle.
Loans usually last between six to 18 months, while a typical APR is 400% or higher. The time taken to approve a loan varies from a few hours to a few days.
The FCA took on responsibility for regulating logbook loans on April 1, 2014 as part of consumer credit.
Every firm currently offering consumer credit business has to have an ‘interim permission’, but will need to become fully authorised by the FCA.
Sector by sector, starting with those that pose the greatest risk to consumers, the FCA will be inviting firms to become fully authorised and in doing so will look closely at their business model, culture and management team.
Logbook lenders will need to apply for full authorisation from January 1, 2015 and before April 1, 2015.