Feedback on FCA Approach to Pawn Broking
We recently had a response to a client’s application for authorisation that included the following question:
Charges imposed arising from sale of pledges. Please note that while your costs can be taken into account, they should be assessed as part of the finance advanced under the security of the pledge rather than imposed on the borrower as an additional fee. This is an FCA requirement in order for pawnbrokers to make use of the exemption from carrying out affordability assessments by limited liability to the true sale value of the pledge. Please let me have your comments on this.
We were quite taken aback by this! It seems that the FCA believe that every time a pledge is made the lender should add a fee for costs that MAY be incurred on selling un-redeemed pledges! I know lenders have to anticipate many things but surely the assumption has to be that anyone pawning their possessions will attempt to redeem them?
Our answer is below:
We disagree. We are aware that no costs can be added to the agreement at the point of pledge. However, although the Consumer Credit Act 1974 is clear that no special charge shall be made for redemption of the pawn it does not exclude sale or storage expenses being added to the gross redemption figure.
We also disagree with your point in relation to your comment in relation to the FCA requirement. Section 55B of the Consumer Credit Act 1974 states:
55B Assessment of creditworthiness
(1)Before making a regulated consumer credit agreement, other than an excluded agreement, the creditor must undertake an assessment of the creditworthiness of the debtor.
(2)Before significantly increasing—
(a)the amount of credit to be provided under a regulated consumer credit agreement, other than an excluded agreement, or
(b)a credit limit for running-account credit under a regulated consumer credit agreement, other than an excluded agreement,
the creditor must undertake an assessment of the debtor’s creditworthiness.
(3)A creditworthiness assessment must be based on sufficient information obtained from—
(a)the debtor, where appropriate, and
(b)a credit reference agency, where necessary.
(4)For the purposes of this section an agreement is an excluded agreement if it is—
(a)an agreement secured on land, or
(b)an agreement under which a person takes an article in pawn
S.55B(4)(b) above specifically excludes an article taken in pawn and this is reiterated in CONC 5.2.1R(4)(b) we therefore find your comment to be disingenuous as the exemption is provided by statute not the FCA.
We now turn to our expenses in relation to the redemption of an item. As stated above, we do not believe that your position is correct. If we were to anticipate that our customers would not redeem their pledge and therefore any costs resulting from that were calculated as part of the finance this in itself would not be treating our customer’s fairly. We believe any expenses which are subtracted from the gross redeemable figure at the time of disposal are reasonable and also draw your attention to the fact that the customer can question these fees if they do not think they are fair. S116 (4) of the Consumer Credit Act 1974 states:
S.116 Redemption period.
(4)No special charge shall be made for redemption of a pawn after the end of the redemption period, and charges in respect of the safe keeping of the pawn shall not be at a higher rate after the end of the redemption period than before.
S.121 of the Consumer Credit Act 1974 goes on to say:
121 Realisation of pawn.
(5)In this section the “net proceeds of sale” is the amount realised (the “gross amount”) less the expenses (if any) of the sale.
(7)If the pawnor alleges that the expenses of the sale were unreasonably high, it is for the pawnee to prove that they were reasonable, and if he fails to do so subsections (3) and (4) shall have effect as if the reference in subsection (5) to expenses were a reference to reasonable expenses.
We have updated all our pawn broking clients to look for this in any communications they receive from the FCA in case this is a back door attempt by them to change the rules to something totally unworkable! Please be aware!