Learn everything there is to know about Debt Management Companies in the UK
The recent news story about an American lead generator being fined raises questions about the role of lead generators in the payday loans uk industry. Are we protected from possible dangers of lead generators?
In September 2017, authorities fined the Californian-based lead generator company Zero Parallel LLC $100,000 for selling payday loan applications to lenders. These lenders didn’t follow individual state laws and were guilty of unethical business practices. The Consumer Finance Protection Bureau (CFPB) oversees consumer credit. They are a body comparable to the Uk’s FCA. As a federal agency, working across state borders, they imposed this penalty. The company had agreed to pay the penalty without admitting or denying the allegations.
Lead generators are like a middleman; they identify consumers who are interested in a product or service and then sell this information onto companies which can provide customers with what they’re looking for. Sometimes affiliate companies support lead generators. Affiliate companies are like smaller lead generator companies. These companies gather the ‘leads’ and pass them along. Lead generators might pay smaller companies for every lead or otherwise only if the lead results in a sale.
Unlike traditional advertising campaigns, aimed at everyone, lead generators use highly-targeted online ads on search engines. They also use social media to reach their desired audience. In the case of payday loans, when a would-be borrower clicks on an advert such as ‘Get cash now!’ it acts as a ‘doorway’ enabling lead generators to refer customers to a lender. Very often borrowers might not even be aware that they’ve gone through an intermediary.
Authorities fined US lead generators for steering borrowers into taking illegal or dangerous payday loans.
The first reason for the penalty was because the company didn’t respect individual state usury laws. Same day funding payday loans aren’t legal in all US states. The heart of the CFPB’s case is the fact that the loan can only be legitimate if it complies with the laws of the borrower’s state of residence rather than the lender’s. As a result, they have said the loans are void, and the lenders can’t collect the loans.
The second reason for the fine is that the company knowingly sold loan applications to businesses that didn’t abide by individual states’ interest-rate restrictions. These companies deliberately kept borrowers in the dark about the risks and overall costs of their payday loan. The implication of this ruling is that the CFPB is saying that all parties involved in the generation and purchase of a lead must police each other’s activities or face liability for non-compliance.
The owner of Zero Parallel LLC, David Gasparyan, agreed to resolve similar charges filed last year against a previous company T3 Leads which had resulted in a $250,000 fine. Established in 2005, this company currently operates in the UK under this name. Before we consider the implications for the UK payday loan industry, let’s look briefly at how lead generators work.
There are some worries about the way lead generators operate. The first concerns the way they refer borrowers to payday loan providers. Although the borrower might think they have the best possible deal on the market, in fact, the lead generator often passes the customer onto the lender with which the lead generator has the best commercial relationship. In other words, the one that pays the highest for these leads to potential borrowers.
Before being passed onto to a lender, the borrower must fill in information about themselves. Apart from security concerns about how lead generators store this potentially sensitive financial data, there are also worries that it is often passed onto other lenders later at a lower price. The other worry is that lead generators sell personal details to companies offering other or similar financial products. This could lead vulnerable and possibly desperate borrowers to take on no guarantor short term loans, entering further debts which they can’t afford to repay.
In the wake of this sizeable fine and the fact that T3 Leads operates in the UK, the question remains of how concerned UK consumers should be about the role of lead generators in our payday loan industry. We must remember that the history, structuring and regulation of the industry are completely different in the US and the UK. Firstly, there isn’t the fragmentation of laws in the UK that exists in the US. If they abide by FCA regulations, payday loans aren’t illegal here. Although the CFPB (the federal regulatory body) has been working for a year on legislation to protect payday loan customers with restrictions and a price cap, their investigation hasn’t been completed yet and has been meeting some resistance.
Similarly, the allegations against Zero Parallel LLC that they passed borrowers’ data onto companies offering unacceptable loan terms with hidden extras also wouldn’t be possible in the UK payday lending market since the FCA strictly regulates because of abuses which occurred in the past. But what exactly used to happen and how has the role of lead generators been curbed by FCA regulation?
Before the FCA started overseeing the industry in January 2015, the Competition & Markets Authority (CMA) highlighted some problems regarding the way lead generators operated in their 20-month investigation in the report released in February 2015.
Their first concern was that many borrowers were using a lead generator’s website to find a payday loan and weren’t aware that they were dealing with an intermediary but thought they were applying to the lender directly.
Their other criticism is that there was a lack of transparency about how lead generators described the service they provided. Similarly, the nature of their commercial relationship with lenders was also not transparent. They voiced their concern that lead generators were referring customers to the lender who offered them the best commercial deal rather than the one who provided the most suitable loan to meet the individual client’s needs.
Because of their investigation, lead generators in the UK are now required to amend their website, any advertising material and any communications with consumers so that it’s clear that they aren’t dealing directly with a lender. Also, they should disclose fully what role they play in the loan application process, how they’re paid and on what basis they refer applications to would-be lenders.
Unlike the years before regulations, they must also be cautious about what promises they make. As they don’t know what the terms of the loan will be exactly, they can’t give misleading information.
This habit of ‘recycling’ borrowers’ data is the origin of what became known as the ‘ping tree’. A borrower would apply for a payday loan often unwittingly through a lead generator. Then they would be bombarded with offers of further loans, often from other companies. The ‘ping’ was the sound of their mobile phone as it received successive text messages. The tree metaphor referred to the way borrowers’ details filtered down from companies prepared to pay the best rates for sale leads. Those further down the ‘tree’ bought the same data later at cheaper rates. This was because the sales tip was older.
When searching for the best deal in the market, it would be much better for would-be borrowers to use at least two price comparison sites and from there to go directly to the website of the payday loan provider.
When clicking on ads which appear on internet search engines, they should always scroll down the page to make sure that they know who they’re dealing with. They must read the fine print regarding privacy, so they know what these intermediaries do with the data collected.
Even though the lead generator T3 Leads operates in the UK, the allegations against them in the US wouldn’t be possible in a highly-regulated market like the payday loan industry has become nowadays. Lead generators may be useful tools for payday loan providers who offer unsecured loans online. However, from a consumer’s point of view, it’s much better to deal directly with the lenders themselves.