As part of our Mission[1], we recently published details of Our Approach to Supervision[2]. In this, we outlined how we supervise firms as part of a portfolio of firms that share a common business model. Pawnbroking forms part of the high-cost credit portfolio and through our supervisory work we have been gathering further information about the market to assess any potential risks. This report outlines the findings of our review.
Our supervision review included a wide-ranging data request, visits to a number of firms, discussions with the National Pawnbrokers Association and a review of information already held by us. We would like to thank those firms and organisations that participated in the review.
As well as providing some important information on the size, scale and changes in the sector over the last three years, it also helped us to better understand industry practices, the customer experience and some of the potential harm that could occur.
In line with our Mission and to help firms understand that they can, and should, be proactive in identifying ways to treat their customers fairly, we are sharing our key messages with the sector.
Sector data
The figures below include estimates and averages based on the data we received. 70% of firms responded to our survey and while this allowed us to gain a fuller picture of the market, we would ideally have liked every firm to respond.
| The average pawnbroker | |
|---|---|
| Trading since 2008 | 5400 agreements per year |
| 23 members of staff | Average loan £300 |
| Operating across 4 stores | Maximum loan £2000 |
| Revenue of £1.5m | LTV is 50% |
| Profit of £100,000 | APR is 120% |
Summary
Our data gathering exercise and visits to a number of firms have enabled us to explore business models and areas of potential harm and risk in greater depth. In light of our findings we remain of the view that Pawnbroking is not a priority area in terms of potential risk or harm to consumers.
We identified a number of positive features in our analysis including:
- business models focused heavily on customers with quality of service, long-standing relationships and trust being paramount
- flexibility, and personalisation, of product terms in the interests of customers
- staff culture focused on customers and treating them fairly
- robust controls to minimise the risk of criminally obtained items being received
- strong, proactive relationships with the local community (including the police) allowing prompt responses to incidents or trends regarding crime and firms are quick to respond to local police updates
- a strong focus on security, stock control and the safety of staff and customers
Key risks
Regardless of the strength of controls there will always be inherent risks in any market or sector, due to either the business model or products and services offered by firms.
These are areas we would expect all firms to consider to ensure they continue to meet threshold conditions and fulfil their requirement to treat customers fairly. This is not an exhaustive list and firms should consider all the risks that may apply to their specific business model. We encourage firms to review our findings and consider how their own business compares.
Our key concerns regarding the Pawnbroking sector are that:
- when an unredeemed pledge is sold above the redemption value, taken together with the expenses of sale, customers are not always receiving the ‘surplus’ money owed to them
- the expenses of sale relating to the sale of an unredeemed pledge are not always reasonable
- pawnbrokers may be at risk of being exploited for criminal purposes – whether being offered stolen goods or in an attempt to launder money
- customers may not be aware of the absence of equivalent consumer protections when entering into unregulated agreements (e.g. ‘sale and buy back’) or where agreements are regulated differently (e.g. peer-to-peer lending)
Areas for improvement
We identified particular areas where improvements are required:
Unpaid surplus
We requested information on the amount of surplus due to be returned to consumers and the amount still unpaid. Under section 121(3) of the Consumer Credit Act (CCA) any surplus from the sale of the pledge must be returned to the customer and while the information provided within this notice is prescribed, the way in which any money is returned is not.
A small number of firms have returned 100% of surplus to customers. Whilst firms returned varying amounts, some had returned less than half of surplus to customers.
Considering the extent of repeat business, and the often quite personal relationships evident in the Pawnbroking sector, we were surprised at the number of customers who had not received the money owed to them. We found firms were not refunding money particularly proactively, or contacting the customer more readily to make arrangements for a refund.
We are following up with the firms concerned using our expertise in behavioural economics to trial improved customer contact strategies with a view to increasing the amount claimed. We hope to share any findings and potential improvements that can be made once this work is completed.
We estimate that the harm to customers in this area could be in the region of £1m per year.
Expenses of sale
Through the course of our review we noted a number of approaches to expenses of sale charged upon the sale of an unredeemed pledge. Some firms have opted for a fixed amount (i.e. £20), whereas others use a percentage fee (i.e. 20%).
Whilst there is no prescribed way to calculate proceeds of sale, we would remind pawnbrokers that s121(7) of the CCA refers to reasonable expenses of sale. If the customer challenges this, the onus is on the firm to prove they were reasonable.
We saw examples of uncapped percentage fees being charged where, for high value items, it became challenging to demonstrate reasonable expenses of sale. Firms should review their business model to ensure that expenses of sale are reasonable.
Financial crime
We found that firms offered a variety of products and services as well as operating different business models, such as online-only or luxury asset pawnbroking.
It is important that firms identify and assess the financial crime risks relevant to their mix of business and implement proportionate and appropriate systems and controls, including staff training programmes.
Our review indicated that firms generally understood the potential financial crime risks – particularly those relating to stolen goods. We found firms were using information from customer due diligence and commercial registers to identify higher-risk customers and known stolen goods.
One area of weakness, however, related to Money Laundering Reporting Officers (MLRO). MLROs are required to act as the focus point for all activity within the firm relating to anti-money laundering. Where the MLRO also acted as the nominated officer for reporting any knowledge, or suspicion, of money laundering we found weaknesses in the knowledge of some MLROs of the requirement to report Suspicious Activity Reports (SARs) to the National Crime Agency (NCA).
We expect MLROs to understand what a SAR is, when to report and what information should be included in a SAR. Further details on SARs can be found on the NCA’s website including how to report and guidance on submitting better quality SARs[4]. We encourage firms to read this as well as the FCA’s Financial Crime Guide[5], and to understand their responsibilities under the Money Laundering Regulations 2017 and SYSC 6.1.1 of our Handbook.
Sale and buy back
We requested some information in relation to sale and buy back agreements and followed up on this during the visits we undertook. Our main aim was to understand how firms ensured the service offered was suitable for a specific customer, given there is some overlap between pawnbroking sale and buy back and customers often have an open mind about what service might suit them when looking to realise cash from an item they own.
Generally, we found that a combination of the individual customer’s needs and the nature of a customer’s item led to clear differentiation between the two services. However, there may be factors where differentiation becomes less clear.
Examples could be where a customer wants a particularly short-term loan, or indicates an intention to repay early, or on certain types of item (such as designer-branded watches) that straddle the line between products typically pawned (i.e. jewellery) or those sold with an option to buy back (typically electronics). In these situations, it is important for firms to have clear policies that state what items are acceptable for a pawnbroking contract, and those items which are not.
Systems and record keeping
It was apparent during the data request phase of the review that a number of firms were using estimations and sampling to provide data to us. SYSC 9.1.1R of our Handbook requires firms to keep orderly records of their business, including all services and transactions. This not only ensures we can monitor firms’ compliance and ascertain whether customers have been treated fairly, but also gives firms greater oversight of their own activities.
We recognise that for some firms estimates were used in order to provide the data within the timeframe given. However, going forward firms should review whether their current record keeping processes are adequate for their business if key data and information is not easily accessible. We may request similar data in the future.
Next steps
Firms should consider the findings of our review and take any action as necessary. Where we have highlighted potential failings in this report, we expect firms to act upon them and will assess this in any future supervisory work.
We will continue to monitor the sector through our ongoing supervision and authorisation processes as described in the FCA’s Approach to Supervision[2] and Approach to Authorisation[6].