The Financial Conduct Authority (FCA) has announced new proposals designed to protect millions of people who use overdrafts and high-cost credit. The changes the FCA are consulting on follow an in-depth review into the high-cost credit market and are expected to reduce the costs for consumers and give them greater control over their finances. These changes are wide-ranging and some specific proposals are being consulted on from today. In addition, the FCA will gather additional evidence and carry out further analysis before any formal decisions can be made on a number of other issues.

Andrew Bailey, Chief Executive of the Financial Conduct Authority said  “High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society.  Today we have proposed a significant package of reforms to ensure they are better protected including the possibility of a cap on rent-to-own lending. The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.”

“Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place.  However, we believe more fundamental change is needed in the way banks charge customers for overdrafts.  Given the size of the market our work here will be completed as part of our wider review into retail banking.”

 Under legislation, the FCA is required to formally consult on rules it proposes to introduce. Consultations must be open and transparent, and the FCA cannot prejudge the result.  In order to consult, the FCA must have a sufficient evidence base on which to base its proposals and develop a cost-benefit analysis, which is why the FCA has launched this call for input. These checks and balances ensure any proposed measures are proportionate and necessary to protect consumers.

Overdrafts

The FCA believes that the way banks operate and charge for overdrafts needs fundamental reform. In 2016 firms made an estimated £2.3bn in revenue from overdrafts; 30 per cent of this was from unarranged overdrafts. The majority of unarranged overdraft charges are paid by only 1.5% of customers, who pay around £450 per year in fees and charges.

The FCA is putting forward some immediate proposals today for overdrafts that it believes will save customers up to £140m a year. Beyond that, the FCA will consider more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices.

If appropriate, these options will be consulted on later this year to coincide with the wider Strategic Review into Retail Banking so that the FCA is able to take into account the part that overdrafts play in the current UK banking model.

The FCA is also consulting on mandatory rules to make it easier for customers to manage their accounts.

These include:

·         mobile alerts warning of potential overdraft charges;

·         stopping the inclusion of overdrafts in the term ‘available funds’;

·         requiring online tools to make the cost of overdrafts clearer;

·         introducing online tools to assess eligibility for overdrafts; and

·         making it clear overdrafts are credit or borrowing.

Rent-to-own

As part of the review the FCA looked closely at the rent-to-own sector.  Costs for the 400,000 customers can be high – sometimes exceptionally.  The FCA has seen examples where people have paid over £1,500 for essentials like an electric cooker, which could be bought on the high street for less than £300.

The FCA has identified a need to intervene to protect financially vulnerable consumers in this market.  The FCA believes the harm identified in this market is sufficient in principle to consider a cap on rent-to-own prices. It will now carry out the detailed assessment of the impact that a cap could have on the rent-on-own sector and how it might be structured. In the meantime the FCA is open to other options. The FCA will undertake this work over the next few months with the aim of introducing changes, if appropriate, in the rent-to-own sector by April 2019.  In addition, the FCA is consulting on banning the sale of extended warranties at point of sale; this could save consumers up to £7.7m per year.

Home collected credit

Additionally, the FCA intends to strengthen protections for vulnerable users of high-cost credit in stores and at the door, by introducing new requirements to raise standards in disclosure and sales practices.

The FCA is announcing a package of reforms in the home-collected credit sector.  These will raise standards in disclosure and sales practices preventing home-collected credit firms from offering new loans or refinancing during home visits without the customer specifically requesting this.  The measures will also bring greater controls over the refinancing process, which may not work well for consumers. Changes in this area are estimated to save consumers up to over £34m a year.

Catalogue credit and store cards

Catalogue credit and store card firms will be required to do more to help customers avoid persistent debt – in the same way as credit card providers have been made to do by the FCA. These changes are estimated to save consumers up to £27.5m a year.

The FCA has already transformed some high-cost sectors, with firms making substantial improvements and paying more than £900m in redress to customers across consumer credit.  The series of measures announced today builds on this work.

Industry reaction

Eric Leenders, Managing Director, Personal Finance at UK Finance said “People up and down the country use credit as a helpful means of managing their everyday spending, so we have been working closely with the regulator to develop alerts for customers who may be about to slip into the red as well as a range of prompts that make it much easier to keep on top of finances and reduce costs. The industry is also introducing proactive support where persistent use of an overdraft facility might be a symptom of financial difficulty. We will continue to work closely with the FCA to make overdrafts more transparent and ensure customers take full advantage of the banking services available to them.”

Responding to the proposals Joanna Elson OBE, chief executive of the Money Advice Trust, said “The FCA’s decision to introduce a cap in the rent-to-own market is welcome – and could make a significant difference to thousands of people.  The regulator should keep the impact of its new measures in other sectors, such as doorstep lending, under review – and be prepared to reconsider the case for further cost caps.”

“Similarly, while new measures on unarranged overdrafts may go some way in addressing the problems we help people with at National Debtline – the FCA should still be prepared to intervene with its ‘backstop price cap’ if consumer detriment persists in this area.  It is important that this option remains firmly on the table. Today’s news has also been overshadowed by the government’s disappointing decision to step back from reforming logbook loans through its Goods Mortgages Bill.  In light of that decision, the FCA needs to takes urgent action to improve consumer protection in this sector, too.”

Greg Stevens, Chief Executive Officer of the CCTA, said “The FCA is taking a cautious approach which is to be welcomed. The focus on overdrafts is welcome too: this is where the bulk of high-cost borrowing takes place. Providing credit to low-income consumers will always be an emotive topic. You can’t simply wish-away the costs of servicing this customer group. The FCA gets this and it is taking its time to get the balance right. We are 100% committed to working with them to make sure consumers can get access to the credit they need on the best possible terms.”

“We are pleased the FCA has listened on caps – they look great on paper but they are counterproductive in practice. We’re not surprised they have committed to considering one for the rent-to-own sector: they were under intense pressure from the debt campaigns to bring one in. We’ll have to see where the review gets to, but we’re pleased the FCA will be undertaking a proper cost-benefit analysis.”

Phil Andrew, Chief Executive of StepChange Debt Charity said “We have long argued for action on high-cost credit. Its regular use to meet essential costs by those already struggling can lead to debt spiralling out of control. Our recent research shows the number of people who used high-cost credit for essential household costs rose to 1.4 million last year, so we welcome the focus the FCA is placing on protecting consumers in this market. We welcome the transparency measures on overdrafts as we found that over two million people in the UK are stuck in a constant cycle of persistent overdraft debt. However, we are looking forward to the FCA abolishing unarranged overdraft fees and introducing substantive steps to identify and support people in or at risk of persistent overdraft debt through the banking review.”

“Rent-to-own is a very expensive type of credit, not just due to interest rates, but the price of the goods themselves, other possible add-ons and the length of period for repayment, so we believe the FCA is moving in the right direction by considering a price capping and banning point of sale warranties.”

“We’ve previously pointed out that there’s a risk that a lack of access to affordable credit could push more vulnerable households into problem debt, so it’s right that the proposals focus on this too. The Government and the FCA need to look creatively at working with businesses to provide low- and no-interest loans, learning from successful schemes in Australia and elsewhere while recognising the need for the welfare system to provide better emergency support for those who need it. Such an approach could truly transform the options available to those on low incomes and break the vicious debt spiral that high-cost credit all too often creates.”

Vim Maru, Group Director, Retail, Lloyds Banking Group, said “As the first bank to remove all unplanned overdraft charges we absolutely believe addressing the issue of high unplanned overdraft fees is an important one for the industry and one which will have a notable and positive impact on millions of customers. Introducing a single daily overdraft fee based on how much customers borrow and for how long, means that our customers do not have any charges made in arrears. We send millions of text alerts to our customers each month helping them to stay in control of their finances.”

Paul Smith, Chief Executive Officer of Morses Club, said “We consider that our historical technological developments and future enhancements, already in scope, alongside our conservative growth targets put us in good stead following the FCA announcement today. We do not envisage any significant financial or operational impact on our business, which has always had customer forbearance at its heart.”

Money Advice Service Chief Executive, Charles Counsell, said “We welcome the FCA’s wide-ranging review into high-cost short-term credit, a review that has highlighted the complex array of products and charging structures that too often have critical consequences for consumers.  We support any proposals that could improve the high-cost credit market for its customers and look forward to responding to the FCA in more detail.”

“Access to affordable credit and people’s ability to make informed financial decisions is key to day-to-day money management.  Alongside savings, the responsible use of credit is a vital way for UK consumers to make bulky purchases and smooth income and expenditure.  Our evidence shows that of the financially capable behaviours that people exhibit, it is managing credit that can have the greatest impact on their financial wellbeing. We are very pleased to see a growing range of alternatives to high-cost credit including community or social finance-led solutions. ”

Provident Financial Group said that it welcomed the proposals from the FCA on Home Credit. “Our aim is to always put our customers first, lend responsibly and provide our customers with the best credit solution for their needs. We believe the FCA’s focus on ensuring the provision of credit and protecting the consumer by providing credit responsibly aligns with how we serve our customers. We will continue to work with the FCA on how to implement proposed changes during the consultation period.”

Philip King, Chief Executive of the CICM, said that it was important that all high-cost products needed to be looked at: “The review needs to build a full picture of how such products are used, whether they cause detriment, and if so to which consumers, and should include not only the higher profile products but also those that make the banks millions of pounds but are often not in the consumer’s best interests.”

“We would also urge the FCA to capture data and investigate in the greatest detail the extent to which consumers are moving towards the use of loan sharks and unauthorised lenders, as a last resort, where FCA measures have resulted in a reduction in the availability of legitimate high cost credit.”

Gary Little, co-CEO lender of Duologi said “Banks and finance lenders have been ripping off consumers for too long; affordability and reasonable treatment of customers have – worryingly – become an afterthought. As a sector, not only is it our responsibility to offer flexible loans at 0% – or very low – interest rates that help hard-up households afford what they need, but to also present these finances in a fair and transparent way. Many of those currently trapped in expensive rent-to-own contracts are on very tight budgets so need to know exactly what they’re signing up to and what this equates to in fixed monthly repayments. ”

“Moreover, it’s an incredibly outdated view that charging customers over-the-odds to borrow is the only way finance companies can profit. Our research shows that lenders can expect brand loyalty, repeat business and ultimately profits to increase by as much as 28%-30%.”