Last month the Financial Conduct Authority (FCA) published an update, as part of their review of High-cost credit. In the update, the FCA outlined key areas of concern with the sector, including arranged and unarranged overdrafts, rent-to-own, home-collected credit and catalogue credit. The regulator has also continued to gather evidence from firms and its consumer research.
HCSTC not the focus
It’s encouraging for us that the regulator is now turning its attention to other parts of the high-cost credit market. There have long been problems in different parts of the sector, be it the charges on unauthorized overdrafts or the transparency of rent to own agreements.
HCSTC has certainly been the guinea pig for FCA regulation of consumer credit and has provided a great deal of evidence for the FCA in terms of what works. In its review of the price cap, the FCA found that HCSTC customers now pay less, repay on time more often and are less likely to need help from debt charities.
It’s no surprise to learn that the regulator is now looking at how some of these measures could be applied to the rest of the market, but the FCA also needs to be mindful of how any changes affect the wider consumer credit market as well.
A changing market
The FCA has said that it is not afraid to look at alternatives to high-cost credit, nor making further regulatory interventions in the market. However, the FCA does recognise that it must watch for unintended consequences, which could impact access to credit. The challenge for the regulator will be striking the right balance with the measures it can take.
To develop alternatives innovation is needed. As a result, the regulator is inviting innovators to come forward to build new products, with the opportunity to test in the FCA sandbox initiative. It remains to be seen if there will be new entrants to this market.
The feedback statement also mentions social enterprises. We know that social enterprises can’t currently keep up with demand, but it will be interesting to see how they interact with this sector moving forward.
A word of caution
While the regulator pursues alternatives to high-cost credit is must consider the impact any new changes would make to the industry. For this reason, is it important that the FCA doesn’t consider high-cost credit products in isolation. It must also look at how consumers interact with mainstream products and the impact that future restrictions would have.
A lack of certainty about the future does also impact on existing firms, as they think about developing new products, while arguably having the best understanding of consumers in this market.
The CFA believes the best approach for the FCA would be to develop a more consistent approach for all consumer credit products.
A good starting point would be for the FCA to set out what “good” looks like for every consumer credit product. This could include, amongst other measures, an affordability check, consistent across products and clarity about the cost and charges.
Ultimately this would ensure that consumers would receive the same amount of protection across all products.
Parts of the high-cost short-term credit sector have changed radically in the recent years. At the CFA we will be continuing to review the future proposals from the FCA for this market, as the industry continues to evolve.
Demand remains, and everyone needs access to credit facilities in the modern world and the financial services industry has a duty to provide different options to suit different needs.
To protect consumers from potential detriment, there needs to be fair and equitable regulation across the consumer credit sector. All consumers should benefit from regulation that works and improves outcomes. It is important that regulation delivers a truly competitive market that drives these improvements while ensuring access to credit.
Jason Wassell, Chief Executive, Consumer Finance Association (CFA)
The CFA is the principal trade association representing high-cost short-term lending businesses in the UK. Our members range from start-ups to market leaders, operating both online and on the high street. We also represent a growing number of credit brokers.