The Financial Conduct Authority (FCA) has published an update on its work in the high-cost credit sector. The update follows a Feedback Statement the FCA published in July 2017 which identified key areas of concern with the sector including overdrafts, rent-to-own, home-collected credit and catalogue credit.
Work undertaken since July 2017 has demonstrated an emerging picture of the case for intervention in a number of markets but also some limitation on what can be achieved purely through traditional regulatory interventions.
As well as being prepared to propose new rules where it has the evidence that markets are not working well for consumers, the FCA is prepared to look at solutions designed to increase the choice and availability of alternatives to high-cost credit. It will look at the guidance given to social landlords and others about referring to cheaper sources of credit and is also proposing to work with government to highlight examples of best practice around alternative models.
The FCA considers that it is important to avoid negative unintended consequences from taking steps that might restrict the availability of credit to those consumers who are able to repay it affordably.
Christopher Woolard, Executive Director of Strategy and Competition said:
“High-cost credit products remain a key focus for us. We have already taken significant steps to address the risk they pose to potentially vulnerable consumers by putting in place new rules for high-cost short-term credit firms and taking supervisory and enforcement action against non-compliance across all credit markets.
“This review and the analysis we have conducted so far give an emerging picture of the need to intervene in some parts of the market. At the same time we can also see the social utility of these credit products. We need to address both the choice and range available and how this market can work better for consumers.”
The FCA remains concerned about the high fees and charges for unarranged overdrafts, especially when compared to the relatively small amounts lent. The FCA has conducted detailed analysis of how consumers use their overdrafts, looking at the transaction history of 1.5 million personal current accounts. The data have shown that while arranged overdrafts are a larger source of revenue for firms than unarranged overdrafts, the proportion of revenues from unarranged overdrafts is significantly higher when compared to the amounts lent. Over half of the total charges paid on unarranged overdrafts were applied to just 2% of accounts.
We are taking this work forward alongside our Strategic Review of Retail Banking Business Models, and this analysis of overdrafts will feed into that Review
FCA supervision and authorisation work on rent-to-own has already driven significant improvement in the sector and reduced the risk of consumer harm.
However, concerns remain about the cost of using such services particularly when add-on products are included, and the FCA continues to gather evidence in this area as part of its review of the market.
The FCA is focusing on home-collected credit consumers’ repeat borrowing and refinancing, particularly where people take out additional borrowing with the amount outstanding from the previous loan incorporated into the new loan. There are concerns that when consumers refinance their loans in this way, it may result in them paying significantly more interest on the amounts originally borrowed than they would had they maintained separate loans. The FCA has requested further data from firms on their lending patterns and the nature and extent of refinancing to examine ways in which other borrowing options could work better for consumers.
Catalogue credit also remains a concern for the FCA, particularly the complexity of charging structures and how people are offered choices to make repayments. These mean many consumers may not understand key features or may not be making informed choices. The FCA is gathering evidence on firms’ policies including information they provide to customers and doing consumer research to better understand consumer use of these products.
Alternatives to high-cost credit
The FCA has set out a series of commitments on initiatives to support greater consumer access to alternatives to high-cost credit. This includes working with the government to clarify our expectations of social landlords and others so that they can feel confident in signposting their clients to alternatives to high-cost credit. The FCA will also highlight best practice that lowers the demand for high-cost credit, such as providing white goods when tenants move into a new property. The FCA is also inviting innovators in this space to bring forward ideas that are in the interest of consumers and test them if necessary as part of the FCA Sandbox.
In most areas, the FCA intends to publish conclusions and proposals for consultation in the Spring. Overdrafts will be addressed as part of the FCA’s Strategic Review of Retail Banking Business Models, which will be reporting later this year.
Commenting on the FCA update Greg Stevens, CEO of the CCTA, said “We have seen a very significant concession from the FCA today. The regulator has acknowledged that ‘the provision of high cost credit can have a socially valuable function’ and that access to legal, regulated sources needs to be maintained.
“This is music to the ears of hundreds of responsible, specialist lenders serving small local communities up and down the country. These businesses are being choked out of the market by wave after wave of regulation designed to protect consumers but actually causing them harm by reducing their access and choice to legal products.
“Making the case for ‘high cost credit’ is a thankless but necessary task. My hope is that today we have drawn a line in the sand on the level of regulation the sector is able to bear.”
Peter Tutton, Head of Policy at StepChange Debt Charity, said: “We welcome this update from the FCA that echoes the findings of our own research. The pressing need now is to call time on harmful persistent overdraft debt and charges causing hardship for people who are already financially vulnerable. We are keen to get to work with the banks and the FCA on solutions, as personal banking is just too important to everyone’s financial health to allow these problems to continue.”
“Furthermore, the government must ensure families do not have to pay a poverty premium to get the most basic household goods and help develop alternatives to high-cost credit.”
Gillian Guy, Chief Executive of Citizens Advice said “The FCA’s high-cost credit review update echoes our concerns that rent-to-own companies and unarranged overdraft fees unfairly penalise vulnerable consumers. Credit products should help consumers manage their money and not push them into debt.”
“It’s encouraging to see that the FCA is willing to intervene in the market in order to protect consumers from high-cost credit debt, and we look forward to seeing their consultation paper in Spring. The total cost cap on payday lending has succeeded in reducing the number of people getting into problem debt. The FCA should build on that success by extending similar protections to other types of high-cost credit.”