Credit, Collections & Insolvency News
The Financial Conduct Authority (FCA) has today published the outcome of its review into high-cost credit, which includes its assessment of the effectiveness of the payday loan price cap.
The review provides clear evidence that FCA regulation of high-cost short-term credit (often known as ‘payday lending’) has delivered substantial benefits to consumers. The review found that 760,000 borrowers in this market are saving a total of £150m per year, firms are much less likely to lend to customers who cannot afford to repay and debt charities are seeing far fewer clients with debt problems linked to high-cost short-term credit.
The FCA has therefore decided to leave the existing payday loan price cap in place, and to review it again in 2020.
However, the review has also established clear concerns with other forms of high-cost credit. In particular, the FCA believes that fundamental changes in the way that unarranged overdrafts are provided may be necessary. Charges for unarranged overdrafts are often high after taking into account the risks to lenders, and can be complex and thus hard for consumers to understand.
The FCA also identified particular concerns in the rent-to-own, home-collected credit and catalogue credit sectors. While there are similarities between high-cost credit markets and products, there are also significant differences in how they work and how people use them. The FCA is developing tailored solutions to these issues, and will consult on action to address these concerns in Spring 2018.
Andrew Bailey, Chief Executive of the FCA, said “High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers. We are pleased to see clear evidence of improvement in the payday lending market after a period when firms’ treatment of customers and their business models were often unacceptable.
“However, there is more that we can do, and this review is about identifying the areas where consumers may be suffering harm so that we can focus our efforts accordingly. In particular, the nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option. We are now working to resolve these issues while preserving the parts of the market that consumers find useful.”
Alongside the review, the FCA is publishing proposals to clarify its rules on creditworthiness and affordability. Most credit firms understand the FCA’s rules regarding checks on prospective customers’ creditworthiness, including whether they can afford consumer credit products. However, there is some uncertainty in parts of the market, so the FCA is proposing a number of changes to clarify its expectations.
The FCA has also published more detail on its work on motor finance, setting out the issues that it is considering and the steps it is taking to develop its understanding of the market. The FCA will publish an update on this work in the first quarter of 2018.
Industry Reaction
Eric Leenders, Head of Personal at UK Finance, said “Our members are committed to responsible lending and to serving better those customers who require access to credit, whether an overdraft, loan or credit card. When used sustainably consumer credit is important for economic growth, and lenders work hard to ensure the balance is right between helping customers to borrow while ensuring longer term affordability. Transparency is important and our members are constantly developing new ways to make the costs of an overdraft even clearer. If a customer is struggling with repayments they should speak to their lender straight away.”
“With the current prudential regulatory focus on rising consumer credit, it is understandable that the FCA will also want to look closely at firms’ assessment of how customers can repay if economic circumstances change. We will carefully consider these reports and will continue to work with the regulator in supporting those customers who do not use credit in a way which is in their best interests.”
Stephen Sklaroff, Director General of the Finance & Leasing Association (FLA), said “The FLA’s members work hard to ensure they lend responsibly and treat their customers fairly. We note that the FCA has found that most firms address affordability in an appropriate way. We look forward to working closely with the FCA on affordability assessments in the consumer credit markets, and as it carries forward its exploratory work to develop its understanding of the motor finance markets. ”
“We welcome the FCA’s focus on vulnerable customers, and we have recently published our own new guidance for the lending industry on how best to identify and support such customers.”
Citizens Advice Chief Executive Gillian Guy said: “The payday loan cap has protected thousands of borrowers from dangerous amounts of debt. Prior to the cap extortionate fees and charges were trapping people into debt – meaning what was supposed to be a short-term loan turned into a long-term nightmare. Since the cap and other new measures were brought in the number of people seeking our help with payday loan debt has more than halved.”
“But people are experiencing similar problems when taking out other forms of high cost credit – like doorstep loans, guarantor loans and rent to own services – as well as overdrafts. It’s good to see the FCA recognise this and the need for action, we think applying a similar cap would help protect consumers – so strongly recommend the FCA considers this as part of its options for other forms of high cost credit.”
“A decade on from the financial crisis, it is important to keep in mind the lesson learnt by credit providers and regulators of how ‘loose lending’ overburdens households with unmanageable debt. The review of credit-worthiness is a good opportunity to assess whether the tests lenders use to check if people can afford to take out credit are still up to the job – and are being used appropriately. “
“All too often people are being able to borrow money which they can’t afford to pay back. The FCA has rightly recognised that firms should fully consider people’s income and outgoings when deciding whether to lend to them. We’d like also the FCA to turn its guidance on affordability checks into rules that lenders must abide by.”
Jane Tully, director of external affairs at the Money Advice Trust said “The FCA’s intervention in payday lending has shown that targeted regulation in the high cost credit market can make a real difference in protecting consumers. The FCA is right to now turn its attention to other forms of high cost credit, as well as unauthorised overdrafts, which have become a common feature of the problems that debt charities help people to resolve.”
“As always, the regulator needs to be mindful of unintended consequences, including potential displacement effects between different forms of credit resulting from any intervention it makes. We look forward to working with the FCA as it develops tailored solutions for different sectors.”
Mike O’Connor, Chief Executive of StepChange Debt Charity, said “Last week, the Bank of England warned that lenders may be dicing with a spiral of complacency in relation to the rapid growth of consumer borrowing. The role of the FCA is to police the market and ensure that any complacency doesn’t translate into harm for consumers. Today’s announcement marks a slight tightening of some rules. It remains unclear, however, that these measures will address some of the fundamental problems that still exist in consumer credit market, including persistent credit card debt, persistent overdraft debt and multiple payday loan borrowing.”
“The FCA has said that the status quo on unarranged overdrafts is not an option and that there is a case for fundamental reform. The charges for unarranged overdrafts are a real problem for our clients and it is disappointing that no action will be taken until spring 2018. The market is already showing signs of movement on this issue, so there is no need to delay vital changes that could address a major source of consumer detriment.”
“The FCA is right not to loosen the payday loan cap and we have seen a marked fall of in the number of people coming to us with payday loans problems. There are currently over one million people using high-cost credit to cover everyday essentials. We need to ensure that people who need credit for essential costs are able to access products that are genuinely affordable and which don’t push them deeper into hardship. We believe that the Government will need to provide major financial backing to support a low and no interest loan scheme.”
