FCA launches call for input on high-cost credit and overdrafts

29th November 2016

The Financial Conduct Authority (FCA) has today announced that it is seeking evidence and feedback to further inform its work on high-cost credit, including a review of the payday loan price cap.

 Since taking over regulation of consumer credit in April 2014, the FCA has focused on products that it believes pose the highest risks to its consumer protection objective. One area of focus has been high-cost credit, which includes payday loans, home-collected credit, catalogue credit, some rent-to-own, pawn-broking, guarantor and logbook loans. Other credit products – such as motor finance, credit cards, overdrafts and some instalment lending – may be high-cost, particularly for less creditworthy customers or depending on how they are used.

The Call for input covers:

High-cost products – The FCA will look across all high-cost products to build a full picture of how these are used, whether they cause detriment and, if so, to which consumers. This will enable the FCA to consider whether further policy interventions are needed.

Overdrafts – The Competition and Markets Authority (CMA) identified a number of competition issues with overdrafts, which include poor price transparency and the nature and level of charges, especially for unarranged overdrafts. The FCA will look in more detail at overdrafts from a consumer protection, as well as a competition, perspective using its full range of powers.

The high-cost short-term credit (payday loan) price cap – The price cap came into force on 2 January 2015. The FCA committed to reviewing the cap two years after its implementation, in the first half of 2017. The FCA will assess whether there is evidence that suggests that the cap should be changed. The FCA is also keen to see if there is any evidence of consumers turning to illegal money lenders directly as a result of being excluded from high cost credit because of the price cap. The FCA expects to publish its findings on the review of the payday cap next summer.

Repeat and multiple high-cost short-term credit (HCSTC) borrowing – The FCA will continue to monitor the impact that repeat and multiple borrowing has on the market and consumers.

Andrew Bailey, Chief Executive of the FCA, said “This is a significant moment for our approach to consumer credit regulation as we continue to ensure that this market works well for consumers. As an organisation, we have already taken many steps to address the risk of consumer harm by putting in place new rules for high-cost short-term credit firms and taking action against non-compliance across all credit markets. We have come up to the point of reviewing the cap on payday lending, making now the right time to take a broader view of the issues around high-cost credit, including unarranged overdrafts, and to consider whether our requirements remain appropriate.”

Since the FCA took over regulation of consumer credit in April 2014:

  • Arrears rates have fallen by a quarter
  • 800,000 fewer people took out a high-cost-short-term credit (payday) loan over an 18-month period*
  • A 20% drop in loan approval rates from the start of 2014 to the middle of 2015

 The FCA has also:

 Assessed applications for authorisation from firms formerly licensed by the Office of Fair Trading (OFT) who wish to continue carrying on regulated credit activity, including an assessment of the suitability of their business models and ability to satisfy, and continue to satisfy, our other minimum standards;

  • Carried out a market study of competition in the credit card market;
  • Undertaken robust risk-based supervision, leading to redress where appropriate, and thematic reviews; and
  • Introduced new rules to address the harm we have identified based on detailed evidence gathering and cost benefit analysis.
  • The FCA has also worked closely with other bodies looking at related issues, including the CMA investigations on competition in the payday lending and retail banking markets, and the Law Commission’s review of the Bills of Sale Acts (the legal basis for logbook loans).

 The FCA is asking for responses to its Call for Input by 15 February 2017.

In response to the FCA’s call for input on high-cost credit and overdrafts, Mike O’Connor, Chief Executive of StepChange Debt Charity, said “Today’s announcement is a welcome one. High-cost short term credit (HCSTC) products are used by people who are often financially vulnerable. The cost and design of these products can trap people in cycles of repeat borrowing which deepens their financial difficulties. Every day our advisers see people who are damaged by these products. The review of payday loans is timely, and we think further FCA intervention is necessary to address the problems that still exist in the market, including lenders moving from traditional payday loans to instalment loans, the continued problems caused by people accessing multiple loans, and the poor treatment of customers. But let’s not forget that this market is selling to people who lack other options. The Government must support financially vulnerable through the provision of better alternatives to HCSTC.

“I welcome the fact that the FCA has now acknowledged that overdrafts can act as a form of high-cost credit, and this review gives the FCA an opportunity to examine the case for a cap on unarranged overdraft fees. The need for caps in other markets has already been accepted, as with payday loans and credit cards. There is ongoing consumer detriment from overdraft fees. Unnecessary delays in action risks further harm to financially vulnerable consumers.”