FCA Targeting High-cost Credit and Car Loans
2nd August 2017
In a previous blog post, we discussed how the debt crisis is unlikely to trigger a financial crisis due to the lessons that the 2008 financial crisis taught to the financial community.
This week, the Financial Conduct Authority (FCA) has demonstrated this by unveiling their intention to take action on the issue of high-cost credit, and by reporting on their ongoing investigation into car loans.
This comes at a crucial time, as unsecured consumer credit topped £200bn – something that has not happened since December 2008.
The Debt Crisis
The latest warnings on the debt crisis come from credit ratings agency, Moody’s. This week, they downgraded the outlook on bonds backed by credit card customers, buy-to-let mortgages and car loans as they believe that they will perform poorly for the next 12 to 18 months. In a recent report, Assistant Vice President, Greg Davies, expressed his concern: ‘household debt is high and still growing, leaving consumers vulnerable to an economic downturn, while higher inflation, weaker wage growth and levels of indebtedness leaves those in lower-income brackets more exposed’.
There are growing concerns that the debt crisis may be being fuelled by irresponsible lending and Moody’s is just the latest of a number of voices of concern. The debt crisis, and particularly car loans, buy-to-let mortgages and lending practices in general, have all been hot topics in the news for a while.
So, as the agency in charge of financial conduct, is the FCA taking notice of the discussion? And what are they doing about it?
What is the FCA doing?
The FCA is taking notice, and have been reviewing situations such as persistent credit card debt, creditworthiness and motor finance since the beginning of this financial year. This week, they have reported on the outcome of their recent review of high-cost credit, as well as on their ongoing review of motor finance.
The report notes the successes of the cap they placed on charges of payday loan in 2015. The cap limits payday interest and fees to 0.8% per day of the amount borrowed. They argue that this has successfully discouraged lenders from lending to customers who cannot afford to pay and saved customers a total of £150 million. As such, the FCA plans to keep the cap in place until another review takes place in 2020.
Despite this success, however, the report notes that more needs to be done. The Chief Executive of the FCA, Andrew Bailey, says in the report ‘high-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers’.
Their greatest concerns include:
- rent-to-own loans, which allow you to pay for white goods such as fridges
- home-collected credit (Doorstep Loans), which are high-interest loans collected from you at home
- catalogue credit, which allow you to spread the cost of goods over weekly or monthly instalments, and
- unarranged overdrafts, which happen when you go into your overdraft without previous agreement
This has motivated the FCA to take action and develop solutions to these issues. A consultation on the solutions is expected in Spring 2018. This can’t happen soon enough, as, according to ‘Which?’, high street banks can still charge up to 12.5 times more than the recently-regulated payday loan companies.
The FCA has also proposed to clarify its rules on creditworthiness and affordability, with the aim of creating a policy statement before September 2018. In this statement, they would like to clarify rules on:
- the distinction between affordability and credit risk
- factors which determine affordability
- role of income and expenditure in determining lending, and
- their expectations of firms’ policies and procedures
This should aid consumers by keeping firms’ in check and ensuring responsible lending behaviour.
As well as this report, the FCA has released an update on their review of motor finance. This demonstrates that they are looking into whether firms are lending responsibly, are properly assessing a customer’s affordability, have conflicts of interest due to commission arrangements, offer sufficient information, and are suitably prepared for the risk of falling asset values. Another update is expected in 2018.
Too little, Too Late?
In response to the report, the Chair of the Business, Energy and Industrial Strategy Committee, MP Rachel Reeves, who had campaigned for action on overdraft charges, said ‘No one in debt or financial difficulty will find it easier to make ends meet just because a report confirms the problem. They need action to get rid of these charges’.
Reeves has a point. Although it can be argued that the FCA is adequately preventing a financial crisis, is it doing its best for consumers?
The next update on motor finance is not due until January 2018, at the earliest, and it is not expected that they will have solutions to implement until 2019. Similarly, consultation for high-cost credit solutions will not happen until March 2018, at the earliest, and their policy clarification on creditworthiness and affordability is not due until September 2018.
For us, the report is a step in the right direction, but, while it remains to be seen if it is ‘too little’, it is definitely ‘too late’. Lots of people can’t afford to wait years for responsible lending practices to be enforced. If you are one of those people, don’t worry – we are here to help! For advice on debt solutions, such as an IVA or a Trust Deed, call us on 0808 2085 198.