On 31 May 2018, the FCA, following its 18-month review of the high-cost credit market, published two consultation papers pointing to the key areas of concern and focus with regards to arranged and unarranged overdrafts, the rent-to-own market, home-collected credit, catalogue credit and store card products.
The FCA, who had been criticised as too slow in protecting consumers from the high costs of consumer credit, proposed a significant package of reforms to ensure consumers are better protected including the possibility of a cap on rent-to-own lending and a potential backstop price cap for overdraft charges.
The main points raised in the FCA consultation papers are set out below.
Rent-To-Own, Home-Collected Credit, Catalogue Credit and Store Cards
The first consultation paper focuses on rent-to-own, home-collected credit, catalogue credit and store cards, and alternatives to high-cost credit. More specifically:
Rent-to-own: The FCA considers that “the case is made, in principle” for introducing a price cap in the context of rent-to-own products. The FCA proceeds with the relevant proposal in its consultation paper, but notes that it remains open-minded to alternative solutions. It further proposes new rules to ban the sale of extended warranties alongside rent-to-own agreements at the point of sale, taking the view that similar cover is already provided by standard manufacturers’ warranties.
Home-collected credit: The FCA is proposing new rules in order to ensure customers are treated fairly when they re-borrow. It is also introducing new guidance on the interpretation of the ban on “canvassing” cash loans off trade premises, clarifying that firms cannot visit a customer to offer new loans or refinancing unless this is in response to a specific request by the customer. Moreover, a new rule is being contemplated whereby firms would be compelled to provide customers with the comparative costs of refinancing.
Catalogue credit and store cards: The FCA is concerned about the consumers’ understanding of complex products and applicable fees, the lack of control over credit limit increases and the lack of protection for consumers at risk of financial difficulties or persistent debt.
The FCA proposes new rules whereby:
catalogue credit and store card firms offering “buy now pay later” and similar offers would have to give consumers clearer explanations of the relevant implications and costs of not paying back within the offer period;
- firms would have to remind the customers when the offer period is about to come to an end;
- catalogue credit consumers would enjoy more choice in relation to their credit limit increases;
- catalogue credit firms would not be allowed to give credit limit increases or increase the interest rate on the account of customers in financial difficulties;
- firms, including store card firms, would have to identify customers at risk of financial difficulty based on available information and take appropriate steps;
- firms would have to offer customers in persistent debt help to repay their debt more quickly.
Alternative forms of credit: The FCA also considered wider issues in the high-cost credit sector and in particular, the degree to which demand in the rent-to-own market may be driven by the social housing system and the lack of availability or awareness of alternatives to high-cost credit. The FCA took the view that for such issues to be addressed, public authorities need to work together in a number of areas.
Arranged and Unarranged Overdrafts
In its consultation paper, the FCA sets out immediate measures to improve consumer engagement and awareness of overdrafts, but also notes that it is considering more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices. Such options will, if appropriate, be consulted on later in 2018.
The FCA proposes rules requiring firms to provide online or in-app tools that assess eligibility for overdrafts; improving the visibility and content of key information about overdrafts by means of including an online calculator to show the costs of overdrafts for different patterns of use and help consumers understand how overdrafts work; and expecting firms to send consumers overdraft alerts (including text messages or push notifications) to address unexpected overdraft use.
The FCA also introduces for discussion a potential package of remedies and measures which may form part of the next stage of its work on overdrafts. Such measures include simplifying overdraft pricing structures; a potential backstop price cap for overdraft charges; guidance around which costs firms should consider when ensuring refused payment fees reasonably reflect the actual costs; an explicit obligation on firms to have adequate systems and policies around their provision of overdrafts; and interventions by firms at prescribed intervals.
The FCA welcomes comments on its consultation papers by 31 August 2018.
The rules in relation to the rent-to-own market, home-collected credit, catalogue credit and store card products are expected to be finalised in autumn 2018 and come into force early in 2019. With regard to the rules on overdrafts, the FCA will consider the feedback received before finalising its rules near the end of 2018, or alternatively, as part of the next stage of its review of pricing interventions and repeat overdraft use.