As part of an on-going process of reviewing high-cost credit products, the FCA recently published two consultation papers focusing on:
rent-to-own, home-collected credit, catalogue credit and store cards and alternatives to high-cost credit; and
The consultation papers follow on from action taken by the FCA to address perceived issues in the high-cost short-term lending sector (commonly referred to as “payday loans”) through the imposition of measures such as the price cap on high-cost short-term loans and several high profile redress programmes involving payday lenders.
The FCA’s consultation papers outline an extensive series of measures which are designed to address the high relative cost of finance and banking services affecting sub-prime and near-prime borrowers in the UK. Reaction to the FCA’s consultation papers has been mixed, with consumer advocates such as Gareth Shaw of consumer association Which? and Gillian Guy, chief executive of Citizens Advice, expressing disappointment that the regulator shied away from introducing a cap on overdraft fees (at least in the short term) and frustration at the length of time it has taken to address these issues. Industry representatives, such as Greg Stevens, chief executive of the Consumer Credit Trade Association, have welcomed the FCA’s approach, saying their cautious approach was important in getting the balance of the rules right.
It should be noted that high cost credit is an exceptionally difficult area for the FCA to regulate due to the need to balance the interests of vulnerable customers (who are adversely affected by higher financing costs and at greater risk of falling into persistent debt) against the economic realities of lending to such customers (including a greater risk of default and higher relative administrative costs when compared to mainstream borrowers). The FCA’s consultation papers represent an attempt to curb some of the worst excesses of the high cost credit sector without closing off access to finance for poorer borrowers (who might otherwise be forced to turn to illegal money lenders). In the case of overdrafts, a cap on overdraft fees could impact the viability of the UK’s “free-if-in-credit” banking model (which represents approximately three-quarters of all UK current accounts) which could prove highly unpopular with average voters if the cost of their bank accounts was to rise.
High Cost Credit Review: Overdrafts
The FCA has identified that the key harm arising out of the overdraft market is that prices are too high for consumers. The four drivers of harm it highlights are lack of awareness and engagement, complex price structures, high fee levels and repeat use.
The FCA has suggested a number of market interventions aimed at encouraging competition through increasing consumer awareness of how they use their overdrafts and how the facility works; these include mobile phone alerts, increased visibility of key information and online tools to indicate overdraft eligibility. There has been the suggestion of more interventionist measures in the future (such as a ban on fixed fees and price capping) should the FCA’s suggested measures prove insufficient.
The FCA has proposed introducing new rules to:
Require firms to provide online or in-app tools which can assess overdraft eligibility – the aim is to reduce the barriers that prevent customers switching PCAs with an overdraft;
Improve visibility and content of key overdraft information – for example, online calculators to show the costs of overdrafts for different patterns of use and assist consumers understand how the overdrafts work; and
Require firms to send alerts to customers addressing unexpected overdraft use – warnings that use of the overdraft may result in charges can be delivered by text message or push notification.
Further measures which may be consulted on in future include:
Simplifying the pricing structure of overdrafts – namely, banning all fixed overdraft fees other than refused payment fees, a single interest rate for arranged overdrafts, requiring un-arranged overdraft rates to match arranged overdraft rates and standardising the representation of rates;
A backstop price cap for overdraft charges; and
Guidance on what exact costs can be included in refused payment fees.
High Cost Credit Review: Rent-to-own, home-collected credit, catalogue credit and store cards
Over three million UK consumers use high-cost credit, many of whom are among society’s most vulnerable. The FCA has made it a priority to ensure there is adequate protection for these consumers.
The FCA has expressed concern that customers purchasing goods via Rent-to-Own (“RTO”) schemes often pay many times more than what they would pay at a retailer and up to three times what they would pay if using other high cost credit. This increased price also has a knock-on effect, as customer will pay more interest on the higher price. The FCA’s research also noted that RTO customers are also more likely to make use of other high cost forms of credit (such as home-collected credit) which can lead to the problem of persistent debt.
One potentially controversial aspect of the consultation paper is the suggestion that certain customers would be better off if they were “denied access to RTO” and should move to “other, cheaper credit sources” or reconsider their needs and forgo purchases. Such comments may be viewing in some quarters as patronising insofar that they suggest that such cheaper credit sources are always available (implying ignorance or laziness on the part of the consumer in not finding a better deal) or that forgoing a purchase is always an option (implying that RTO is being used to facilitate frivolous borrowing). In reality, RTO is often the option of last resort for customers who are unable to borrow elsewhere and who are borrowing to afford essential household goods (such as a washing machine, fridge-freezer or cooker). For those customers the affordability of low weekly payments often outweighs the higher overall cost due to the long term nature of the RTO contracts (which typically run for two to three years). Other goods that might previously considered as luxuries (such as laptops or smartphones) may have education and/or social benefits such that they would (for many people) be considered essential parts of modern life.
The three principal measures proposed by the FCA in relation to RTO are:
a cost cap on RTO (although the FCA has not set out any details on how such a cap would be calculated);
a two day deferral period for the sale of extended warranties; and
a requirement to give customers sufficient, prominent information so they can make an informed choice to buy the extended warranty.
The FCA highlighted three main areas of concern surrounding store cards:
Credit offers – consumers are generally unaware of interest being charged from the date of purchase on Buy Now, Pay Later schemes or of interest being payable on the total purchase amount;
Consumer choice and control over credit limit increases – while many store cards offer credit limit increases, the FCA has concerns that they are issued without consulting or even informing clients of these changes; and
Potential problem debt – flexible payment terms hide financial difficulties and debt held over a long period of time can incur high costs.
The FCA expressed serious concerns with the practice of charging interest on the whole balance in the event that the debt is not fully repaid by the end of the promotional period, stating that they are concerned about the unnecessarily high costs this practice can incur on some customers and believe that the firms with these offers need to be clearer about the consequences linked to these offers, offer reminders to those customers who look likely to miss the deadlines and extend the existing rules on explaining specific matters to include explaining the charging of interest.
In respect of credit limit increases, the FCA has had discussions with the Finance and Leasing Association and the British Retail Consortium to discuss voluntary industry agreements similar to those which apply to credit cards. This could lead to an opt-in basis for credit limit increases or part of the initial sign-up for the card including a decision on if and how credit limit increases are communicated to the customer.
The FCA wants to extend the rules applying to store cards to ensure complete parity with the credit card regime. New rules would build upon the existing requirements to monitor repayment records, maintain adequate policies and take appropriate action where necessary, even if no payment has been missed. The FCA has not proposed specific guidance on what activities to monitor, trusting that the firms in question will know which indicators are appropriate. The FCA has also proposed extending its rules on persistent debt (introduced following the FCA’s credit card market study) to store cards, which would require firms to:
intervene if a consumer remains in persistent debt for a period of 18 months by informing them off the implications of continuing to make low repayments;
send a further reminder at 28 months if payments indicate the consumer is still likely to be in persistent debt at the 36 month point; and
offer the customer a way to repay their balance in a reasonable period if they remained in persistent debt at 36 months (and exercise forbearance, such as reducing or waiving interest or charges, if the customer is unable to do so).
Home-collected credit (or doorstep loans) are another area that the FCA has identified as presenting serious risk to consumers. Investigations into the loans highlighted that many consumers using this form of high-cost credit would borrow repeatedly in this manner and borrow more and more each time they took out a subsequent loan. As groups using this form of credit often lack substantial savings and use the loans to meet recurring expenditures and the occasional emergency, the borrowing becomes habitual and “an entrenched part of their budget”.
Broadly, the FCA did not think home-collected credit to be harmful, as long as creditworthiness assessments were carried out effectively and weekly repayment levels were affordable and sustainable. However, the FCA is concerned about the small core of customers for who this form of borrowing has become habitual. In particular, they highlighted that these habitual borrowers were unduly influenced by the representatives of the firms offering the loans to keep borrowing. These representatives can be quick to suggest further borrowing when eligible, or at certain times of the year (like Christmas or the start of the school year). These firms, the FCA noted, were in a unique positions to exploit intimate knowledge of their consumers’ spending needs and can use this is subtly influence consumers.
The FCA has proposed new rules which would:
re-word guidance on sections of the Consumer Credit Act 1974 (“CCA”) which prohibit soliciting of cash loans off trade premises when not done in response to a signed written request – namely to prevent firms using an initial agreement as an on-going permission to call; and
introduce regulations to protect consumers from spiralling into repeat borrowing, using a new loan to pay off a previous one and increasing information disclosure requirements around refinancing options.
The FCA did consider more interventionist measures, such as price caps or limiting refinancing, but felt they were not necessary at this time.