Lenders and advice charities have backed moves announced today to fundamentally reform overdrafts and introduce a price cap in the rent-to-own sector.
The Financial Conduct Authority (FCA) announced a series of long-awaited reforms in the high-cost short-term credit sector this morning (May 31), after its review of overdrafts, the rent-to-own market, catalogue credit and home-collected credit.
The regulator announced, among several measures, a consultation on mandatory rules to make it easier for customers to manage their overdrafts. These rules could include:
Having reviewed rent-to-own providers, the FCA said it believes the harm in this market is sufficient in principle to consider “a cap on rent-to-own prices”. The regulator will now assess the impact a cap could have on this sector and how it might be structured. The regulator is also consulting on banning the sale of extended warranties at point of sale; this could save consumers up to £7.7m per year.
The particular proposals for banks and rent-to-own providers sparked reactions this morning, with most welcoming action on overdraft fees.
Gary Little, co-chief executive of consumer lender Duologi, said: “Banks and finance lenders have been ripping off consumers for too long; affordability and reasonable treatment of customers has – worryingly – become an afterthought.
"As a sector, not only is it our responsibility to offer flexible loans at 0 percent - or very low - interest rates that help hard-up households afford what they need, but to also present these finances in a fair and transparent way. Many of those currently trapped in expensive rent-to-own contracts are on very tight budgets, so they need to know exactly what they’re signing up to and what this equates to in fixed monthly repayments.
“Moreover, it’s an incredibly outdated view that charging customers over-the-odds to borrow is the only way finance companies can profit. Our research shows that lenders can expect brand loyalty, repeat business and ultimately profits to increase by as much as 28 percent to 30 percent.”
"The FCA should still be prepared to intervene with its ‘backstop price cap’ on overdrafts"
Joanna Elson OBE, chief executive of the Money Advice Trust, the charity that runs National Debtline, said: “The FCA’s decision to introduce a cap in the rent-to-own market is welcome – and could make a significant difference to thousands of people. The regulator should keep the impact of its new measures in other sectors, such as doorstep lending, under review – and be prepared to reconsider the case for further cost caps.
“Similarly, while new measures on unarranged overdrafts may go some way in addressing the problems we help people with at National Debtline – the FCA should still be prepared to intervene with its ‘backstop price cap’ on overdrafts if consumer detriment persists in this area. It is important that this option remains firmly on the table.
“Today’s news has also been overshadowed by the government’s disappointing decision to step back from reforming logbook loans through its Goods Mortgages Bill. In light of that decision, the FCA needs to take urgent action to improve consumer protection in this sector, too.”
Welcome #FCA support for Labour's calls for stringent action in consumer credit market but it’s deeply disappointing FCA has failed to introduce caps on overdraft interest and charges Labour demanded. With nearly 3 million in persistent overdraft debt, urgent action is needed.— John McDonnell MP (@johnmcdonnellMP) May 31, 2018
Phil Andrew, chief executive of StepChange Debt Charity, said: “We welcome the transparency measures on overdrafts as we found that over two million people in the UK are stuck in a constant cycle of persistent overdraft debt. However, we are looking forward to the FCA abolishing unarranged overdraft fees and introducing substantive steps to identify and support people in or at risk of persistent overdraft debt through the banking review.
"Rent-to-own is a very expensive type of credit, not just due to interest rates, but the price of the goods themselves, other possible add-ons and the length of period for repayment, so we believe the FCA is moving in the right direction by considering a price cap and banning point of sale warranties.
“We’ve previously pointed out that there’s a risk that a lack of access to affordable credit could push more vulnerable households into problem debt, so it’s right that the proposals focus on this too. The government and the FCA need to look creatively at working with businesses to provide low and no-interest loans, learning from successful schemes in Australia and elsewhere, while recognising the need for the welfare system to provide better emergency support for those who need it."
one of the standout findings from FCA's condoc on overdrafts- consumers in deprived areas on average pay twice as much on unauthorised overdafts as those in less deprived areas; this needs to dealt with now, not put off yet again; see para 2.6— Mick McAteer (@MickMcAteer) May 31, 2018