The Financial Conduct Authority (FCA) has published an update on its work in the high-cost credit sector, including detailed reasons for its areas of concerns.
The update follows a feedback statement the regulator published in July 2017 which identified key areas of concern with the sector.
The FCA said that the work undertaken since July 2017 has demonstrated an emerging picture of the case for intervention in several markets but also some limitation on what can be achieved purely through traditional regulatory interventions.
As well as being prepared to propose new rules where it has the evidence that markets are not working well for consumers, the FCA is prepared to look at solutions designed to increase the choice and availability of alternatives to high-cost credit.
The FCA considers that it is important to avoid negative unintended consequences from taking steps that might restrict the availability of credit to those consumers who are able to repay it affordably.
Christopher Woolard, Executive Director of Strategy and Competition said: “High-cost credit products remain a key focus for us. We have already taken significant steps to address the risk they pose to potentially vulnerable consumers by putting in place new rules for high-cost short-term credit firms and taking supervisory and enforcement action against non-compliance across all credit markets.
“This review and the analysis we have conducted so far give an emerging picture of the need to intervene in some parts of the market. At the same time, we can also see the social utility of these credit products. We need to address both the choice and range available and how this market can work better for consumers.”
Areas of concern
Overdrafts: The FCA remains concerned about the high fees and charges for unarranged overdrafts, especially when compared to the relatively small amounts lent.
The regulator will be carrying out further research into this area alongside its strategic review of retail banking business models.
Rent-to-own: FCA supervision and authorisation work on rent-to-own has already driven significant improvement in the sector and reduced the risk of consumer harm.
However, the regulator’s concerns remain about the cost of using such services particularly when add-on products are included, and the FCA continues to gather evidence in this area as part of its review of the market.
Home-collected credit: The FCA is focusing on this sector’s consumers’ repeat borrowing and refinancing, particularly where people take out additional borrowing with the amount outstanding from the previous loan incorporated into the new loan. There are concerns that when consumers refinance their loans in this way, it may result in them paying significantly more interest on the amounts originally borrowed than they would had they maintained separate loans.
The FCA has requested further data from firms on their lending patterns and the nature and extent of refinancing to examine ways in which other borrowing options could work better for consumers.
Catalogue credit: This area remains a concern for the FCA, particularly the complexity of charging structures and how people are offered choices to make repayments. These mean many consumers may not understand key features or may not be making informed choices.
The FCA is gathering evidence on firms’ policies including information they provide to customers and doing consumer research to better understand consumer use of these products.
In most areas the FCA intends to publish conclusions and proposals for consultation in the May 2018.