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High-cost credit overhaul could take effect within a year 

Consumer credit providers could have less than a year to prepare for swingeing changes to the high-cost credit sector after the regulator said reforms could be introduced as early as April 2019.

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The rent-to-own sector faces the prospect of price caps similar to those imposed on payday loans, although action on unarranged overdrafts is limited to greater information to customers, the Financial Conduct Authority (FCA)’s review of high cost credit reveals.


A previous attempt to reform overdrafts ended with defeat in the Supreme Court, FCA chief executive Andrew Bailey warned, and as such, the regulator would take a carefully considered approach to more radically reforming them this time.


“We are going to do that work as soon as we possibly can – we aren’t going to hang around,” Bailey said in a press conference. “There is harm occurring, but we have to do it this way because there was a previous attempt (to reform overdrafts) some years ago which came to an end when it lost in the Supreme Court.


"I do not want us to end up in that position again. I do understand the points made that it may sound like foot-dragging, but it would be much worse in my view if ended this process saying we’re sorry we couldn’t do anything because we didn’t do it properly.”


As a result, a price cap on overdrafts – which in some cases can cost as much as seven times a payday loan – will not yet be introduced. Instead, a series of measures designed to increase consumer awareness will be introduced. These include:

  • Alerts warning of potential overdraft charges
  • Stopping the inclusion of overdrafts in the term ‘available funds’
  • Requiring online tools to make the cost of overdrafts clearer
  • Introducing online tools to assess eligibility for overdrafts
  • Making it clear overdrafts are credit or borrowing

There is, though, a proposal to ban fixed fees on arranged and unarranged overdrafts, along with pricing by a single interest rate and a requirement to include APRs in advertising.


In a bid to tackle the high level of fees, the alignment of arranged and unarranged overdraft prices has been put forward, essentially removing the distinction between the two.


It also calls for the provision of guidance to help firms ensure refused payment fees reflect relevant costs and, in the case of repeat users of overdrafts, early identification and timed interventions.




The FCA review suggests that “the harm identified” in the rent-to-own market is “sufficient in principle to consider a cap on rent-to-own prices”. It will now carry out the detailed assessment of the impact that a cap could have on the sector and how it might be structured.


Rent-to-own sees customers given an item – usually a vital household appliance such as a refrigerator or cooker – which they then pay rent for over an agreed period until they own it. The FCA said it was aware of cases where consumers had paid more than £1,500 for a cooker that could be bought on the high street for less than £300.


The FCA said it would consult on a ban on the sale of extended warranties at the point of sale after it found they were of “limited value” to consumers when similar cover is provided by manufacturer’s warranties.


However, while legal due diligence is necessary, FCA director of strategy Christopher Woolard said, he noted that should the FCA decide to pursue the price cap following consultation, it could be in place as early as April 2019.


Home-collected credit


The FCA has launched a consultation on guidance designed to ensure firms do not visit customers in their homes to offer new loans or refinancing unless customers specifically request it.


“We are concerned there is a small core of customers who are using home-collected credit over an extended period and that some customers are being unduly influenced by firms’ representatives to keep borrowing,” Woolard said.


It is also seeking views on proposals to require firms to provide consumers with comparative costs of taking out a new loan against the cost of refinancing an existing loan.


Catalogue and store cards


Catalogue credit and store card firms will be required under the proposals to do more to help customers avoid persistent debt in the same way as credit card providers have been required to. It is expected these changes could save consumers up to £27.5m a year.


It would achieve this by requiring catalogue credit and store card providers offering ‘buy now or pay later’ deals to clearly explain the implications of such arrangements to customers, along with a requirement to remind customers when their offer period is approaching its end.


Customers would also be given greater choice and control over the circumstances in which they can be offered credit limit increases and when they can decline such offers. Curbs over offers to increase credit limits for customers at risk of financial difficulties will be introduced under the plans, while requirements for store and catalogue credit providers to use the information they hold on customers to better identify those at risk and offer them assistance would also be put forward.


The consultation period runs until August 31 2018, with policy announcements expected in the autumn.

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