Our response to the Financial Conduct Authority’s announcement on high cost credit

31 Jan 2018

The Financial Conduct Authority (FCA) has today published an update on its work in the high-cost credit sector.

The update follows a Feedback Statement the FCA published in July 2017 which identified key areas of concern within the sector including:

The FCA is concerned about the high fees and charges for unarranged overdrafts, especially when compared to the relatively small amounts lent. FCA analysis of how consumers use their overdrafts shows that, while arranged overdrafts are a larger source of revenue for firms than unarranged overdrafts, the proportion of revenues from unarranged overdrafts is significantly higher when compared to the amounts lent. This analysis will feed into their Strategic Review of Retail Banking Business Models.

There remain concerns 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 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. They have requested further data and examining ways in which other borrowing options could work better for consumers.

Catalogue credit
Catalogue credit also remains a concern for the FCA, particularly the complexity of charging structures and repayment choices. They fear that many consumers may not understand key features or may not be making informed choices. The FCA is gathering evidence on firms’ policies to understand consumer use of these products better.

Alternatives to high-cost credit
The FCA has set out a series of commitments on initiatives to support greater consumer access to alternatives to high-cost credit. The FCA will also highlight best practice that lowers the demand for high-cost credit, such as providing white goods when tenants move into a new property.  The FCA is also inviting innovators in this space to bring forward new ideas and test them as part of the FCA Sandbox.

Work undertaken since July 2017 has demonstrated an emerging picture of the case for intervention in a number of markets but also some limitation on what can be achieved purely through traditional regulatory interventions. The FCA has stressed 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.

The FCA intends to publish conclusions and proposals for consultation in the Spring.

In response to this announcement this morning, Sian Williams, Director of Financial Health at Toynbee Hall said:

“We welcome the FCA’s announcement today that they are undertaking a range of work to improve the outcomes for people who currently have to use high-cost credit to meet their basic needs. The communities we work with are struggling to make ends meet and provide for their families; the squeeze on incomes, benefits cuts and rising living costs leave too many households without a buffer to cope with even small financial shocks, and we are seeing increasing numbers of working people in London seeking debt advice, including for high-cost credit. So the FCA’s commitment to ensuring that all forms of credit make a positive contribution to the financial health of our communities is encouraging.

At Toynbee Hall we have long flagged hidden systemic issues around the drivers of high-cost credit use, such as when people needing social housing are given only a few days’ notice to move into an unfurnished property; this leaves some of our most financially vulnerable households little choice but to buy essentials from expensive rent-to-own stores and borrow from high-cost lenders. It’s time to ensure that basic needs can be met at a fair price, and without exacerbating the “poverty premium” through a lack of access to affordable credit. So we fully support the FCA’s approach in recognising that users of high-cost credit need and deserve better, fairer options. This includes increasing the supply of cheaper credit, and ensuring that people can find it and access it when they most need to do so, but also designing services, such as housing, in such a way that the need for credit is minimised. In our work with social landlords and local authorities we see examples of both good and poor practice, and are ready to share our experience in this area with interested providers.

The FCA also sets out important opportunities for cross-sector collaboration aimed at solving the systemic reasons why too many vulnerable households have to rely on high-cost credit in the first place, and enabling them to access fairer pricing when credit is appropriate. We know from our work with local authorities and social landlords that their staff often don’t know how to help, or what information they are legally allowed to give about where to borrow at an affordable price. So we are pleased to see the FCA’s proposals for working with partners, including MHCLG, to create clear good practice guidance for local authorities and housing providers. In our financial health work, we have increasingly recognised the part that frontline teams in public services – and in banks and building societies – could play in giving more and better options to people facing debt or money problems. We need a co-ordinated effort to support training and culture change so that those teams can feel empowered and sufficiently confident to play that role. We look forward to continuing to help build an effective referral and guidance culture across the wider frontline community.”

Read the FCA’s update in full here.