In July 2017, the FCA published its response to the Call for Input into its review of high-cost credit products. The feedback statement identified a number of risks to consumers associated with certain high-cost credit products, namely, arranged and unarranged overdrafts, rent-to-own, home collected credit and catalogue credit. The FCA committed to undertake further investigation into these sectors with the aim of issuing a consultation paper in Spring 2018 with proposals to address its concerns.
The FCA has now issued an update on its progress and initial findings from this investigative work. The update confirms that the FCA continues to have concerns about outcomes for customers who use high-cost credit products, however it is yet to reach any final conclusions or decide on how it might intervene. The regulator has, however, confirmed that it will seek to intervene to encourage alternative lower cost solutions for users of high-cost credit.
Findings from the FCA’s work
The FCA states that its work completed to date into overdrafts reinforces its concerns, in particular, in relation to unarranged overdrafts.
The regulator is concerned about the high fees and charges associated with this type of overdraft. The FCA’s analysis has highlighted that, while arranged overdrafts are a greater source of revenues for providers than unarranged, the proportion of revenues from unarranged is significantly higher compared to the amounts lent.
The FCA’s concerns are not purely restricted to the level of charges, but also the complexity for customers and the concentration of the fees and charges. The FCA is concerned that its research has indicated that over half of the charges levied by providers were concentrated on just 2% of accounts. This indicates that some customers are using unarranged overdrafts repeatedly or persistently.
The FCA believes that rent-to-own customers are a ‘particularly vulnerable’ group due to low incomes, increasing personal debt levels and more limited access to other credit products.
The FCA is exploring rent-to-own firms’ pricing policies, including add-ons, such as insurance and warranties. There is a concern that customers do not fully consider the costs or value of these products, and that the costs of add-ons could negatively impact customers’ finances.
Home collected credit
The FCA’s analysis has indicated that home collected credit customers hold debt in these products for long periods. For this reason, the FCA is focusing on gathering evidence on repeat borrowing and, particularly, refinancing. Customers in this sector who undertake additional borrowing can incorporate the outstanding balance from a previous loan into the new loan. The FCA is concerned that when customers refinance their loans in this way, it could result in them paying significantly more interest on the amounts originally borrowed than they would have had they maintained separate loans.
In this sector, the FCA has concerns around the complexity of the products which could lead to customers making poor choices. In particular, there are concerns that customers do not understand complex charging structures and repayment options, leading to customers paying more interest than necessary and increasing the risk of them falling into arrears.
Alternatives to high-cost credit
The FCA has indicated that it recognises the value of high-cost credit for customers who lack other options. However, it has also stated that it intends to explore why relatively lower cost, mid-price, lower risk credit options are not more widely available.
The regulator has explored the barriers that exist to the provision of alternatives and what could be done to remove these. It has identified some key issues that act as barriers to the expansion of alternatives to high-cost credit. These include an inability for providers of alternatives to achieve a sustainable funding model given the costs and risk involved in providing small loans to high risk customers, as well as fears around reputational risk and varying appetite and capacity for alternative providers to lend to higher risk customers.
The FCA wishes to encourage alternative providers to use its regulatory sandbox to test business models, ensuring they are in the interests of consumers. In addition, the FCA will continue its discussions with firms, Government and other stakeholders on the barriers, and welcomes further engagement on what the FCA or others could do to foster alternative credit options.
Regulatory next steps
Once the consultation on proposals to address risks in this sector is published in Spring 2018, firms should ensure they read and respond to ensure their views are reflected.
Considerations for firms
Firms in the high-cost credit sector can expect a greater level of scrutiny over the coming months as the FCA continues to explore and enhance its understanding of this market. Firms who provide high-cost credit products to customers should continue to stay abreast of the FCA’s direction of travel in this sector. As the FCA’s view of the risks in these sectors is defined, firms should review their own products and practices to ensure that these risks do not exist in their own business models.