On the 31st May 2018, the FCA published the outcome of its high cost credit review. As part of its review, the regulator also published their proposed rules and guidance for consultation.
The regulator has focused their attention on arranged and unarranged overdrafts, as well as rent-to-own, home collected and catalogue credit products, including the use of store cards. Alternatives to high cost credit are also touched on as the regulator wants to see an increase in choice and availability of alternatives to high cost credit.
The FCA have also acknowledged that it is important to avoid negative unintended consequences from taking steps that may restrict the availability of credit to those consumers who are able to repay it affordably.
Christopher Woolard, Executive Director of Strategy and Competition has stated:
“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.”
The regulator has proposed the following changes which they are consulting on following the review:
There are around 400,000 customers that currently use rent-to-own products, the regulator says they have seen examples where customers have paid over £1,500 for essentials like an electric cooker, which could be purchased on the high street for a little as £300.
Significant harm has been identified in the sector and has resulted in the FCA considering a price cap on rent to own products. The regulator has committed to commence a detailed assessment of the impact that a cap could have on the sector and how the cap could be structured. The intention by the regulator is to undertake the work over the next few months, with an aim to introduce the changes, if appropriate, by April 2019.
The regulator is also consulting on a ban on the sale of extended warranties at the point of sale.
The regulator is considering options, such as to ban fixed overdraft fees and to end the distinctions between how arranged and unarranged overdrafts are priced, as well as tackling harm from repeat use. The regulator intends to consult on any proposals in late 2018.
The consultation will include exploring mandatory rules to make it easier for customers to manage their accounts, including:
- Removing the inclusion of overdrafts in the term 'available funds'
- Online tools to make the cost of overdrafts clearer
- Online tools to assess eligibility for overdrafts
- Mobile alerts warning of potential overdraft charges
- Clearer explanations that overdrafts are credit or borrowing
The regulator has estimated that these changes could save customers up to £140 million a year.
Home collected credit:
The FCA is consulting on guidance to make clear that firms must not visit customers to offer new loans or refinancing unless this is at the customer’s request. The regulator is also consulting on rules requiring that firms give consumers a clear explanation of the comparative costs of taking out a new loan and refinancing an existing loan.
Catalogue credit and store cards:
Catalogue and store credit firms will be required to do more to help customers in persistent debt, in a similar vein as credit card providers have been required to do so following the output of the ‘credit card market study’. The regulator is also consulting on new rules to help customers in long term persistent debt to repay their outstanding debt more quickly, and to help customers in financial difficulty.
Additionally, the regulator is also consulting on rules to give customers more choice about whether their credit limits are increased, ensuring that firms do not raise limits or interest rates for customers in difficulty.
Regulatory next steps
The FCA intends to publish its conclusions in the Spring of 2019. Overdrafts will be addressed as part of the FCA’s ‘Strategic Review of Retail Banking Business Models’, which will be finalised later this year. Interested firms should aim to respond to the regulator in relation to the relevant consultation papers by 31 August 2018.
Considerations for firms
Firms in the high cost credit sector should be reviewing the wide-ranging proposals issued by the regulator. The Financial Ombudsman Service (FOS) has also concurrently published its annual review for 2017/2018, which notes a 40% increase in complaints about consumer credit products and services and calls out particular increases in complaints associated with ‘responsible lending.’ Vulnerability remained a key theme within the annual report.
Given the publications, firms should be actively considering;
- The additional process implications required to adhere to the proposed changes and restrictions on borrowing costs
- Reviewing whether product literature and disclosure are adequate and can be easily understood by consumers
- Training staff to ensure potential new requirements are embodied into the culture of the business
- Reviewing early arrears, collections and recoveries procedures in light of the concerns raised by the regulator
- Ensuring technology solutions are adequate to support mobile alerts and customer interaction in relation to alert warnings and behavioural nudges
- Reviewing holistic target operating models to ensure firms are equipped to provide good outcomes to consumers, with an emphasis on those in financial difficulty and wider vulnerable circumstances