31 May The FCA High-Cost Credit Review: A Step in the Right Direction
Today, the FCA released their long-awaited review of the high-cost credit market in the UK. The review contains proposals and recommendations to try and re-shape bank overdrafts, catalogue credit and rent-to-own finance products. In their review, the FCA has suggested changes that would better inform and protect consumers, as well as save them money.
We welcome any proposals like these as a step in the right direction to empower consumers, and to help them better manage their personal finances. We’ve broken down the key points from the FCA’s review below, and added some market reactions.
Issues: High cost; Lack of transparency in pricing; Repeated use; Limited customer awareness and engagement
Consultation Proposals: SMS/Push alerts; Online eligibility tool, Online charge calculator; Better disclosure at the time of account opening; Prohibiting overdraft limit from being included in “available funds” calculation
Discussion Ideas: Ban on fixed fees; Require pricing by single interest rate; Require APRs in overdraft advertising; Alignment of arranged and unarranged overdraft prices; Price cap on overdraft charges; Restrictions on level of unpaid item charges; Early identification of persistent overdraft users; Timed interventions, including potentially a repayment plan
Our view: The most simple way to make things fairer would be to force overdraft providers to include their APR, in line with other other credit products. We think this would enable consumers to more easily compare prices against other credit products, and make it easier for people to understand how expensive overdrafts can really be.
Catalogue credit/Store cards
Issues: Risk of becoming high-cost, persistent debt; Poor understanding of promotional pricing; Lack of choice and control with respect to credit limit increases
Consultation Proposals: Better explanations of promotional terms, as well as repayment alerts when offer periods end; Increased choice and control with respect to credit limit increases; Limitations on being able to increase credit limit or interest rate when customers are at risk of difficulties; More proactive assessment of the likelihood of certain customers to be at risk of financial difficulties; Measures requiring firms to help customers avoid persistent debt and repay their borrowings more quickly.
Our view: Catalogue credit can be a slippery slope into further debt, as it’s often an easy, tempting way for people to borrow without thinking. We’re glad to see an emphasis on making pricing more visible and easy to understand. Restrictions on credit limit increases should also help people to keep their borrowing under control.
Issues: High cost; Questionable value of warranty products
Consultation Proposals: Ban on offers of extended warranties at the point of sale
Discussion Ideas: Price cap
Our view: There are no rules that require rent-to-own companies to offer their goods for a fair or competitive price, meaning those looking for credit have to pay much more for something than if they’d paid for it in cash. We think these companies should charge the same or similar (within a range) prices for the goods as other providers. Some kind of price matching requirement could go a long way to protecting consumers, as well as highlighting how expensive the credit they are getting really is.
Home collected credit
Issues: Long-term use; Pressure for repeat borrowing; Refinancing issues
Consultation Proposals: Prohibiting lenders from visiting customers to make unsolicited new loan or refinancing offers; Better explanations of relative cost of taking out new loan vs. refinancing existing debt
Our view: We’d like to see some rules introduced that prevent or greatly reduce the number of unsolicited offers borrowers receive, so people aren’t tempted by expensive credit that they might not need.
Reactions to the FCA’s High Cost Credit Review
The financial inclusion community seems quite upset and feels there is very little teeth to the proposals.
Banks seem unperturbed about future regulation, given the muted moves in the stock price. Investors in catalogue credit and store card providers also don’t seem too bothered, with a slight climb in bond prices for industry players.
The Guardian quoted Goodbody Stockbrokers as saying: “The high-cost credit market will face little turbulence as a result of new regulation, a bit of a relief for the major players in this space.”
Gareth Shaw, of consumer watchdog Which? remarked:
“Last summer, the FCA expressed serious concerns about how unarranged overdrafts work, and now almost a year later it is still refusing to take action. As the FCA continues to drag its heels, the government must urgently intervene to ensure unarranged overdraft charges are brought into line with arranged overdrafts, to finally help all those struggling from these rip-off fees.”
Nevertheless, it’s undeniably a step in the right direction.