In a feedback statement issued in July 2017, the FCA outlined a number of concerns within the sector, including overdrafts, rent-to-own, home-collected credit and catalogue credit. The regulator’s ongoing work in this area has highlighted a need for market intervention, but also limitations in what traditional intervention methods could realistically achieve in this sector.
The FCA is concerned about the high fees and charges associated with unarranged overdrafts as its analysis of data from large personal current account (PCA) providers shows that the proportion of revenue from unarranged overdrafts is significantly higher than the amounts borrowed. The data showed that annual revenue from unarranged overdrafts for the five largest PCAs was around 200% of the average amount borrowed in 2016.
The high revenues are partly explained by the daily fixed fees applied to the amount borrowed, which can easily amount to 10% or more of the total amount. In comparison, the high-cost short-term price cap limits daily interest and other fees to no more than 0.8% a day. This indicates to the FCA that the market may not be working well for consumers.
The data also highlights that a significant proportion of charges are linked to the persistent use of unarranged overdrafts, with between 30-65% of charges paid by consumers who used an unarranged overdraft more than 15 times in the past two years. The FCA is conducting further research in this area to determine whether firms’ incentives are negatively impacting consumers in this situation. Wider investigations include whether certain groups of consumers use their overdrafts as an alternative to other forms of credit and if any steps could be taken to protect them from the harm linked with persistent use of this form of credit.
The FCA’s analysis indicates that rent-to-own customers are particularly vulnerable and potentially have fewer credit options open to them. The regulator has particular concerns in this area as the median amount of outstanding debt has more than doubled between November 2014 and November 2016.
While the regulator accepts that there are higher costs associated with rent-to-own than purchasing via alternative options, its investigation has uncovered significantly high costs in some cases. The FCA is continuing to gather information on firms’ pricing policies, including add-ons, which will shape its response in this market.
The regulator has found many similarities between rent-to-own customers and those that use home-collected credit services, including a significant increase in median levels of outstanding debt.
The home-collected credit market is quite significant, with 700,000 individuals taking out a home-collected credit product in 2016. These consumers also appear to hold these products for a long period of time, potentially using refinancing options or repeat borrowing. In these cases, the FCA is concerned that these consumers may be paying significantly more in interest on the amounts originally borrowed then they would have if they maintained separate loans. The regulator has also requested data on firms’ lending patterns and refinancing arrangements which, when combined with consumer research, will provide a clearer picture of the implications of refinancing and repeat borrowing.
The FCA has concerns around the apparent complexity of catalogue credit products, particularly the risk that consumers may not fully understand the options and therefore, be unable to make informed decisions. The regulator is exploring whether this leads to consumers being funnelled into options with a higher likelihood of arrears and higher charges.
Higher-risk consumers currently have access to two forms of alternative credit: community development finance institutions (CFDIs) and credit unions. The FCA doesn’t believe that alternative finance options will replace high-cost credit, but recognises that supporting the availability of alternatives can help reduce the risk of poor consumer outcomes.
The report outlines a number of barriers to expanding alternative credit options:
- Achieving a sustainable funding model with access to capital;
- Varying appetite and capacity to lend to higher-risk consumers;
- Uncertainty around regulatory requirements;
- A lack of resources and infrastructure to connect with consumers at key moments of need;
- The cost of access to creditworthiness data.
The FCA does have initiatives currently underway to address some of the above issues and will be exploring further actions it could take in the coming months.
The regulator intends to publish a further update to this work in May 2018, including its assessment of the risk of harm posed by these credit products. At this stage, the FCA will also consult on any changes it believes to be necessary.