High-cost credit: what next?
Andrew Bailey, FCA Chief Executive delivered a speech on high-cost credit at a New City Agenda Event. We bring you the key points.
Taking responsibility for regulating consumer credit in 2014 has been one of the largest tasks the FCA has undertaken. At the end of the month, the regulator will be setting out steps to tackle problems it has identified associated with high-cost credit.
Mr Bailey listed 13 products the regulator considers consumer credit products, including credit cards, overdrafts, motor finance, payday loans and pawn broking.
Noting that a sub-set of consumer credit activities are high-cost, he highlighted the regulator’s focus on overdrafts, rent-to-own, home-collected credit and catalogue credit because of the risks these directly pose to customers.
Stark attention was drawn to some key findings within the 2017 Financial Lives Survey:
- 6% of UK adults have one or more high-cost loan, or have had one in the previous 12 months
- 25% – 17.9 million adults have been overdrawn in the last 12 months, with 3.1 million having used an unauthorised facility
- People showing characteristics of vulnerability were twice as likely to use high-cost credit.
Mr Bailey continued to focus on the need to identify vulnerable customers and understand their interaction with high-cost credit products. Included in some of these stats was the surprising categorisation of 18–24 year olds, who are often saddled with high Student Loans and other debts – the average outstanding amount being £17,440. While this group is tech-savvy, they are also the least confident in managing money and the least knowledgeable about financial matters. “Tech and financial awareness do not necessarily go together” he commented.
The survey results painted a gloomy picture for 25–34 year olds too. “Adults aged 25 to 34, have the highest level of over-indebtedness of any age group, with below average financial resilience, and the highest ownership of high-cost loans along with the next group up (35 to 44 year olds). 37% of all UK adults with a payday loan are in this age group.”
35–44 year olds are most likely to hold an unsecured consumer credit product, but are the most financially resilient.
Mr Bailey went on to disclose the figures on overdrafts, rent-to-own and catalogue credit including:
- Revenues from unarranged overdrafts were up around 200% on average from 2016
- The overall outstanding debt of rent-to-own customers doubled between November 2014 and November 2016
- Catalogue credit customers have a slightly higher annual income than consumers of home-collected credit and rent-to-own.
“Consumers using catalogue credit are drawn from a wider socio-economic group and have on average higher credit scores than other high-cost credit products. However, we still have concerns about catalogue credit products regarding the high level of arrears.”
Mr Bailey highlighted the importance of consumer credit products for customers with lower credit scores, but he made it clear it’s the FCA’s duty to make sure credit is given where appropriate, and that it’s affordable.
“Our view is that the provision of credit can nevertheless have a socially valuable function. High-cost credit users typically have low credit scores, and many do not have savings but may need credit to make ends meet and avoid wider financial difficulties, for example, default on household bills or priority debts.”
In tackling payday loans, Mr Bailey noted that defaults have fallen by a third. He also praised debt charities for their work, alongside the payday loans cap.
He advised that the regulator is examining a range of approaches to price capping in other areas of high-cost credit and overdrafts, with its views to be released next month.
Too many to-dos: UK households face 33 tasks a week on average
75% of UK adults tackle their ‘to-do’ list over a Bank Holiday weekend, with ‘sorting finances’ topping the list.
The FCA commissioned research into the matter, to run alongside its campaign to raise awareness of reclaiming PPI before the deadline of August 29th 2019.
The results revealed that 60% of adults feel overwhelmed by the tasks they face. The regulator enlisted the help of Countdown’s Rachel Riley and 1990s icon Mr Motivator to spur on customers.
Rachel has five top tips to help get people started. Find out more.
FCA calls for innovation to help customers find the best mortgage deal
The regulator has published its interim report into the mortgage market, finding that competition is working well for many people.
The FCA has also identified a number of ways the market can improve and assist customers in finding the best deal and to help ‘mortgage prisoners’ in accessing the market when looking to switch to a better deal.
The findings include:
- High choice leads to three quarters of customers switching to a new deal within six months of moving onto a reversion rate
- 30% of customers fail to find the cheapest mortgage for them
- A number of long-standing customers whose payments are up-to-date are struggling to switch.
The regulator identified a number of ways the market can work better for customers, including:
- Making eligible mortgage products more accessible at an early stage to help customers compare and take out mortgages
- Removing barriers to innovation in the sale of mortgages
- Exploring options to help long-standing customers switch.
A final report is expected at the end of the year and the FCA will consult on any specific changes required to its rules.