Public Inquiry into the FCA’s ‘High Cost Credit Review’

The APPG held a short inquiry into the FCA’s high cost credit review ahead of the regulator’s 15 February deadline for responses to its call for input. The group held two separate evidence sessions, one on 24 January when the group heard from four leading companies in high cost credit market, and another on 31 January when the group heard from leading money advice experts and academics with a specific knowledge of this area of the credit market.

Giving evidence in the first session were Nicholas Beal, Director of Legal and Compliance at Amigo Loans, George Badejo-Adegbenga, Legal, Risk and Compliance Director at Loans2Go, Hamish Paton, Chief Executive of BrightHouse and David Rees, Chairman of the Legal Committee of the Consumer Credit Association.

Attending the second session were Nigel Keohane, Director of Research at the Social Market Foundation, Matthew Upton, Head of Policy for Consumer and Public Services at Citizens Advice, Tony Quigley, Head of the England Illegal Money Lending Team and Laura Rodrigues, Senior Public Policy Advocate at StepChange.

A full report of the Group’s inquiry appears separately on the website. The main Observations shared with the FCA were:

• Together with credit cards, bank overdrafts are the major source of ‘high cost’ borrowing for millions of consumers in the UK. While other products and sectors grab the headlines, overdrafts tend to fly beneath the radar. The cost to consumers of borrowing on overdraft can exceed the cost of borrowing on other more publicised products, such as payday. Recent research by Which? illustrates this point. Both authorised and unauthorised products are problematic. It was reported to us that banks make £1.2bn in unauthorised charges each year. These charges are often paid by those least able to bear the cost. The key issues are the transparency and comparability of charges. There are also behavioral aspects that cause consumers to underestimate their likely usage of overdraft facilities. But there is a deeper-seated, pan-industry problem that might require government or regulatory attention: the historic dominance of the ‘free banking’ model for those in credit. This causes banks to try to recoup costs via high overdraft charges; and because of the issues around transparency and comparability, banks can do this quite easily. According to some witnesses, a better model might be paid-for banking which would enable more competitive pricing of overdraft facilities. The remedies proposed thus far by the CMA and the FCA might not be sufficient to address these problems. For its part, the Group will aim to give further scrutiny to this issue in the near future.
• Credit card borrowing is the other major component in consumer debt cases seen by the debt advice agencies. The problems here are better publicised: 2 million consumers using credit cards as a source of long-term borrowing, making only minimum repayments without ever clearing their capital balance in full. Again, there are transparency and behavioral issues that require attention. It remains to be seen how the FCA will address them in the final remedies of its credit card study. Given the volume of high cost debt that credit cards account for – far in excess of the amounts borrowed on the other product types under review – the regulator will need to act if it is serious about prioritising the major causes of detriment in the ‘high cost’ marketplace.
• On the wider question of price controls, there would be a risk of detriment if blunt interventions on price were to cause suppliers to exit the regulated marketplace. The diverse nature of the products and their differing cost and charging models would make designing and implementing caps a complicated exercise. This would detract from the ‘simplicity ‘ that proponents of the payday cap point to, with the potential for a price cap to be too high for one product but not high enough for another. A ‘one size fits all’ approach may not work in such a hugely varied sector. It is clear that the payday cap has contributed to a beneficial outcome in the payday market – arrears levels and problem debt have reduced. However, it seems these improvements are also due to the other regulatory measures introduced in parallel. Our view is the FCA should keep its focus on the competition and conduct aspects of its toolkit. And any future consideration of moves to extend interventions on price should be preceded by detailed impact assessments, which to our knowledge have not been undertaken in relation to the current consultation. In the absence of this work, we are not as yet convinced that an extension of the payday price cap would benefit consumers.
• There are other aspects of the HCC market that should receive further attention, however. The practice of compulsorily bundling warranties into rent-to-own loans appears to be problematic for consumers. We understand the FCA is looking closely at this as part of the authorisation processes for the largest operators in the rent-to-own market. Tighter guidance with regard to affordability assessments also appears to be warranted. Beyond this, we are satisfied that the FCA has done a successful job in assuming regulatory responsibility from the OFT in a short space of time. The elephant in the room appears to be the problems with overdrafts, outlined above. The FCA should be able to deal with any residual, lower level concerns with sectors such as rent-to-own, home credit, guarantor lending and catalogues by using its supervisory powers. Logbook lending is subject to a different regime overseen by the Law Commission. We understand new arrangements are due to be published which should deal with residual concerns in that market.
• Lastly, the problem of illegal lending needs close and ongoing monitoring. There is a clear risk that FCA regulation could cause an increase in levels of illegal money lending activity. It is a significant problem that could easily get worse if regulated supply were to be withdrawn or restricted. The boundary between legal and illegal is already diffuse and insufficiently demarcated in the mind of the consumer: there has been a marked increase in ‘friends and family’ borrowing and the term is often used as a proxy for illegal borrowing. The risk of online illegal lending seems to be an area where more attention is required: illegal sites can disappear and reappear very quickly. Monitoring this will be a significant challenge but it is an area where serious consumer detriment could manifest.