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Financial Conduct Authority: high cost credit

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High-cost credit and a review of the high-cost short-term credit price cap

We welcome the decision by the FCA to expand the review of the HCSTC price cap into a broader call for input into high cost credit as a whole including overdrafts. A holistic approach is welcome as our evidence supports the FCA finding that consumers of high cost credit are likely to be using several of these products or switching between them.

Summary

Overdrafts

Persistent overdraft debt is a serious concern with more than half (52%) of our clients having overdraft debts. There are particular issues with unarranged overdraft charges as they can push those already struggling further into financial difficulties. On average our clients exceeded their overdraft limit in five out of the last 12 months and were charged around £45 for doing so. There are also issues with consumers struggling to get out of their arranged overdraft as this can also lead to the build-up of interest and charges that can result in problem debt.

  • We believe the FCA is best placed to balance the interests of lenders and consumers and set an effective and fair cap on unarranged overdraft charges
  • Earlier forbearance should be applied to overdraft debts: where consumers are struggling the FCA should require banks to separate overdraft debt from the transactional banking facilities

High-cost short-term credit (HCSTC)

FCA regulation has made a difference to the HCSTC market. We have seen a significant fall in the number of people coming to us with HCSTC debts as in 2013 23.4% of our clients had HCSTC debts and in 2016 this had fallen to 16.3% of clients.

We have concerns about the risks for consumers of using HCSTC post-cap including what the shift to instalment loans means to borrowers. Our evidence suggests there are still some issues with lending practices and multiple loans, as well as, concerns about how HCSTC lenders treat customers in arrears and default. We think there is also a broader question of where financially vulnerable households can turn if payday loans and other commercial credit are not a viable options.

  • The FCA should strengthen their rules on responsible lending including turning their existing guidance on responsible lending into rules and look further into the mandating of real-time data sharing
  • The FCA should explore what the implications of the shift to instalment loans are for the appropriate level of the price cap
  • We urge the FCA to work with the Government to identify new ways of providing greater access to more affordable credit safety nets for the most financially vulnerable

Other high cost credit products

There are also issues with high cost credit products (excluding HCSTC) like guarantor loans, rent to own, logbook loans and home credit, that we think the FCA should take action on. This issues include poor lending practices, complex lending terms, a lack of price transparency and concerns about the treatment of customers in arrears.

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