The FCA is tackling the high-cost credit market
First they tackled high-cost payday loans, and now the financial services regulator is taking steps to crackdown on other forms of high-cost credit too.
The Financial Conduct Authority (FCA) is bearing its teeth with new proposals aimed at protecting the millions of people who use overdrafts and other types of high-cost credit.
It follows a detailed review of the high-cost credit market and, if properly implemented, could reduce costs for consumers, giving them greater control over their personal finances.
In this blog post, we take a look at the findings of the FCA’s high-cost credit market review and consider the proposals they have put forward for consultation.
Starting with overdrafts then; the FCA study found that the majority of fees for overdrafts were being paid by just 1.5% of banking customers. Those customers pay around £450 a year each in overdraft fees and charges.
Banks and other financial firms offering overdraft facilities made an estimated £2.3bn in revenues from overdrafts in 2016. Of this, 30% came from unarranged overdraft fees and charges.
As a result, the FCA is saying that the way banks operate and charge for overdrafts is in need of fundamental reform. They are putting forward some immediate proposals for overdrafts which aims to save customers up to £140m a year.
Longer term regulatory change could result in a ban on fixed overdraft fees and end distinctions around unarranged overdraft prices.
Assuming the consultation supports these more radical proposals on overdraft charging, the new rules come could into force in the autumn, to coincide with the FCA’s Strategic Review into Retail Banking.
Looking at wider bank account management challenges, the FCA is consulting on some new rules which are designed to make life easier for customers.
These rules include mobile alerts warning of potential overdraft charges, stopping the inclusion of overdrafts in the term “available funds”, requiring online tools to make the cost of overdrafts clearer, introducing online tools to assess eligibility for overdrafts, and making it clear overdrafts are credit or borrowing.
Our clients aren’t typically using their overdrafts, although might from time-to-time due to a timing mistake around paying a bill or receiving some income into their current account. However, these reforms seem sensible and should help the minority of banking customers who are paying the majority of overdraft fees and charges.
Also within the consultation, the FCA is seeking to get tough on the rent-to-own sector. Around 400,000 people in the UK use these services, which often result in incredibly high costs. The FCA has reported examples where customers paid more than £1,500 for an electric cooker via rent-to-own, with the same model available to buy for cash for less than £300.
Because there are often financially vulnerable consumers making use of rent-to-own products, the FCA has identified a need to intervene here and is considering a cap on prices. Before such a price cap can be introduced, the regulator needs to carry out a detailed assessment of its impact on the sector, and how such a cap might be structured.
The FCA is aiming to introduce price caps in the rent-to-own sector by April 2019, although it remains open to other solutions for tackling the challenge in the meantime.
Also within its consultation, the FCA is looking at banning the sale of extended warranties at the point of sale. Such a measure is estimated to save consumers as much as £7.7m each year and would be a welcome measure, reducing the pressure we all feel when buying electrical goods on the High Street!
Other measures within the FCA consultation include strengthening protections for vulnerable users of high-cost credit in stores and at the door. Better disclosure and improved sales practices are designed to protect financially vulnerable consumers in this market.
Finally, catalogue credit and store card firms will be required to do more to help customers avoid persistent debt. This follows similar rules introduced for credit card providers and could result in such consumers saving up to £27.5m a year.
Commenting on the findings of the study and new rules being considered, Andrew Bailey, Chief Executive of the Financial Conduct Authority said:
High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society. Today we have proposed a significant package of reforms to ensure they are better protected including the possibility of a cap on rent-to-own lending.
The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.
Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place. However, we believe more fundamental change is needed in the way banks charge customers for overdrafts. Given the size of the market our work here will be completed as part of our wider review into retail banking.
We also heard from UK Finance, with their managing director of personal finance, Eric Leenders saying they will continue to work closely with the FCA to make overdrafts more transparent and ensure customers take full advantage of the banking services available to them.
What do you think of the findings of this FCA study into the high-cost credit market and the proposed measures for tackling the issues they identified? Does it go far enough or will the new rules make it harder for people to access credit when they need it?