The FCA's recent consultation is the latest in what is becoming a long campaign to get to grips with consumer credit following the transfer of responsibility from the OFT in 2014. Below, my colleague Kathryn Shepley provides an interesting take on its main features...
High-cost credit is often considered to be a ‘safety-net’ by consumers who are on tight budgets. However, its interest rates and charges can significantly increase the risk of consumer debt, and as a result, their vulnerability. The FCA started its review of high-cost credit in November 2016, resulting in consultation paper CP18/12, published on 31 May 2018. The FCA proposes new rules for three high-cost credit markets:
- Home collected credit.
- Catalogue credit and store card firms.
The rent-to-own market enables customers to acquire products such as household furniture and electrical appliances under a hire purchase or instalment plan. This results in full ownership of the product once the series of payments have been made. The FCA proposes the introduction of a price cap from 1 April 2019, with a precise figure or mechanism yet to be determined.
The 0.8% daily interest cap on high-cost short term lending introduced in January 2015, more commonly referred to as the payday price cap, led to a drastic reduction in payday lending. As a result, many consumers turned to other high-cost credit providers in order to obtain ‘essential’ household items. The definition of this varies depending on the household. For example, many consumers consider a computer in a household with school-aged children to be an essential household item. The introduction of a price cap on high-cost credit providers may see a similar constriction in the market, with consumers seeking alternatives in order to obtain what they consider to be essential.
The FCA has explored alternative options for consumer demand for credit within its consultation paper, proposing registered social landlords (RSLs) as one answer. Approved RSLs would be able to: provide essential household goods as part of the rent; provide credit; direct tenants to more affordable local credit alternatives; or act as brokers or introducers for specific credit firms.
In the Government’s forthcoming green paper on housing, the FCA is encouraging the Government to consider how those moving into social housing on low incomes can be supported by public and commercial organisations offering mid-cost or lower-cost credit. However, it is unlikely that the timescales for these changes will align with CP18/12, and so this isn’t an immediate solution. As a consequence, the question remains as to what will fill the high-cost credit gap in the short-term.
Interestingly, the FCA has not extended the application of a pricing cap to home-collected credit, despite evidence consumers are using it to re-borrow in ways which added to their existing high borrowing costs. This questions the extent to which the proposed changes can be considered ‘significant’. Instead, the FCA has focused on the cost of refinancing versus taking out a concurrent loan. It shows customers may experience better rates by taking out an additional loan to cover their finance needs rather than refinancing with the same loan provider. The resulting proposal is that firms will no longer be able to visit customers to offer new loans or refinancing unless specifically requested by the customer.
Customers should have choice when it comes to managing their finances, and the FCA’s proposal for firms to provide a price comparison to customers, setting out the costs of refinancing a loan against taking out a separate loan, is fair in principle. However, this extent of disclosure may see customers more frequently asking firm representatives for advice when presented with more than one option. Firms will therefore need to spend time on redesigning their disclosures, and consider further staff training on what constitutes advice and whether they are authorised to provide it.
Catalogue credit and store cards
The FCA also looked at catalogue credit and store cards and found evidence that many customers do not understand the complexity of catalogue credit and store cards, or the fees and charges. The FCA has identified harm associated with the lack of control over credit limit increases, and a lack of protection for consumers entering or in financial difficulty.
One of the FCA’s proposals to address these issues is placing a more onerous responsibility on firms to use available information to identify customers at risk of financial difficulty, and take ‘appropriate steps’. Firms will be tasked to ensure that credit limit or interest increases are not provided to these customers, or those already in financial difficulty.
These changes would pose a significant challenge to firms facilitating the provision of catalogue credit and store cards. They will need to decide how to measure and define ‘financial difficulty’, and what level or extent of action they should take to satisfy the FCA’s “appropriate steps” requirement. These changes will need to be built into existing and new business models, and staff will need to be educated to understand and effectively manage these processes in a way that is fair for customers and of value to the business.
Staying ahead of the curve
There is no doubt that we are seeing the evolving role of the FCA as a price regulator due to parliament giving it ‘express power to make general rules about the cost of credit’ including the ‘power to cap charges for regulated credit agreements’ as set out in its introduction to the consultation paper. The FCA’s proposals should give consumers greater control over their borrowing and finances, meaning they are hopefully less likely to encounter persistent debt and experience vulnerability.
However, these proposed changes will have a significant impact on firms and their profitability if business models and products are left as they are. Firms will need to devote time and effort to work through where their business models are at their most stressed as a result of these potential changes. This is a consultation process and it will be important that all valid options to tackle the risks set out by the FCA are put forward by industry over the coming months, particularly given the lack of detail in some proposals set out in CP18/12. Inevitably, firms will need to consider further product innovation in order to sustain or increase their presence in the market and this will be a key opportunity to demonstrate how new product governance arrangements can deliver good outcomes in the shape of products that provide value and function to a market in need of credit.
'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.