Coupled with the FCA's update on high cost credit (31 Jan), this IFS report provides a fascinating picture of the interface between unsecured debt and regulation.
Given the persistent lack of growth in real incomes, this is only likely to become more acute. So it's worth thinking about the wider context and some of the realistic limits of what the regulator can do.
Here are 4 questions to ponder (no easy answers):
1. How much should the FCA focus on consumer credit? The FCA built out the regime it inherited from the OFT in 2013. But it was constrained by the resources of the sector - firms have to pay fees to the regulator and, broadly, each sector is expected to fund itself. Given the degree of potential detriment and the increase in household debt, there must be growing pressure on this funding model.
2. Where does the regulator's role end? The FCA's update talks about working with government and about helping develop innovative solutions. Such work is important, but there is a risk of the FCA being distracted from the nuts and bolts of its day job.
3. What role does data play? The FCA is gathering considerable data in this area, but the picture it paints has a different perspective from the IFS' approach. It's not easy to reconcile them fully, and that's before factoring in the recent FCA/Bank joint paper on unsecured debt, which used the more forensic data available from credit agencies.
4. What should consumer credit firms focus on? These must be strange times for the sector - increasing demand for its products and improving systems' capability, but also growing regulatory scrutiny of its business models and pressure on its decision making (e.g. around "affordability").
It's unlikely the FCA's work on high cost credit will be the end of the story. The socio-economic problems are too deep, and it's not clear that regulatory tools will work, except perhaps around the edges.
The IFS report shines considerable light on the complex nature of consumer vulnerability in this area. Understanding how to respond is a challenge for firms and regulator alike.
about one sixth of the lowest-income tenth of households are in arrears on repayments or bills and an additional 10% are spending more than a quarter of their income on unsecured debt repayments.