Put this announcement - that the FCA want to introduce a 100% price-cap on rent-to-own from next April, while also seeking ways to encourage alternatives to high-cost credit - together with other recent events such as Wonga’s administration and the recent Dear CEO letter around affordability, and Andrew Bailey’s strategy for consumer credit is becoming clear.
The FCA officially took on responsibility for consumer credit in April 2014, but this date has always been deceptive. The subsequent authorisation process took until late 2016, and the FCA also needed to spend time understanding the market and the various business models.
So consumer credit has only been part of the FCA’s business as usual for about two years. Even during this period, there have been various market studies, notably on credit cards, while continuing high levels of household debt, as real incomes continue to lag pre-crisis levels, exerts constant pressure on the sector’s standards.
In this context, and with Brexit uncertainties continuing, it’s scarcely surprising that the FCA has been cautious in developing its strategy to regulate the sector that deals most with the UK’s lowest income groups. However, the strategy’s outlines and direction of travel now seem clear, even if the destination remains in doubt.
To start with the most recent announcement, the surprise is that this cap has come so long after the original 100% cap on payday lending. The waterbed nature of consumer credit is such that, once the FCA went down this route in 2014, it was always likely to be extended. The question now is which products will be price-capped next, and how soon. This is not to say the cap is necessarily an effective solution, just that it only makes regulatory sense if consistently applied. It also has the virtue of being clearly within the FCA’s powers.
This is not the case with alternatives to high-cost credit, where the FCA’s power is largely limited to convening and general encouragement. The approach has rarely sufficient by itself in other situations, but at least it recognises this is part of a larger problem that goes far beyond the reach of regulation.
The other leg of the FCA’s strategy – the emphasis on affordability – seems more obvious on one level – how can you argue consumers should be sold products they can’t afford? But it’s actually much harder to implement because it requires supervisors to make difficult, sensitive judgements about the quality of firms’ credit assessment. It’s also much braver, because the potential downside – a drying up of parts of the market despite continuing demand – would take regulators into unfamiliar and inevitably hostile territory.
One thing is clear: if the strategy is to succeed, the FCA will need to make consumer credit a greater focus, with more resources directed to its supervision. This was foreshadowed in the current year’s Business Plan, when consumer credit was clearly (if obliquely, as is the regulators’ way) identified as its second priority after Brexit, and will almost certainly be prominent again in the 2019/20 Plan.
On a positive note, it’s welcome to see the CEO leading the way on this. A frequent problem with previous strategies, in whatever sector, has been a lack of coherence and coordination, and the tendency of the FCA’s divisions to follow slightly different scripts. For consumer credit, this now seems much less likely.
The Financial Conduct Authority today proposed to introduce a price cap on the rent-to-own (RTO) sector. The cap, subject to consultation, will come into force on 1 April 2019 providing protection for some of the most financially vulnerable people in the UK. Once in force, the changes are expected to save consumers up to £22.7m per year.