The Financial Conduct Authority (the FCA) has today published two consultation papers on the outcome of its high-cost credit review and its review of overdrafts. The FCA makes a number of proposals designed to protect consumers.
The FCA says high-cost credit is used by over three million consumers in the UK. It is often used by consumers who struggle to get finance from mainstream lenders. Because those consumers are generally 'higher risk' and borrowing smaller sums, the cost of borrowing is normally high.
Given the potential impact of taking high-cost credit, the FCA launched a review in November 2016 to recognise any patterns and sources of harm to consumers and identify where further reviews need to take place. The FCA decided to consider overdrafts (arranged and unarranged), rent-to-own (RTO), home-collected credit, catalogue credit and store cards.
The FCA's review explains its proposed new rules and guidance for RTO, home collected credit, catalogue and store cards credit markets. The FCA has published a separate consultation on overdrafts.
Key points from the consultations
- The FCA has identified a need to intervene to protect financially vulnerable consumers because it considers the costs to consumers are exceptionally high.
- The FCA intends to consult on a cap and how this would be structured.The FCA has, however, asked for alternative solutions.
- The FCA proposes to undertake further work over the next few months and introduce changes by April 2019.
- The FCA also proposes to ban the sale of extended warranties at point of sale.
- While consumers were mainly positive about the use of home-collected credit, the FCA has concerns over longer term use of home-collected credit.
- The FCA's proposals therefore focus on perceived sources of harm to consumers from the costs of repeat borrowing.
- The FCA also intends to raise standards in disclosure and sales practices which will stop home-collected credit firms from offering new loans or refinancing during home visits without the customer asking to do so.
Catalogue credit and store cards
- The FCA's concerns were over the high level of arrears, the fees and charges applied on those arrears and the level of interest being applied.
- The FCA proposes to require providers to do more to help customers avoid persistent debt (in the same way as credit card providers have been made to do so by the FCA). The FCA has asked for views on whether to extend the existing rules for credit cards.
- The FCA considers overdrafts are poorly understood. The FCA's research suggests a minority of consumers pay the majority of fees.
- The FCA believes that the way firms operate and charge for overdrafts needs reform.
- The FCA therefore proposes to:
- require firms to provide online tools that assess eligibility for overdrafts;
- improve key information given to consumers (including an online calculator); and
- require firms to send consumer overdraft alerts to deal with unexpected overdraft use.
- The FCA also proposes to:
- simplify overdraft pricing structures so (a) most overdraft fees are banned, (b) a single interest rate is used, (c) to make the rate for arranged and unarranged overdrafts the same and (d) prices are shown in the same form;
- include a potential backstop price cap; and
- give guidance on what costs firms should consider.
- To try and address the repeat use of overdrafts, the FCA has asked for comments on placing an obligation on firms to make sure they have systems in place which will allow them to assess whether customers are in financial difficulty and for firms to intervene at prescribed periods.
The proposals in summary
The FCA believes these proposals will reduce costs to consumers, improve sales practices, protect consumers at risk of financial difficulty, ensure repeat borrowing is consumer-led and encourage market innovation. For overdrafts, the FCA aims to improve competition for overdrafts by making it clear to consumers how overdrafts work, what they cost, how they compare with other products and how much they are being used. The FCA's deadline for responses is 31 August 2018.
For more information contact Russell Kelsall, Warren Clark or Alanna Tregear
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