Consumers could be given new protections against rampant high-cost credit under proposals announced by the financial services watchdog, the Financial Conduct Authority (FCA).
The FCA has published a wide-ranging report into the high-cost credit market covering overdrafts, rent-to-own, home-collected credit, catalogue credit and store cards. Its proposals include considering a cap on rent-to-own loans.
It comes as only this week the Financial Ombudsman Service reported that complaints about consumer credit had risen by 40% over the last year.
FCA chief executive, Andrew Bailey, comments: “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.”
We break down the key proposals by sector below – although many of these will then need to be consulted on, while the FCA adds that it also needs to undertake additional analysis before any formal decisions can be made on several issues.
Overdrafts need ‘fundamental reform’
The FCA is calling for “fundamental reform” of how banks apply overdraft fees.
It wants to introduce mandatory rules to make it easier for current account customers to manage their accounts, which is says will save consumers £140 million a year in charges. These proposals, which will be consulted on later this year, 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
- Making it clear overdrafts are credit or borrowing.
Mr Bailey explains: “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.”
Moneywise reported recently that the regulator was being accused of “dragging its heels” on an overdraft fees crackdown as many people were still paying higher rates on overdraft fees than on payday loans.
Andrew Hagger, founder of personal finance website Moneycomms.co.uk comments: “An overhaul of bank overdrafts is well overdue – I’m sure the FCA has recognised that some banks are charging the equivalent of sub-prime lending rates to credit worthy customers and that there is a huge and unfair variation in charges between providers.”
Eric Leenders, managing director, personal finance at UK Finance, which represents financial providers such as banks, adds: “People up and down the country use credit as a helpful means of managing their everyday spending, so we have been working closely with the regulator to develop alerts for customers who may be about to slip into the red as well as a range of prompts that make it much easier to keep on top of finances and reduce costs.
“The industry is also introducing proactive support where persistent use of an overdraft facility might be a symptom of financial difficulty. We 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.”
Rent-to-own cap to be explored
The rent-to-own sector has been highlighted in the FCA’s report as being a troublesome part of high-cost credit as it is difficult for consumers to understand exactly how much they are spending, while the costs can be “exceptionally high”. Products such as cookers, for example, can cost consumers over £1,500 through rent-to-own when similar products can be bought outright for less than £300, according to the FCA.
In the past, this has led to the fining of companies such as Brighthouse, which was ordered to refund millions to customers the FCA ruled had been treated unfairly.
However, the regulator now says it needs to intervene to protect vulnerable consumers in this market, and it believes the financial harm these products cause is sufficient enough to explore the introduction of a cap on borrowing costs.
The FCA says it will conduct further work into this field with the aim of introducing changes by April 2019.
It is also considering a ban on the sale of extended warranties at the point of sale, which could save consumers up to £7.7 million per year.
Phil Andrew, chief executive of StepChange Debt Charity comments: "Rent-to-own is a very expensive type of credit, not just due to interest rates, but the price of the goods themselves, other possible add-ons and the length of period for repayment, so we believe the FCA is moving in the right direction by considering a price capping and banning point of sale warranties."
He adds: "The government and the FCA need to look creatively at working with businesses to provide low- and no-interest loans, learning from successful schemes in Australia and elsewhere, while recognising the need for the welfare system to provide better emergency support for those who need it. Such an approach could truly transform the options available to those on low incomes and break the vicious debt spiral that high cost credit all too often creates."
Home-collected credit, catalogue credit and store cards need to do more to help customers
The FCA says it will require providers of home-collected credit, catalogue credit and store cards to do more to help customers of these products avoid persistent debt - in the same way as regular credit card providers.
The watchdog also wants to introduce more protections for vulnerable users of these sorts of high-cost credit.