FCA calls for input on high-cost credit and overdrafts

Since taking over regulation of consumer credit in April 2014, the FCA has focused on products that it believes pose the highest risks to its consumer protection objective. One area of focus has been high-cost credit, which includes payday loans, home-collected credit, catalogue credit, some rent-to-own, pawn-broking, guarantor and logbook loans. Other credit products - such as motor finance, credit cards, overdrafts and some instalment lending - may be high-cost, particularly for less creditworthy customers or depending on how they are used.

The Call for input covers:

High-cost products - The FCA will look across all high-cost products to build a full picture of how these are used, whether they cause detriment and, if so, to which consumers. This will enable the FCA to consider whether further policy interventions are needed.

Overdrafts - The Competition and Markets Authority (CMA) identified a number of competition issues with overdrafts, which include poor price transparency and the nature and level of charges, especially for unarranged overdrafts. The FCA will look in more detail at overdrafts from a consumer protection, as well as a competition, perspective using its full range of powers.

The high-cost short-term credit (payday loan) price cap - The price cap came into force on 2 January 2015. The FCA committed to reviewing the cap two years after its implementation, in the first half of 2017. The FCA will assess whether there is evidence that suggests that the cap should be changed. The FCA is also keen to see if there is any evidence of consumers turning to illegal money lenders directly as a result of being excluded from high cost credit because of the price cap. The FCA expects to publish its findings on the review of the payday cap next summer.

Repeat and multiple high-cost short-term credit (HCSTC) borrowing - The FCA will continue to monitor the impact that repeat and multiple borrowing has on the market and consumers.

Andrew Bailey, Chief Executive of the FCA, said:

“This is a significant moment for our approach to consumer credit regulation as we continue to ensure that this market works well for consumers.

“As an organisation, we have already taken many steps to address the risk of consumer harm by putting in place new rules for high-cost short-term credit firms and taking action against non-compliance across all credit markets.

“We have come up to the point of reviewing the cap on payday lending, making now the right time to take a broader view of the issues around high-cost credit, including unarranged overdrafts, and to consider whether our requirements remain appropriate.”

Since the FCA took over regulation of consumer credit in April 2014:

arrears rates have fallen by a quarter
800,000 fewer people took out a high-cost-short-term credit (payday) loan over an 18-month period (see Notes to editor 1)
a 20% drop in loan approval rates from the start of 2014 to the middle of 2015

The FCA has also:

assessed applications for authorisation from firms formerly licensed by the Office of Fair Trading (OFT) who wish to continue carrying on regulated credit activity, including an assessment of the suitability of their business models and ability to satisfy, and continue to satisfy, our other minimum standards
carried out a market study of competition in the credit card market
undertaken robust risk-based supervision, leading to redress where appropriate, and thematic reviews
introduced new rules to address the harm we have identified based on detailed evidence gathering and cost benefit analysis

The FCA has also worked closely with other bodies looking at related issues, including the CMA investigations on competition in the payday lending and retail banking markets, and the Law Commission’s review of the Bills of Sale Acts (the legal basis for logbook loans).

The FCA is asking for responses to its Call for input by 15 February 2017.