(qlmbusinessnews.com via theguardian.com – – Mon, 31 July, 2017) London, Uk – –
The Financial Conduct Authority is to crack down on the high cost of overdrafts and review the booming car loan market in the latest attempt by regulators to tackle mounting consumer debt.
Andrew Bailey, chief executive of the FCA, said charges imposed on customers falling into unauthorised overdrafts would be overhauled. Research by consumer group Which? has found the cost of borrowing £100 through an unauthorised overdraft for 28 days from some high street banks is as high as £90. This is up to four times higher than the maximum charges allowed on a payday loan.
The FCA found that one in six people with debt on credit cards, personal lending and used to buy cars were in financial distress and that they are more likely to be younger, have children, be unemployed and have lower education than a comparable group of consumers not in financial distress.
In a paper discussing creditworthiness of customers published on Monday, it said: “In the absence of adequate affordability rules, consumers can suffer potentially avoidable financial distress”.
The FCA has already imposed a cap on the rates that payday lenders can charge. After reviewing the impact of this restriction, it has decided to keep it in place. The cap has “delivered substantial benefits to consumers,” the FCA said, finding that 760,000 borrowers are saving a total of £150m per year.
“High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers. We are pleased to see clear evidence of improvement in the payday lending market after a period when firms’ treatment of customers and their business models were often unacceptable,” said Bailey.
But, he said, there was more to be done. “In particular, the nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option. We are now working to resolve these issues while preserving the parts of the market that consumers find useful,” Bailey said.
The FCA’s action comes after the Bank of England told banks it would conduct health checks on their exposure to car loans, credit cards and personal loans after finding that lending in the consumer credit sector was growing at 10.3% a year, far outpacing the 2.3% rise in household income.
The FCA will now review alternatives for unauthorised overdraft charges – a key plank of the way banks structure their current accounts – which was rejected by the Competition and Markets Authority in its review of the sector last year. Lloyds Banking Group, the biggest current account provider in the UK, earlier this month overhauled its charging structure, abandoning all existing charges for overdrafts and replacing them with a single fee of 1p every day for every £7 of overdraft used.
Gareth Shaw, Which? money expert, said the FCA “must act swiftly to crack down on these exorbitant fees and to restrict unarranged overdraft charges to the same level as for arranged overdrafts, as further delay will only cost consumers”.
The FCA took steps to cap payday lending charges in 2015 so that interest and fees on all high-cost short-term credit loans are now capped at 0.8% per day of the amount borrowed. If borrowers do not repay their loans on time, default charges must not exceed £15.
It said on Monday that its regulation of the sector meant that payday lenders are much less likely to lend to customers who cannot afford to repay, and debt charities are seeing far fewer clients with debt problems linked to high-cost short-term credit.
The FCA will now review financing for cars where lending is growing at 15% a year. “The majority of new car finance is now in the form of personal contract purchase, a form of hire purchase. The key feature of a PCP is that the value of the car at the end of the contract is assessed at the start of the agreement and deferred, resulting in lower monthly repayments,” the FCA said.
The regulator is looking at whether firms take the right steps to ensure that they lend responsibly and if the firms are managing the risk that car prices could fall and whether they are taking account for that in their loan terms.
In April the FCA announced measures to help people in persistent credit card debt, including waiving or cancelling interest and charges if customers cannot afford to curb their liabilities through a repayment plan.
By Jill Treanor