The FCA need to protect everyone from the spiralling costs of debt

Today the FCA has taken steps to protect people who use high-cost credit. But there’s much more to do to protect those who are hit the hardest.

This morning the Financial Conduct Authority (FCA) published their consultation on high-cost credit markets. The good news is they’re willing to consult on capping the cost of rent-to-own credit. But they’ve missed an opportunity to protect people who use other types of high-cost credit.

Why we need a cap on high-cost credit

The FCA’s willingness to cap the cost of credit in the rent-to-own market is an important recognition of problems in this sector. People who take out rent-to-own loans tend to be on the lowest incomes and — according to the FCA — can find themselves paying as much as 5 or 6 times the total cost of the product by the time they finish their hire purchase agreement.

We modelled the effect of such a cap earlier this year and found that it could save consumers as much as £62 million per year. We’re delighted that the FCA have considered this measure to reduce the costs of this form of credit, and have recognised that a cap can limit the worst excesses of high cost credit.

The measures to ban the sell on of extended warranties — expensive and often unnecessary weekly payments to cover the cost of repairs or replacements — will also save consumers significant amounts of money.

These warranty agreements can add up to a quarter of the total cost of the product by the time the agreement is completed. At one rent-to-own provider, a 6 kg washing machine with a shelf price of £180.50 and an extended warranty, will cost the customer a staggering £586.50 by the end of the agreement.

A missed opportunity to protect doorstep loan customers

While the FCA has shown that it’s willing to protect people from the spiralling costs of rent-to-own credit, they haven’t committed to the same protections for people who take out doorstep loans.

This is a missed opportunity.

Doorstep loans are excessively expensive. The loans can have interest rates of up to 1,557% and refinancing — where customers take out a second loan to pay off the first — causes the costs of borrowing to spiral. The FCA found that up to 2 in 5 doorstep loan customers refinance their loans and 1 in 10 refinance 3 or more times.

These extortionate costs are paid by people who tend to be on a very low income.

But, instead of providing doorstep-lending customers with the robust protections of a cap, the FCA have sought to manage the way doorstep loans are sold to people.

The practices around the sale of doorstep loans can be a problem, but this measure will do nothing to protect people from spiralling costs when they get into financial difficulty.

We want the FCA to limit the total cost of borrowing on doorstep loans, to prevent these loans pushing already vulnerable people further into debt.

Addressing the problem of unarranged overdraft charges has been delayed

When it comes to overdrafts, the FCA have again kicked the issue down the road. The consultation identifies that unarranged overdraft debts can quickly spiral out of control. After using an overdraft, nearly 80% of people have used one again in the next 3 months.

In the short term, the FCA has proposed a series of ‘nudges’ to help people avoid unarranged overdraft fees through clearer communication. But these are unlikely to change consumer behaviour or stop spiralling costs, as few people plan to be in an unarranged overdraft when they take out an account.

In the longer term, the FCA has agreed to discuss an end to fixed fees and the potential for a backstop cap. It is these major changes which we think are essential to protect the 19 million consumers who use overdraft facilities.

We want to see more action taken to protect people from the high cost of credit

The research that the FCA have done into high cost credit is right to identify huge problems in each of these markets, but it’s disappointing that they decided not to provide people who use doorstep loans and overdrafts with more robust protections.

If a cap was introduced on the cost of doorstep loans, people could save as much as £123 million on 540,000 doorstep loans alone. This is not to mention the £690 million in revenue that the FCA estimates banks make through unarranged overdraft fees.

The FCA’s regulation of the payday loan industry has been a significant success. It hasn’t pushed customers into further financial difficulty. Among former payday loan clients whose application was declined, only 1% said they missed paying a bill and two thirds (63%) felt the decision was for the best. And it hasn’t forced people to turn to loan sharks. Our evidence, and that of the Illegal Lending Team, shows there hasn’t been an increase in problems with illegal lending.

The protections built into the payday loan cap limit the escalation of debts, and the FCA have acknowledged that these could work for consumers who take out credit on rent-to-own goods.

We need these benefits to be extended to those who use doorstep loans or unarranged overdrafts, who — at the moment — remain unprotected.

What’s next?

To ensure robust protections are put in place, we’re going to work with the FCA in 3 ways:

1. We’ll put the pressure on to make sure a cap on the cost of rent-to-own goods is effectively implemented by April 2019, as they set out in their consultation.
2. We hope the FCA will carry forward their discussion points to bring an end to fixed overdraft fees — and give consumers the parity of protection that is needed.
3. We’ll push the FCA to reconsider its decision — and extend the protections granted to payday loan and (hopefully) rent-to-own consumers — to those who take out doorstep loans and overdrafts as well.