The FCA has published its Portfolio Strategy Letter to firms providing high cost lending. This was sent on 6 March to firms that provide:
- guarantor loans (eg Amigo)
- payday loans
- high-cost unsecured subprime loans
- home-collected credit (eg Provident)
- logbook loans
- rent-to-own (eg Brighthouse).
This letter doesn’t cover overdrafts, subprime credit cards or catalogues which are supervised by different teams in the FCA.
Potential for harm to customers
The common factors across this wide range of products are that customers are likely to have poor credit records, low financial resilience if they encounter further problems and may be vulnerable.
The FCA has analysed firms’ business models, their regulatory histories and the complaints they receive. It has identified two major potential areas for harm to consumers:
- a high volume of relending, which may be symptomatic of unsustainable lending patterns, and
- firms’ affordability checks may be insufficient, leading to loans that customers may not be able to afford.
These two points, plus complaint handling, are the priorities for the FCA’s supervisory work until January 2021.
The FCA says:
We have seen a high volume of relending across all credit products in the portfolio. We aim to carry out diagnostic work across the portfolio so that we can better understand the motivation for, and impact of, relending on both consumers and firms. This work will examine aspects of relending such as customers’ borrowing journeys, firms’ marketing strategies for offering additional credit and the costs of relending for consumers. We want to understand what harm, if any, relending may cause consumers.
The FCA is right to highlight relending. Volumes appear large across the whole range of products. I have readers commenting on this for all the products, with the exception of pawn-broking which is rarely mentioned.
Here are some comments about aggressive marketing practices, with the names of the firms removed as this is so widespread:
- a high-cost subprime lender has hounded me daily to borrow more and more money despite me asking to be removed from text and email updates;
- I have been bombarded without pause by text, email and post by a doorstep lender (You sure you want to cancel?/Can give you that money?/You can have a loan);
- I cleared all my payday loans by taking out a large high-cost loan. I am being constantly barraged by 3 payday lenders by text to borrow more with discount;
- I actually came home to a letter from the lender offering me a loan of up to £1000. One day after not upholding my complaint for irresponsible lending;
- my guarantor loan was topped up in December to £10,000. I had £2700 to pay back when I felt the need to top up after so many texts and emails from the lender;
- my collecter continually texts me to see if I want another loan. I have clearly stated I cannot afford it but she comes back with max amounts available.
Top-ups are a particular problem with logbook loans, where the current lender has a captive customer, who can’t go to another logbook lender who may offer a lower rate of interest.
For some customers, these marketing communications may be a convenience or, if too frequent, a simple annoyance. But convenience for a few customers has to be balanced against the significant harm to people who are either desperate or vulnerable who may see the offered credit as an easy solution to the next few weeks or months. Most people who currently have high-cost credit need debt advice or forbearance, not additional debt, if they are struggling.
This is an area where the regulator needs to take action. A responsible lender who chooses not to heavily market to existing or previous customers is going to be at a competitive disadvantage compared to one that does.
The FCA says:
We recognise that there is an inherent challenge for these firms in assessing affordability for both new loans and repeat borrowing. High-cost credit customers’ finances are often squeezed and they may have poor credit histories and low financial resilience. Nevertheless, firms must ensure that they are complying with all our affordability requirements.
I agree. Some comments:
Relending and top-ups
For top-ups or relending soon after a loan is repaid, it is not right to simply apply the same affordability checks that were applied to the original loan.
Prolonged repeat lending by itself – a major problem with payday loans and doorstep lending – suggests that another loan may not be in the best interests of the customer.
For top-ups, if a customer is in difficulty it may be more appropriate to reschedule the existing loan without adding extra interest an/or to signpost to debt advice. This should be actively suggested by the lender as some customers are not aware they can ask for it.
A responsible lender will frequently want to get actual verification of income and expenses, not rely on statistical averages or information from a CRA. There may be some information the lender is not aware of, even if the customer appears to have ample disposable income. Any of the following are major indications of problems:
- a customer’s overall indebtedness appears to have increased since the original loan;
- new defaults or missed payments have appeared on the CRA records since the first loan; or
- where a customer said the original loan was for debt consolidation but it does not appear to have been used for that.
The CONC rules are not prescriptive about the exact checks a lender should make but the lender must get sufficient information to carry out a reasonable assessment. I would say that a subprime lender making large high-cost loans who reports to Call Credit but only takes data from Experian into account when making an affordability assessment is shutting its eyes to potential problems.
The larger the loan, the more important it is that an accurate assessment of affordability is carried out the first time a loan is made to a customer. Although a good disposable income may show this loan is entirely suitable, it can also indicate that the lender may have incomplete or inaccurate information from the customer or the CRA so further questions should be asked.
Lenders should consider all the information they know. If the lead was bought through a ping tree, the lender is effectively on notice that another high-cost lender has declined to lend to the customer and so they should make additional enquiries.
A firm should also consider if it is TCF to sell a customer’s data if they have declined a loan on affordability grounds. This is another area where regulatory intervention may be needed, or a responsible lender who does not sell leads it has declined is at a competitive disadvantage.
The FCA says:
We know that there have been increasing numbers of complaints about many of the products in this portfolio. Firms should ensure that they are handling complaints appropriately. We expect firms to fulfil all relevant obligations, including analysing the root causes of complaints and taking into account the Financial Ombudsman Service’s relevant decisions.
All payday lenders should have been well aware of this after the two previous Dear Payday Lender letters from the FCA which I have looked here 2017 and here 2018. Other lenders who may have thought these FCA letters weren’t relevant to them need to read them and apply the same reasoning to their own complaint handling.
Guarantor loans … and logbook loans
The FCA also said in this letter that they would be looking into the number of payments made by guarantors as this seems to be increasing. I think this is an important warning flag of a range of problems associated with inadequate affordability checking for guarantor loans. I have written a separate article on this: Guarantor loans – why guarantors & borrowers need extra protection.
I think some debt advisers will be surprised not to see any mention of specific work associated with logbook loans., following the government’s decision in May 2018 to drop the proposed logbook loan legislation. A large amount of the harm to logbook loan customers can be adequately tackled through supervisory work on relending and affordability. But there remains the problem of consumers who buy a car used to secure a logbook loan without realising. The FCA does need to look at what it can do to prevent or minimise this happening under the current antiquated legislation.