FCA high cost credit review – great headlines, not so much action

The FCA published two High Cost Credit Review consultation papers published yesterday:

• rent-to-own, home-collected credit, catalogue credit and store cards, and alternatives to high-cost credit;
• overdrafts.

Although these got some great headlines – the word crackdown appeared frequently – I think it is fair to say that most debt policy campaigners have been disappointed by the proposals for change contained in the reports.

On rent to own (RTO)

The FCA makes a lot of excellent points about the rent to own sector, the pay weekly shops where the market is dominated by BrightHouse. For example

Our findings make clear that the costs of RTO are high, sometimes exceptionally so. RTO users are paying an average premium of 3 or 4 times the typical retail price of goods. At the extreme, this can be nearly 5 or 6 times.

Table 2.1 sets out a selection of 10 items showing how the RTO base price is often considerably higher than typical retail prices for similar items. And this is then inflated further by the insurances and warranties than most customers buy.

It concludes:

We think it is highly likely that harm is being incurred through both the high levels of charges and the likelihood that a group of consumers would have improved economic welfare if they were denied access to RTO. For these consumers, the benefits of acquiring items through RTO are likely to be outweighed by the significant costs… We anticipate that a price cap at the appropriate level may achieve the right balance between avoiding indebtedness for some and continued access to RTO at a lower cost for others.

It is therefore consulting on how a price cap could work for RTO, with the aim of introducing changes by April 2019.

The FCA says

Creating an appropriate structure for an RTO cap is not simply a question of extending the scope of the cap that we introduced for [payday loans].

It doesn’t elaborate on this, but the underlying problem is that the lender chooses the base price of the item onto which interest is added. The legal term for this is colourable pricing.  For the cooker listed in the comparison table, there was a typical retail price of 300 but a RTO base price of £522. If the amount of interest was capped, it would be easy for the overall cost to remain the same if the base price was increased.

This is a difficult problem and it is depressing that the FCA hasn’t proposed for consultation any ways in which it could be overcome.

The FCA is also proposing a ban on the sale of extended warranties at the point of sale in the RTO shops, to come in in early 2019.

On doorstep lending

Campaigners have been calling for a cap on interest charges for home collected credit, often called doorstep lending, where Provident is much the largest provider.

However many doorstep loans don’t actually breach the 100% cap, where interest charged is more than the amount borrowed.  The FCA says:

Our concerns centre on the costs of repeated use of home‑collected credit rather than the costs of any individual loan. We are therefore not currently planning to develop proposals for a price cap for home‑collected credit.

I agree with that. Whilst lower interest rates would be good, the real problem with doorstep lending is the poor quality of the affordability assessments and the number of customers that continually refinance loans. I have seen cases where people have borrowed every month for over 15 years… and to do this over 3 or 4 years is very common.

In many cases the refinancing comes on the suggestion of the agent. People are routinely offered another loan before Christmas, or in August to pay for new school uniform costs, or just because they have paid off a certain amount of the last loan.

The FCA thinks that these offers of new loans breach the Consumer Credit Act 1974 Section 49 which prohibits the canvassing and soliciting of cash loans off trade premises where this is not done in response to a signed written request made on a previous occasion. The FCA points out that this applies to existing customers as well as new customers. It has provided draft new CONC rules to clarify this.

I am updating my page on how to ask for a refund of interest on doorstep lending to include this useful point!

The FCA also concludes:

we are concerned that there remains unacceptable risk to consumers from the incentives firms have to influence consumers to borrow again and to do so in a way that is more costly for them.

It is proposing that lenders have to set out the alternative costs of refinancing and of taking a second loan. But it is not proposing to put a limit on refinancing, saying this would have the effect of limiting access to credit which may be needed for emergencies.

I think this is wrong – hard limits on refinancing and reborrowing should have been introduced. As with all other forms of high cost credit, it is not always in the customers best interest to offer more credit. The large drop in payday loans after 2015 did not cause large amounts of consumer harm.

On catalogues and store cards

The FCA is proposing to implement similar rules on credit limits and persistent credit card debt to those that have been brought in for credit cards.

It is also proposed that catalogues will have to provide clearer information about Buy Now Pay Later deals. I think this is welcome but hardly sufficient to counteract the scale of the problem. As the FCA says:

there are 2.7m consumers who currently use these products. Of these, 1.2m fail to pay the balance back in full before the introductory period ends.

And in some cases if the balance is not repaid by the end of the introductory period, interest is added which is backdated to when the purchase was made. I think this backdating should have been banned.

On overdrafts

The FCA is proposing new rules that will help make it easier for customers to manage their overdraft usage. These include:

• customers to be automatically enrolled into alerts (texts or push notifications) warning of potential overdraft charges;
• stopping the overdrafts being included in the term ‘available funds’ at an ATM or online;
• requiring online tools to make the cost of overdrafts clearer. These should show the amounts that will be charged for different patterns of usage;
• introducing online tools to assess eligibility for overdrafts. The FCA hopes this will encourage switching between bank accounts.

Some of these are very sensible. It is simply misleading to see a total amount you can withdraw which is the sum of your positive balance and your overdraft.

Alerts will help some people. But as the FCA says:

While overdraft alerts are an effective remedy to unanticipated use of overdrafts and can make consumers more aware of how much they are using their overdraft, they do not have a significant behavioural effect on more frequent overdraft users who may not be in a position to avoid charges.

But the measures intended to promote competition between banks and switching…  This feels like an economist’s fantasy-land.

People with heavy overdraft usage are very unlikely to switch banks. There is no competition between banks to try to gain them as new customers and this isn’t likely to change. Why would a bank want to try to get more of these customers by reducing their overdraft charges which would cut the large profits from their existing customers?

Overdraft fees

On the subject of how overdrafts are priced, which is confusing for very many customers, the FCA summarises the problems as:

• on average, firms make over 10 times more in revenue from unarranged lending for each pound lent than for arranged overdraft lending;
• consumers are paying high effective interest rates, often more than 10% a day for unarranged overdrafts;
• looking across unarranged overdraft users, we do not see any clear relationship between the level of charges and the amount they use an unarranged overdraft;
• charges for unarranged overdrafts are paid by around 14% of PCA customers but the  majority of fees are concentrated on only 1.5% of customers – we estimate that these consumers pay on average around £450 a year in unarranged overdraft fees;
• consumers living in more deprived areas are more likely to use an unarranged overdraft than those in less deprived areas and pay around twice as much in fees and charges.

But at the moment the FCA has no firm proposals. It is going to start modelling a range of possible measures, including:

• price simplification through a ban on all fees, a requirement for firms to charge for overdrafts using interest rates and to include APRs in arranged overdraft advertising;
• price alignment between arranged and unarranged overdrafts; and/or
• a backstop price cap, which could cover both arranged and unarranged overdraft charges.

The FCA is hoping to consult on proposed new rules by the end of the year, with any new rules coming into force in mid-2019. Let’s hope they reach the right conclusions!

Missing – logbook loans and guarantor loans

These aren’t covered by the reports. But these are important markets. Even though they are much smaller markets the level of consumer detriment with these products is much higher as they often are a major barrier to a someone dealing with their debts.

The government appeared to think logbook loans would be covered when it said two weeks ago:

The government will continue to work with the FCA as they carry out their high-cost credit review, and then further consider government action on alternatives to high-cost credit in light of the FCA’s review.

I hope the FCA is working on these products already. There is no reason why all products have to be dealt with in the same way or at the same time.

What can debt advisers do now?

Many debt advisers were hoping for interest rate caps to reduce the problems they see. Not much is happening and that isn’t happening quickly!

But I think it’s worth remembering that the current CONC (and previous OFT) rules provide a firm basis already for helping clients to make affordability complaints. It is a lot more work for debt advisers, but it can be done and it can be very effective.

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