Regulator slams high-cost credit firms that lure borrowers into further debt
A review of the sector by the Financial Conduct Authority (FCA) highlighted concerns over poor practices and conduct by some high-cost credit firms which ultimately led to consumer debt levels rising.
It said that online accounts and apps encourage consumers to borrow more, while marketing messages emphasised the ease, convenience and benefits of taking more credit, often to the detriment of the borrower.
Some firms even suggested that consumers could use additional borrowing to take a holiday, and reinforced the message by including imagery of exotic locations. Some firms also appeared to use ‘nudge’ techniques by suggesting that relending is a common practice and normal behaviour.
However, the FCA review which looked at the borrowing history of around 250,000 customers, found that nearly half regretted their decision to take on more credit.
Some said they experienced financial difficulties as a result, including missing payments and prioritising repayment of debt over other expenses. In some cases, this led to anxiety and stress.
And users of high-cost credit are already more likely to be vulnerable, have low financial resilience and poor credit histories, the FCA said. They often hold multiple credit products and have to juggle repayments, sometimes having to decide which priority debts to pay when they don’t have enough for all.
A 47-year old woman from Belfast, said: “I started missing payments and hit a really bad period when I was struggling to pay back my existing payday loans meant I had to take out new ones to cover the previous ones. I became so depressed I couldn’t leave the house.”
A 47-year old man from Glasgow, said: “I was borrowing from Peter to pay Paul, and robbing Paul to pay someone else.”
The FCA said it expects firms not to encourage refinancing of credit agreements where the customer’s commitments are not sustainable. It also expects firms to only agree to refinance if they reasonably believe it is not against the customer’s best interests to do so.
Further, marketing material must be more balanced, and firms must consider whether their marketing is omitting information which would be important for their customers.
It also said early settlement charges should not be charged when a customer refinances their loan.
‘We expect firms to review their relending practices’
Jonathan Davidson, executive director of supervision, retail and authorisations at the FCA, said: “We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer.
“Before the pandemic we saw increasing numbers of complaints about high-cost lenders’ relending practices, which showed that firms had failed to adequately assess affordability, and they were not relending in a way that was sustainable for customers. We expect firms to review their relending practices in light of our findings as they start to lend again, and to make any necessary changes to improve customer outcomes. We will continue working with firms to raise standards, and we will continue to take action where we see harm.”
Davidson added that where consumers are experiencing payment difficulties, they should contact their credit provider as soon as possible and explain their situation in order to get help. The FCA also lists the Money and Pension Service which offers free and impartial support.