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Credit Cards & Loans

UK watchdog says consumers need to understand borrowing terms

Cherry Reynard
Written By:
Cherry Reynard
Posted:
Updated:
05/10/2017

The UK financial regulator strikes a conciliatory tone on car finance and credit card debt, but will investigate unarranged overdrafts and catalogue credit.

Financial Conduct Authority (FCA) chief executive Andrew Bailey said in his Mansion House speech that he was not against PCP (personal contract purchase) lending per se, but there were “issues that we seek to understand on the terms of such lending and how well they are understood by consumers.”

Similarly, on high cost credit, he said it needed to remain available to those with lower incomes, allowing them to smooth income flows and enable the purchase of household appliances, but the FCA needed to ensure it was being used appropriately.

In particular, he said, there were problems with some credit card borrowers: “We identified that around five million people experience real difficulties in paying off their balance, and credit cards have become a source of long-term expensive debt, something for which they were not designed.

“It is not untypical for such consumers to be paying around £2.50 in interest and charges for every pound of balance they repay. Firms can lack incentives to tackle this as these customers are profitable.”

Bailey said the FCA’s focus would remain on helping people switch to cheaper loans and cancel debt rather than imposing a cap on charges: “Credit cards are a form of revolving credit, and we do not see it as practical to implement a cap in the way that is by comparison straightforward for fixed sum payday loans,” he said.

Bailey said the growth in consumer credit is ‘not a material risk to economic growth as a whole’, and mortgage lending defaults pose a greater risk to lenders. This is in spite of Bank of England Mark Carney saying that rising consumer credit may force a rise in interest rates.

Bailey added: “Consumer credit is not a monolith, but rather a series of markets. The total stock of consumer credit in the UK is around £200bn. The rate of growth has come off a bit of late but remains just under 10% on a twelve month basis.”