The Financial Conduct Authority (FCA) has announced it aims to shake up a credit industry which has allowed nine million people to fall into serious d…
The Financial Conduct Authority (FCA) has announced it aims to shake up a credit industry which has allowed nine million people to fall into serious debt.
When it officially took responsibility for the sector on April 1st, the new regulator claimed households who use a credit card or take out a loan or overdraft will now be better protected than they were before. It warned lenders they would need to ensure consumers were given the right information and that the services they offered met the needs of their clients.
In addition, the FCA called for credit companies to make sure people who had gotten themselves into financial difficulty are treated fairly. The organisation stated businesses in the payday loans sector and debt management companies would see the biggest changes.
Among the raft of new measures introduced was a limit on the number of rollovers a borrower can take out. This is where lenders allow their customers to carry on owing money after the original repayment date has passed. Under the FCA's proposals, this is now restricted to two occasions.
Credit companies have also been given an obligation to provide customers with information on where to locate free debt management advice. Meanwhile, lenders will see the number of times they are able to seek repayment via a continuous payment authority restricted to two.
The news comes against the backdrop of research from the Money Advice Service, which found around nine million people in the UK have gotten themselves in serious difficulty over debt. Despite this, only 1.5 million have sought advice, while a further 1.8 million do not acknowledge they have a problem.
To tackle this, the FCA stated it has analysed the market to understand the areas where the worst detriment occurs and will use this to decide how it will regulate the industry. The main areas to be considered are a review into the way payday lenders collect debts and approach clients in difficulty. In addition, it will take action in four sectors which were identified as posing serious issues for customers.
Firstly, the new authority will conduct a review into the credit card industry, to see if any potential reforms can be made. It is also set to work in conjunction with the new Competition and Markets Authority to analyse the way overdrafts are provided and will also monitor compliance with its new debt management regulations. The final area of scrutiny will be the logbook loans industry, where the regulator will be checking how well firms meet the conditions for authorisation.
Martin Wheatley, chief executive at the FCA, commented: "We have a big task ahead; it's our job to make sure firms put their customers at the heart of their business and don't just see them as an easy target or a profit line. We won't shy away from taking tough, decisive action to make sure that the people who rely on these products are treated fairly. There will be some firms that don't get the message, or won't play ball, those firms should know that we won't let them carry on."
The regulator also identified three distinct borrower groups in its research, namely survival, lifestyle and reluctant. The first category was said to often feel it had no choice but to take out loans due to a squeeze in finances. People in this group were more likely to take out catalogue or home credit, thanks to ease of access and low weekly instalments.
Households in the lifestyle category use the same services as the survivalists, but for entirely different reasons. They have enough income to cover day-to-day expenses, but take out loans to fund larger purchases or one-off events. Those in this group tend to feel more in control when minimum payments are being met.
Finally, reluctant borrowers were said to limit their use of credit to just paying back existing debts. They were more likely to source loans from mainstream services such as credit cards and banks.
The FCA stated this research would help it understand the factors that push people into debt and also use it to work with credit providers to make sure customers are treated fairly.
By Joe White