The consumer credit market is vital to the UK economy and powers GDP growth. That growth has slowed over the past 18 months, dipping below 10 percent per annum, causing concern over whether lenders will seek to encourage consumers to take on more credit at a time when wages are low and inflation high.
In particular, those at the lower end of the income spectrum are at real risk from high-cost credit products such as rent to own (RTO), Buy it now, pay later (BNPL), home collected credit, and credit/store cards. Estimates suggest 8.3 million individuals are heavily indebted and have missed payments in the last six months according to the Money Advice Service prompting regulators to look afresh at unsecured credit.
In its High-cost Credit Review consultation paper published in May, the FCA aims to address this situation to protect consumers and the viability of the market. It proposes a number of important changes that aim to clamp down on certain practices, extend regulations across similar markets, and restrict lending through product price caps and restrictions on interest rate rises. Let’s look at the main changes set to hit the sector.
Rent to Own
A price cap has been proposed to ensure that credit for a product does not unreasonably exceed the value of that product. RTO products can prove up to 2.7 times more expensive to buy on average than if they had been bought in a retail outlet (with the range going from 1.1 to 4.7 times greater, excluding warranties). The price cap has yet to be set but will come into effect from April 2019.
The FCA also wishes to introduce a ban on the sale of extended warranties offered alongside RTO agreements at the point of sale which are believed to contribute little value to the consumer.
Buy it now, pay later (BNPL)
Clearer explanations of the implications and costs of not paying back credit within the offer period have been proposed. Customers are often not aware that interest will typically be charged on the whole balance or the unpaid part of the balance from the date of purchase once the BNPL agreement comes to an end and better communication should provide some much needed clarification. This will see the process at the end of the agreement become systemised, so warm-up letters notifying borrowers will be sent near the end of the period and upcoming payment reminders will also be issued. The changes will come into effect three months following publication of the policy statement.
Loans of up to £1000 in cash are typically offered as Home Collected Credit and can see repeat borrowing become commonplace, resulting in persistent debt. The FCA will seek to address this problem of ‘layering’ loans on top of one another by requiring firms to provide borrower with comparative costs ie of taking out another loan on top of an existing loan so the borrower can compare with the costs of refinancing.
A ban will also be introduced on ‘canvassing’ cash loans off trade premises as covered in the Consumer Credit Act 1974 (CCA). This makes clear that firms cannot visit a customer to offer new loans or refinancing unless this is in response to a specific request by the customer.
Credit card/store cards and catalogues
Regulation proposed in the FCA’s ‘Assessing creditworthiness in consumer credit PS18/19’ (July 2018) will see catalogue credit providers required to meet the same criteria as credit card/store card providers providing a single set of rules for all. For instance, they will no longer be allowed to automatically increase the maximum spend – or ’unsolicited credit limit increases’ – for those in debt and “will be required to assess creditworthiness prior to any significant credit limit increase”.
Information will also be shared more widely so that the information held by catalogue credit providers and store cards can be used to identify customers at risk of financial difficulty and take appropriate steps. Under CONC 6.7, these providers will need to “monitor a customer’s repayment record and take appropriate action where there are signs of actual or possible repayment difficulties” and will be required to carry out earlier intervention. Rules currently applicable to credit cards will be extended to catalogue credit and store cards to offer customers in persistent debt ways to repay debt more quickly with repayment/intervention plans spanning 18/27-28 and 36 months.
The proposals also include a mandate to remove the statement of the minimum repayment amount (also known as de-anchoring) to increase customers’ credit card repayments where they can afford to do so, whilst preserving the flexibility of credit cards.
- Financial planning: look to determine how the firm will absorb the costs associated with implementing the changes and the loss of projected revenue associated with how products were previously offered
- Policies and procedures: update processes to ensure that monitoring and customer communication can be initiated easily, particularly with respect to notifying customers nearing the end of agreements
- IT systems: upgrade or implement any additional IT systems to meet the requirements. Look at if processes are in place to securely share data with other lender’s systems if required to do so
- Conduct legal reviews: establish the ability of the firm to defend its practices legally
- Data Review: look at the information held on customers and whether this provides the kind of ‘deep dive’ necessary to comply with intervention requirements
- Staff training: examine if staff will require additional training in order to provide the necessary customer support and to follow the required procedures
- Sales process changes: ensure that products and services meet the requirements. In the RTO market the eradication of warranty policies at point of sale will impact sales.
Implementing these changes will require these organisations to make some substantial changes but bedding down periods will assist with the transition. Those who begin to embrace these changes now will be better able to meet compliance demands and to seize the initiative through demonstrating their responsible lending capabilities.