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High-cost credit

High-cost credit covers a large and diverse range of financial products including bank overdrafts, loans, buy-now-pay-later and rent-to-own schemes. Each product has its own benefits to consumers, but they also carry a risk of consumer harm. This harm may include high repayment costs and a greater risk of financial problems.

The regulator’s review of these products

The Financial Conduct Authority (FCA) regulates credit. It began a large-scale review of the sector in November 2016. The different financial products that were included within the FCA’s review were overdrafts, store cards and catalogue credit, home-collected loans and rent-to-own services.

The review found that 3.1 million UK consumers were using these products in 2017, running to billions of pounds in debt. It also found that these products created particular risks to the most vulnerable people.

The FCA review led to several changes to various financial products in late 2019 and early 2020.

  • Overdrafts
    • Rule changes have sought to make interest rates more comparable. Rates must now be calculated as a percentage of the amount borrowed. Fixed fees and charges were banned.
    • Nearly every mainstream bank subsequently decided to charge an interest rate of approximately 40%.
    • The FCA thinks that despite this increase in rates, the banning of fixed fees and charges will leave most people better off.
    • However, the FCA wrote to the banks to seek clarification about how they determined the new interest rate.
  • Buy-now-pay-later
    • The FCA banned interest charges on credit that customers had already paid off during interest-free loan periods.
  • Home-collected loans
    • Commonly known as doorstop lending, these loans involve consumers borrowing money from firms, whose agents conduct transactions at the consumer’s home.
    • It is illegal to solicit or canvass to sell credit away from a premises, unless a prior request to borrow money has been made in writing. However, some firms were using written requests as so-called “umbrella requests” that covered repeated visits to homes to sell more credit.
    • The FCA has changed its guidance to make such agreements invalid. Now each new request for credit must be made in writing.
    • The FCA did not place a price cap on doorstop lending, as it concluded that high prices within doorstop lending were not a source of harm. Instead, it considered the repeated use of such loans instead of alternative credit was the cause of consumer harm.
  • Rent-to-own
    • Commonly associated with the buying of domestic appliances, the FCA found that market participants were charging high prices for the goods, high interest charges and rolling-in add-ons such as extended warranties. This was leading to consumers paying almost three times as much for an appliance compared to buying it outright from a mainstream retailer.
    • The FCA introduced a price cap that has limited the cost of interest charged on a product to 100% of the cost of the good.

The FCA said that it will continue to monitor other forms of high cost credit. This may include on motor finance, guarantor loans and the Credit Information Market Study.

What alternatives are there to high-cost credit?

In conducting its review of the sector, the FCA found that many households had come to rely on high-cost credit to replace domestic items that had broken and could not be lived without such as ovens or fridges. In order to avoid such circumstances, the FCA called for more assistance from numerous stakeholders in promoting the use of second-hand appliance markets.

The FCA also indicated that consumers wishing to avoid using high-cost credit might consider joining a credit union, which are limited by law in how much interest they can charge.

Help for people struggling with debt

People struggling with debt can agree a Debt Management Plan. These are voluntary agreements between a debtor and some or all their creditors to repay their debts in an extended time period. While these can be a solution for some of those who may be struggling, some creditors may not agree to the Plan for some customers.

The Government is therefore considering how to introduce a ‘breathing space’ period for those with problem debt. This would give respite from creditor action, so that consumers can get debt advice and seek a sustainable solution to their debts.

Complaints about high-cost credit

Consumers who feel that they have either been given unaffordable credit, or that the lender acted irresponsibly in providing the product, may be able to complain to the Financial Ombudsman Service. But this avenue is not available for all products, notably buy-now-pay later, as we discuss in an Insight.

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