The Financial Conduct Authority (FCA) has announced new proposals designed to protect millions of people who use overdrafts and high-cost credit.
The changes the FCA are consulting on follow an in-depth review into the high-cost credit market and are expected to reduce the costs for consumers and give them greater control over their finances. These changes are wide-ranging and some specific proposals are being consulted on from today. In addition, the FCA will gather additional evidence and carry out further analysis before any formal decisions can be made on a number of other issues.
Andrew Bailey, Chief Executive of the Financial Conduct Authority said:
‘High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society. Today we have proposed a significant package of reforms to ensure they are better protected including the possibility of a cap on rent-to-own lending.
‘The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.
‘Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place. However, we believe more fundamental change is needed in the way banks charge customers for overdrafts. Given the size of the market our work here will be completed as part of our wider review into retail banking.’
Under legislation the FCA is required to formally consult on rules it proposes to introduce. Consultations must be open and transparent, and the FCA cannot prejudge the result. In order to consult, the FCA must have a sufficient evidence base on which to base its proposals and develop a cost-benefit analysis, which is why the FCA has launched this call for input. These checks and balances ensure any proposed measures are proportionate and necessary to protect consumers.
The FCA believes that the way banks operate and charge for overdrafts needs fundamental reform. In 2016 firms made an estimated £2.3 billion in revenue from overdrafts; 30 per cent of this was from unarranged overdrafts. The majority of unarranged overdraft charges are paid by only 1.5% of customers, who pay around £450 per year in fees and charges.
The FCA is putting forward some immediate proposals today for overdrafts that it believes will save customers up to £140 million a year. Beyond that, the FCA will consider more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices.
If appropriate, these options will be consulted on later this year to coincide with the wider Strategic Review into Retail Banking so that the FCA is able to take into account the part that overdrafts play in the current UK banking model.
The FCA is also consulting on mandatory rules to make it easier for customers to manage their accounts.
- mobile alerts warning of potential overdraft charges
- stopping the inclusion of overdrafts in the term ‘available funds’
- requiring online tools to make the cost of overdrafts clearer
- introducing online tools to assess eligibility for overdrafts
- making it clear overdrafts are credit or borrowing
As part of the review the FCA looked closely at the rent-to-own sector. Costs for the 400,000 customers can be high – sometimes exceptionally. The FCA has seen examples where people have paid over £1,500 for essentials like an electric cooker, which could be bought on the high street for less than £300.
The FCA has identified a need to intervene to protect financially vulnerable consumers in this market. The FCA believes the harm identified in this market is sufficient in principle to consider a cap on rent-to-own prices. It will now carry out the detailed assessment of the impact that a cap could have on the rent-on-own sector and how it might be structured. In the meantime the FCA is open to other options. The FCA will undertake this work over the next few months with the aim of introducing changes, if appropriate, in the rent-to-own sector by April 2019. In addition, the FCA is consulting on banning the sale of extended warranties at point of sale; this could save consumers up to £7.7 million per year.
Additionally, the FCA intends to strengthen protections for vulnerable users of high-cost credit in stores and at the door, by introducing new requirements to raise standards in disclosure and sales practices.
The FCA is announcing a package of reforms in the home-collected credit sector. These will raise standards in disclosure and sales practices preventing home-collected credit firms from offering new loans or refinancing during home visits without the customer specifically requesting this. The measures will also bring greater controls over the refinancing process, which may not work well for consumers. Changes in this area are estimated to save consumers up to over £34 million a year.
Catalogue credit and store cards
Catalogue credit and store card firms will be required to do more to help customers avoid persistent debt – in the same way as credit card providers have been made to do by the FCA. These changes are estimated to save consumers up to £27.5 million a year.
The FCA has already transformed some high-cost sectors, with firms making substantial improvements and paying more than £900 million in redress to customers across consumer credit. The series of measures announced today builds on this work.
Responding to the FCA’s review into high cost credit, Money Advice Service Chief Executive, Charles Counsell, said today:
“We welcome the FCA’s wide-ranging review into high cost short term credit, a review that has highlighted the complex array of products and charging structures that too often have critical consequences for consumers. We support any proposals that could improve the high cost credit market for its customers and look forward to responding to the FCA in more detail.
“Access to affordable credit and people’s ability to make informed financial decisions is key to day-to-day money management. Alongside savings, the responsible use of credit is a vital way for UK consumers to make bulky purchases and smooth income and expenditure. Our evidence shows that of the financially capable behaviours that people exhibit, it is managing credit that can have the greatest impact on their financial wellbeing. We are very pleased to see a growing range of alternatives to high cost credit including community or social finance-led solutions. For more information, visit: https://www.moneyadviceservice.org.uk/en/articles/alternatives-to-payday-loans
“If you find you need to use credit to pay for essential day to day bills, make sure it is affordable and be confident that you can sustain the repayment. But, if you find you are falling behind on payments, help is available. Our payday loans tool could help you find a cheaper, lower risk alternative: https://www.moneyadviceservice.org.uk/en/payday-loans and confidential and free debt advice is available across the UK; our debt advice locator tool has all the information you need to make the first step: www.moneyadviceservice.org.uk/en/tools/debt-advice-locator”