As predicted in newsletter No.3 the High Cost Credit review, including a review of HCSTC was issued 31st July 2017 and various media interviews were conducted by CEO Andrew Bailey. You can find the full report at https://www.fca.org.uk/publication/feedback/fs17-02.pdf NPA contributed to this research and we were thanked by the FCA for doing so.
The headlines are;
-No changes regarding Pawnbroking
-No change to the HCSTC credit cap (this will be reviewed again in 2020).
-A fundamental review of bank overdrafts is required (Spring 2018) and the FCA have questioned whether there is any place in modern banking at all for unarranged overdrafts.
-There will be a further review planned for Rent-To Own, Home Collected Credit and Catalogue Credit.
-They see a need to clarify rules for creditworthiness and affordability, a consultation is underway and NPA will respond to this in due course.
The review states ;
“We received very little evidence of harm from pawnbroking.... Pawnbrokers (NPA) pointed to the relatively low complaints levels compared with other sectors. This was supported by data from debt charities which showed that pawnbroking accounted for the fewest issues among high cost credit clients... Our analysis suggests that, because loans are secured against the pledge, the price of the credit is comparatively low and consumers may decide in some cases not to redeem an item if they are unable to repay. In light of this we do not consider pawnbroking to be a priority area of the review in terms of potential risk. We will maintain a watching brief on the sector through our ongoing supervision and authorisations in case issues arise. We have recently contacted pawnbroking firms to get more information about this market and to assess any potential risks. As part of the creditworthiness CP, we propose to clarify the requirements applicable to certain pawnbroking agreements where the consumer’s liability is limited to the market value of the pledge. Such agreements will be subject to an exclusion from the requirement to assess creditworthiness.
The cap will be kept at current level and reviewed again in 3 years’ time. Consumers are on average 35 and male, have an income below national average at £20,400. 76% are employed, the balance on benefits. 76% have no savings, the other 24% have only £177 on average. Average non mortgage debt is £4,700. Only one in ten have a mortgage. Main reason for a loan is living expenses and to pay a bill. 60% took out 3 loans or less in 2016. 10% took out 10 loans or more p.a., the average was just below 5. The market had a 227% increase in complaints to FOS and yet a 60% reduction in debt advice cases with Citizens Advice.
In 2014 there were 332 firms engaged in HCSTC. As at Dec 2016 there were 144 firms with permissions but only 30 actively lending. In 2013, 1.7m people took out 10.3m loans worth £2.5bn. In 2016,760k people took out 3.6m loans worth £1bn. Since 2015 new customers has been constant at 20k per month.
Both unsecured and secured overdrafts will be investigated further with a consultation paper based on FCA proposed solutions due in Spring 2018. FCA question why unsecured overdrafts have a place in any modern banking market. Unarranged overdrafts are currently available without any affordability assessment and may be incurred by potentially vulnerable customers.
Other HC Markets
-Rent to Own- The FCA were concerned about how vulnerable customers are treated.
-Home Credit- FCA expressed concern about high levels of financial distress. FCA want to look at restrictions on re-financing and rollovers in this sector and impose time gaps between borrowing, or duration of borrowing.
-Catalogue Credit- Thee was some concern about the high level of arrears and the high fees triggered by arrears, and lack of transparency around interest free periods.
Regarding the above, the FCA intend to review worsening credit ratings and will also analyse multiple and repeat use of products to see if there is customer harm due to indebtedness. There will be a consultation on new regulatory measures to be proposed in Spring 2018.
The FCA will maintain a watching brief on the Guarantor Loan market but currently see no consumer detriment.
The FCA is also continuing to review;
-Responses to consultation paper on creditworthiness (launched July and responses required by 31st October, it is likely that NPA will respond).
-Motor finance- update on the FCA review will be published in Spring 2018