Citizens Advice response to the FCA’s high-cost credit call for input
Citizens Advice has used its previous research and new internal data to provide a response to the Financial Conduct Authority’s call for input into high-cost credit and review of its payday lending cap.
Since the FCA introduced tougher regulations on payday lending, the number of people with unmanageable payday loan debts has more than halved. Problems seen by Citizens Advice has fallen from over 10,000 a quarter at their peak to just over 4,000 now.
The starker impact of the regulation has been to highlight the ongoing problems in markets that are similar to payday lending - but have not received the same regulatory attention.
Across high-cost credit markets there are ongoing issues of affordability and of spiralling debt. In the doorstep loan market 25% of people fall into arrears and a third of rent to own consumers do as well. Those people often borrow more in order to make their payments or miss payments on priority bills such as their council tax.
Each high-cost credit market presents unique problems. Citizens Advice has conducted recent research to look at the causes of problem debt in the doorstep loan, rent to own, guarantor, and logbook loan markets.
Doorstep loans - Citizens Advice helped 23,600 people with doorstep loan debt issues last year. Doorstep lenders pressure people into taking loans by cold-calling their homes and when people get into difficulties.
Rent to own credit - Citizens Advice helped people with 11,500 hire purchase issues last year. Rent to own companies inflate prices of goods and then add on further costs by charging high prices for compulsory aftercare services.
Guarantor loans - Citizens Advice helped more than 2,000 people with guarantor loan debt issues last year. We helped twice as many guarantors as borrowers. Guarantors are often not aware of their liability and don’t get enough notice when they are required to make payments.
Logbook loans - Citizens Advice helped people with over 700 logbook loan debt issues last year. Logbook loans are antiquated and complex and put borrowers in a vulnerable position with little protection from repossession of their goods.
Unarranged overdrafts - Citizens Advice helped people with 50,000 issues related to overdrafts last year. Unarranged overdraft fees lead to spiralling and persistent debt and too little is done to help people avoid fees and charges.
There are specific remedies needed in each market, however the FCA should build on its success in the payday loans market by extending the total cost cap to all high-cost credit markets. At the very least it should remove the current exceptions for doorstep and logbook lenders. But it should go further and consider different caps for different products.
The FCA should also address the current issues around affordability checks across high-cost credit markets by strengthening its guidance in to rules for high-cost lenders. As a minimum, high-cost lenders should be required to see proof of income and expenditure before lending.