UK: The FCA's High Cost Credit Review: Action To Protect Vulnerable Consumers

Introduction

This blog:

  • Provides an overview of the FCA's recent high cost credit review;
  • Analyses how the review's findings and proposals fit into the FCA's wider agenda on vulnerable consumers; and
  • Explains what this means for future pieces of FCA work that relate to vulnerability.

High cost credit and vulnerable consumers

The FCA has for a number of years voiced its concerns and expectations over consumer vulnerability. However, with the publication of its recent review of high cost credit, the FCA has shown its increasing willingness to consider introducing strong new rules and regulations to protect vulnerable consumers.

Notably, the high cost credit review explicitly frames its interventions around the issue of vulnerability, saying that there is a "need to intervene to protect financially vulnerable consumers" and that the remedies it is proposing could save these customers approximately £200m a year.

As noted in our previous blog, the review clearly demonstrates the way in which the needs of vulnerable and excluded customers are central to FCA decision-making and act as a key operating principle informing its day-to-day supervisory and regulatory activities.

The review's findings

The FCA launched its high cost credit review in November 2016, in order to identify patterns and sources of harm to consumers across high-cost credit products. It has previously published a Call for Input, a Feedback Statement (FS17/2) and an Update as part of the review, and has now has published two new Consultation Papers (CPs).

The two CPs detail the FCA's findings in these markets, pose some questions for discussion, and outline a series of proposed rules and guidance for consultation. CP18/12 addresses rent-to-own (which includes both hire purchase and conditional sale agreements), home-collected credit, catalogue credit and store cards, and alternatives to high-cost credit, while CP18/13 is focused on overdrafts. The full range of remedies for proposal and discussion are set out in Annex A.

The review's headline measure is the proposed price cap on rent-to-own products. However, the FCA does leave it open to those replying to its consultation paper to propose "alternative solutions" to protect consumers in this market, with the price cap being an item for discussion at this stage. In our view though, it seems unlikely the FCA would row back from this proposal given that it believes "the case has been made to consider the introduction of such a cap".

The review's proposed remedies also include new disclosure requirements for home-collected credit, and changes to catalogue credit and store cards to help customers avoid persistent debt (similar to those rules which now exist for credit cards).

On overdrafts, the FCA says that "the way banks operate and charge for overdrafts needs fundamental reform". It has proposed a series of new disclosure remedies, including mobile phone alerts warning consumers of potential overdraft charges. However, it also promises to consider more "radical options" on overdraft fees and charges, including a ban on fixed fees for arranged and unarranged overdrafts, and potentially aligning prices between the two. As articulated in our previous blog, we thought it likely that the FCA's Strategic Review of Retail Banking Business Models and high cost credit work would likely lead to price cap on overdrafts, and while the FCA does not go this far at this stage, it does confirm that they are "modelling the potential role of an absolute price cap to act as a backstop" for both arranged and unarranged overdrafts. These more radical proposals will incorporate work from the FCA's Strategic Review of Retail Banking Business Models, and be consulted on later in the year.

Implications for firms

While it is banks and other firms operating in the consumer credit market who are most obviously affected by the remedies proposed in the high cost credit review, firms active in other sectors should also take note of FCA's proposals, as they point to a clear direction of travel for other pieces of FCA work focused on vulnerability.

The review makes clear that the FCA will consider taking strong interventionist measures where it considers there to be harm to vulnerable customers, and this has clear implications for its forthcoming review of review of pricing practices in the general insurance market. While the review will explore insurers pricing models and strategies more generally, the FCA will also have a particular interest in prices paid by vulnerable consumers. Previous FCA reviews of the GI market have found that those consumers who stick with their existing provider at renewal are more likely to pay higher prices, and that these consumers are also more likely to be older and more vulnerable.

Insurers' data driven pricing systems are also of concern to the FCA. The FCA will want to understand whether these mean that certain characteristics associated with vulnerability lead to these consumers paying higher prices. While the FCA may see some of these practices as justifiable, if there is a clear pattern where those who are vulnerable unexplainably pay more, then we could see the FCA step in to protect these consumers.

In summary, firms should be mindful that, when it comes to the protection of vulnerable customers, the FCA's approach, always wide-ranging in scope, is now becoming increasingly interventionist. The FCA will expect firms across sectors to show that they are taking vulnerability into account. In that regard, our previous blog sets out a range of points and actions for firms to consider in order to identify their vulnerable customers and ensure that they are treated fairly.

Annex A:

Potential remedies for consultation and discussion: rent-to-own sector

For consultation

For discussion

  • A point of sale ban on extended warranties
  • A two day deferral period before customers can buy extended warranties
  • A price cap on rent-to-own products
  • Alternative solutions to address harm from high prices from rent-to-own products

Potential remedies for consultation and discussion: home collected credit

For consultation

  • Requiring firms to explain the comparative costs of refinancing vs taking out an additional loan, when discussing additional borrowing with consumers
  • New guidance on s.49 of the Consumer Credit Act, making clear that firms may not take blanket written permission to visit consumers in their homes to offer them additional credit from the start of a contract

Potential remedies for consultation and discussion: catalogue credit and store cards

For consultation

  • New rules clarifying that firms must explain clearly upfront how interest will be charged if the customer does not repay within the buy now pay later (BNPL) offer period
  • Requiring firms to prompt customers to repay before the expiry of a BNPL or similar offer period
  • Extending the existing rules for credit cards and store cards regarding credit limit increases to catalogue credit
  • Extending the existing rules for credit cards and store cards to not increase credit limits or interest rates for customers at risk of financial difficulties to catalogue credit
  • Extending the existing rules for credit cards on persistent debt to catalogue credit and store cards

Potential remedies for consultation and discussion: alternatives to high-cost credit

For consultation

  • New guidance for social landlords, making clear that they may, in some circumstances, be able to introduce their tenants to credit unions or other alternative credit providers without being authorised by the FCA

Potential remedies for consultation and discussion: overdrafts

For consultation

For discussion

  • Requiring firms to provide online or in-app tools that assess eligibility for overdrafts
  • Improving the visibility and content of key information about overdrafts including an online charges calculator
  • Requiring firms to send alerts to address unexpected overdraft use
  • Banning firms from including available overdrafts in their descriptions of customers' available balance
  • Ban on fixed fees on arranged and unarranged overdrafts other than "refused payment fees"
  • Requiring firms to charge a single interest rate on arranged overdrafts
  • Requiring the rate on unarranged overdrafts to be aligned with arranged overdrafts
  • Standardising how prices are represented through annual percentage rate (APR)
  • Potential backstop price cap on overdraft charges
  • Guidance to ensure "refused payment fees" reflect the actual costs
  • Early identification of repeat users
  • Interventions by firms at prescribed intervals

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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