Almost daily the Bank of England issues new warnings about consumer credit. Its latest publication reports that default rates on unsecured lending have increased significantly and are still rising. The Bank’s job is stability of course – it says banks are storing up trouble by lending more and not worrying too much about whether people can afford to repay. At the other end of the telescope, consumers are doing their best to shore up economic growth, against a background of falling wages, rising prices and Brexit-fuelled uncertainty. This means borrowing. Lots of it. In the twelve months to April 2017 consumer credit grew by 10.3%, markedly faster than nominal household income growth . It also means a lot of human misery. The debt advice charity StepChange reported that there was a record demand for its advice last year, with nearly 600,000 people contacting them for help – or one person every 53 seconds .
It is not for the Panel to say how we should get out of this mess. Our job is to advise the FCA on the consumer interest. The FCA acted swiftly and decisively to stamp out poor practice in the payday lending market. By contrast, it is taking a long time to do very little about credit cards. Over two years since it first looked at this market, the regulator is still meandering through the issues piecemeal.
The latest effort is a consultation on persistent debt and earlier intervention. People in persistent debt are very profitable. According to the FCA’s definition, they are paying more in interest and charges than capital repayment over 18 months. For the 4 million accounts in persistent debt, the average is £2.50 in costs and charges for every £1 repaid. Having price-capped payday loans “to protect consumers from excessive charges” the FCA is silent on whether the levels of costs and charges paid by those in persistent debt are excessive.
The FCA’s remedies are too little, too late. After 18 months, lenders will have to nudge people to let them know they could pay down their debt faster if they increased their repayments. There will also be a threat to suspend the use of the card after three years of persistent debt. Two questions: Why wait 18 months to take the first steps to prevent detriment? And if the aim is to get people to pay credit card debt faster, why not simply
increase minimum repayments?
We want the FCA to undertake a proper assessment of different approaches to tackle the very real customer harm caused by credit card debt. This should include testing a range of time periods for taking action, as well taking account of the wider costs of over-indebtedness.
None of this reaches the heart of the issue, which is that credit card firms continue to offer inappropriate products to customers, with unaffordable credit limits, featuring fees and charges that are not always transparent and proportionate. For 0% balance transfer offers (in effect not 0% because there is a usually a fee) firms rely on consumers breaching the terms and conditions, or being unable to repay at the end of the 0% period, to generate their profits. So certain are they, that many firms ‘book’ the profits from 0% cards years before they materialise. This is not ‘treating customers fairly’, but the FCA stands by and does nothing to prevent firms exploiting consumers behavioural biases. The regulator has also fudged credit limit increases by agreeing to a voluntary industry agreement. Firms should not increase limits unless the customer explicitly requests it. Why is it so hard for the industry to agree to that?
The FCA’s own analysis shows that 51% of borrowers in persistent debt have two or more cards. Yet the FCA’s consultation paper barely mentions customers who have more than one credit card, and the remedies do not take account of multiple credit card debt. This is a serious omission. StepChange reports that a quarter of its clients have three or more cards and their average credit card debt is nearly £20,000. Levels of debt rise significantly the more cards people have.
In its Mission the FCA says: “the preferred approach is typically preventative – to stop bad things from happening in the future” . The FCA’s proposals are wide of that mark. We wanted the FCA to take more decisive action. Moving regulation of consumer credit to the FCA provided a real opportunity to tackle consumer detriment across the entire consumer credit market where ‘mainstream’ credit products, including credit cards, are a major cause of over-indebtedness. The FCA has failed to grasp this opportunity.
The Panel would like to see:
• A meaningful increase in minimum repayment levels to ensure credit card debt is repaid faster. As firms acknowledge, credit cards are not intended as a longer-term borrowing vehicle;
• A requirement on lenders to develop systems to identify their financially fragile clients;
• Proper assessments of affordability, taking into account all forms of debt;
• The FCA to mandate that all firms report new lending commitments to credit reference agencies (CRAs) serving the UK market and share real-time data;
• The FCA to ban all unsolicited credit limit increases; and
• The FCA consult on whether there should be a ceiling for overall levels of unsecured borrowing by an individual, based on affordability.
The Panel’s response is available here.