Over half of borrowers regret using high cost credit products

The FCA has published findings of a review into relending by firms that offer high-cost credit. The review, completed prior to the coronavirus pandemic, highlights concerns about poor practices by some firms and notes that nearly half of consumers regretted borrowing more money.

The regulator raised issues about:

• Firms not taking affordability assessments seriously enough on repeat borrowing;
• Customers borrowing repeatedly to repay other debts;
• Poor practice in the use of online accounts and apps to encourage consumers to borrow more.

According to the review, nearly half (45%) of customers said they regret taking out additional lending, and for certain high cost credit products, this figure rose to 60%. This is of particular concern, as StepChange Debt Charity found that since the start of the pandemic, nearly one million people have used high cost credit products as a safety net to meet every day living costs.

Some 48% reported that they had to cut back on other spending in order to make their loan repayments, while 37% reported they had missed payments on their rent, mortgage or utility bills in the last six months to make repayments on their relending.

The review identified that most firms had more repeat customers than first-time borrowers, with repeat borrowers accounting for more than 80% of all customers at many firms.

The FCA said it was particularly concerned that some customers may be managing financial difficulties through further borrowing. “Additional borrowing should not be used, in effect, as a debt management solution”, the regulator said, adding: “When considering an application for refinancing where the firm is aware that the customer is a regular user and appears dependant on high-cost credit we expect the firm… to consider whether forbearance or debt advice might be more appropriate than additional lending.”

The FCA also said some firms were not taking responsibilities to assess affordability for repeat borrowers seriously enough. “For example, rather than gather up-to-date customer information, some firms ask customers to confirm there have been no changes in their financial circumstances since the last affordability check was completed and some online applications pre-fill answers with the last details given.” The FCA said firms must base every lending decision on up-to-date and accurate information.

Although the FCA raised several concerns, high-cost credit providers have been in ongoing talks with FCA supervisors about how to improve affordability models – including on repeat lending. Credit Strategy understands that some of the data the regulator reviewed could be up to 12 months old, and that some lenders have made changes since then.

The review stated that for all high-cost lending in the review sample, relending is a significant part of their business. Many firms do not make a profit on a customer’s first loan, and rely on relending for profitability.

The FCA also raised some concerns about conduct, including poor practice in the use of online accounts and apps to encourage consumers to borrow more, and marketing messages which emphasised the ease, convenience and benefits of taking more credit. The FCA stated firms should not encourage relending where the firm has reason to believe that the agreement would be unsuitable for the customer.

The FCA also explained that any communication offering additional credit to a consumer constitutes marketing and is therefore subject to FCA requirements as well as data protection laws. This includes using apps and online accounts to offer credit.

Adam Butler, public policy manager at StepChange, said: “It’s more vital than ever we see fair and sustainable alternatives to these products developed as soon as possible. The government must act quickly to develop a national no interest loan scheme, which would provide a mechanism to influence access to affordable credit more directly.

“In the meantime, the FCA can further curb the harm caused by high-cost credit products by tightening lending rules, looking at harder at the product features that can trap people in debt and improving forbearance measures.”

Jason Wassell, chief executive of the Consumer Finance Association (CFA), said: “For millions of families, repeat lending successfully helps those with regular shortages in their budget, either temporary dips in income or additional expenditure. Access to credit is just as crucial for all those customers that use those other products labelled high cost by the FCA.

“No one will deny that this is a challenging area for lenders to get right and no-one benefits from the wrong lending decision.

“Ahead of this delayed report, there have been talks over the last year between lenders and the FCA to make changes that protect customers. We know that lenders will welcome any additional clarification that the FCA can provide us.”