As previously announced, the financial services regulator will use its first year supervising the £200 billion consumer credit market to carry out a thematic review into the way payday lenders collect debts and treat borrowers in arrears. It has also announced a credit card market study, new research on overdrafts and compliance work which will target the debt management industry and logbook loans.
"We have a big task ahead; it's our job to make sure firms put their customers at the heart of their business and don't just see them as an easy target or a profit line," said FCA chief executive Martin Wheatley.
"We won't shy away from taking tough, decisive action to make sure that the people who rely on these products are treated fairly. There will be some firms that don't get the message, or won't play ball; those firms should know that we won't let them carry on," he said.
Around nine million UK consumers are considered to be in serious debt, according to the government’s Money Advice Service (MAS). The FCA anticipates regulating 50,000 more businesses in addition to the 27,000 already regulated; which will include all firms and individuals offering overdrafts, credit cards and personal loans, selling goods and services on credit, offering goods for hire or providing debt counselling or debt adjusting services to consumers.
The FCA has promised a tough approach to consumer credit regulation, backed with stronger powers to clamp down on poor practice than those that were available to its predecessor, the Office of Fair Trading (OFT). Firms and individuals looking to offer any consumer credit service will have to show that they are fit and proper, and have suitable and sustainable business models, before the FCA will authorise them. In addition, credit providers will have a responsibility to ensure that they treat customers fairly at all times, give customers the right information to make informed choices and to provide services that meet consumer needs.
Firms that break the FCA’s consumer protection rules and Principles for Business could face detailed investigations and enforcement action, overseen by the regulator’s dedicated supervision and enforcement teams. Penalties could include heavy fines, the need to compensate consumers and bans of misleading advertisements.
Some of the biggest regulatory changes will apply to the payday lending and debt management sectors. The number of times a company will be able to use a continuous payment authority (CPA) to seek repayment from a customer’s account will be limited to two, as will the number of times an unpaid loan can be ‘rolled over’ to the next month. Payday lenders will be required to provide information to customers on how to get free debt advice before approving or rolling over a loan, while debt management firms will face new requirements to protect client money and pass on more money to creditors from day one of a debt management plan.
To mark the introduction of the new regime, the FCA published independent research it carried out into low income consumers, their uses of credit and their reasons for doing so. It intends to use these findings to understand what pushes people into debt, and to ensure that firms are treating borrowers fairly. The research identifies three distinct borrower groups: ‘survival’ borrowers, who feel that they have no option but to borrow due to lack of income; ‘lifestyle’ borrowers, who have sufficient income for day-to-day expenses but use credit for large purchases or one-off events; and ‘reluctant’ borrowers, who tend to limit their use of credit.