In its response to a call for input (72 page / 1.86MB PDF) into its review of high-cost credit products, the FCA said there was evidence that the cap on the fees charged for high-cost short-term credit (HCSTC) loans – often described as 'payday' loans – had led to improved outcomes for consumers.
The FCA said consumers were paying less for credit, repaid on time more often, and needed less help from debt charities. Those charities indicated that consumers are presenting themselves earlier and with lower debts, suggesting that underlying problems are being addressed sooner.
The regulator said it would maintain the cap for another three years and review it again in 2020.
The review highlighted issues in other areas of high-cost credit which will now be explored more deeply. These included the high cost of rent-to-own borrowing and particularly overdrafts.
Notably the FCA said there was a “case to consider the fundamental reform of unarranged overdrafts and whether they should have a place in any modern banking market”. It said banks could make unarranged overdrafts available without any assessment of affordability, and that a minority of consumers incurred a majority of fees.
“Based on the evidence we have to date, we believe there is a case to consider the fundamental reform of unarranged overdrafts and whether they should have a place in any modern banking market. We have significant doubts about whether unarranged overdrafts in their current form can continue in a well-functioning market for consumer credit,” said the FCA.
It said it would focus on addressing concerns about unarranged overdrafts as part of its review of retail banking. Meanwhile the FCA is also to assess assess whether and how much consumers suffer harm from persistently using overdrafts and how far financial institutions' incentives are aligned to ensuring borrowing remains affordable.
The next stage of the FCA's review into high-cost credit will see it carry out further investigation into overdrafts, rent-to-own, home-collected credit and catalogue credit and if necessary open a fresh consultation next spring.
The FCA took over responsibility for consumer credit from the Office of Fair Trading (OFT) on 1 April 2014, backed by stronger powers to clamp down on poor practice than those that were available to its predecessor. Oversight of payday lending and debt management services has been a particular focus of its work, and its initial review of debt collection practices at these lenders found examples of "serious non-compliance and unfair practices" by a number of firms.
Regulatory action taken by the FCA since 2014 includes limits on the number of times that lenders can 'roll over' loans for repayment the following month, and restrictions on the use of continuous payment authorities as a means of recovering debt directly from a borrower's bank account. Since 2 January 2015, interest rates on payday lending have been capped at 0.8% of the amount borrowed per day, subject to an overall cap limiting interest and fees to the level of the amount originally borrowed.