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Short-term credit loans rise but borrowing costs stable, says FCA

The UK’s Financial Conduct Authority (FCA) has revealed that the number of high-cost short-term credit (HCSTC) loans is on the rise, but price-capping implemented in 2015 is helping to keep borrowing costs down.28 Jan 2019

The FCA has for the first time released an analysis of the data collected in HCSTC firms’ regulatory returns, which shows a rise in the number of loans made since 2016. However the regulator said the short-term borrowing was still well below the levels seen in 2013, before it took over control of the market.

Consumer finance expert Lauren McCarthy of Pinsent Masons, the law firm behind Out-Law.com, said the data was a reminder to lenders that high-cost short-term lending continued to be an area of focus for the FCA.

“Lenders need to be mindful of this focus when designing and marketing credit products. The FCA is likely to take an interest particularly where disproportionate fees are imposed or where the product is likely to attract vulnerable customer groups,” McCarthy said.

Consumer finance expert Alice Hallewell of Pinsent Masons said HCTSC would remain under scrutiny by the regulator.

“We are likely to see more from the FCA on this in the coming months, particularly in relation to bank overdrafts, ‘buy now pay later’ offers, consultation on rules to make it easier for customers to manage their accounts, and a wider strategic review into retail banking which will be consulted on later this year,” Hallewell said.

The data shows over 5.4 million HCSTC loans were made in the year to 30 June 2018 and on average borrowers are due to repay 1.65 times the amount they have borrowed. The average loan was £250 and the average amount payable £413.

The FCA estimated that the loans were taken out by around 1.7m people, with many borrowers borrowing more than once in a year.

It said the total amount lent was just under £1.3 billion, but the total amount repaid was £2.1bn. Both the loan value and amounts repaid rose between the first and second quarters of 2018.

Although there were around 90 firms active in the market in the year under analysis, the FCA said 10 firms accounted for 85% of loans.

HCSTC borrowers were predominantly young, with 37% of payday loan borrowers and 29% of short-term instalment borrowers aged between 25 and 34. Over half of all HCTSC borrowers are either tenants (37%) or living with their parents (26%).

The FCA took over responsibility for consumer credit from the Office of Fair Trading in April 2014 and in January 2015 imposed a cap on payday lending of 0.8% of the amount borrowed each day, with an overall cap limiting the total interest and fees payable to 100% of the total amount borrowed.

In July 2017 the regulator said the cap had benefitted consumers. It maintained the cap for another three years, with a further review due in 2020.