The purpose of this article is to highlight some of the FCA's key proposals made within its consultation papers, particularly on overdrafts (both arranged and unarranged) where the FCA has signalled that it is proposing some significant interventions in relating to both pricing and the repeat use of overdrafts by consumers.
The consultation papers build on the FCA's feedback statement on the high-cost credit market (FS17/2) published in July 2017, and the update on its high-cost credit review that was published in January 2018. With the worst excesses of the payday lending market having been addressed by the FCA in recent years by way of a range of regulatory measures, the FCA has now turned its attention to some specific areas of the high-cost credit market where consumer harm, or potential harm, has been identified. In these areas the FCA considers that measures are required to protect financially vulnerable consumers, whilst at the same time taking appropriate steps to enhance competition in some areas of the market to improve consumer outcomes.
Looking firstly at CP18/12:
RTO is a means of consumers acquiring household items, such as washing machines and televisions, typically by way of weekly payments over a three year period. Consumers hire the goods during that period under a hire-purchase agreement, with an option to take over ownership when they have made all of the payments.
The cost to consumers of using RTO in relation to what they would pay on the high street for the underlying goods is identified by the FCA as high, and sometimes exceptionally so. RTO pricing is also considered high in relation to the cost of using other forms of high-cost credit as a means of financing the purchase.
The FCA has concluded that there is a case in principle for imposing a price cap. Its initial analysis has shown that a preponderance of consumers who use it are amongst the most financially vulnerable: low income households with a high degree of financial pressure. It is sufficiently concerned about the impact of RTO pricing on this consumer group that it believes that it has good grounds to carry out the significant additional analysis required to reach a final conclusion on the structure, level and rules for a price-cap.
Whilst the FCA carries out that further analysis, the CP invites input from stakeholders on alternative solutions that could protect consumers from the harm associated with these high costs.
In the immediate term the FCA proposes new rules to ban the sale of extended warranties alongside RTO agreements at the point of sale: some 70% of consumers currently purchase these extended warranties. The FCA's perception is that these extended warranties provide little benefit to consumers beyond standard manufacturers' warranties, whereas the cost can be significant - typically around 20% of the weekly repayment cost. The proposal for consultation involves a deferral period of at least two clear days from the point at which pre-sale information is given to consumers. The CP sets out proposed rules which the FCA aims to finalise in the autumn of 2018, with the rules to come into force in early 2019.
This area of the high-cost credit market shrunk significantly when the FCA took over responsibility for regulating consumer credit from the OFT in 2014. However the FCA has identified some particular risks in relation to repeat borrowing and long term use of what is essentially a short term product.
The FCA is consulting on guidance to clarify the ban on 'canvassing' cash loans off trade premises, by making it clear that firms cannot visit a customer in their home to offer new loans or refinancing unless this is in response to a specific request. There is also a proposed new rule in relation to providing comparative information relating to the cost of taking out another loan on top of an existing loan.
Catalogue credit and store cards
The approach here is to seek to apply a similar package of remedies to those which the FCA has recently applied to the credit card market. The issues are around a lack of consumer understanding of these types of complex credit product, and what fees and charges might be incurred and when. There is also the familiar issue of a lack of control over credit limit increases, and a lack of protection for consumers at risk of financial difficulties and problems with persistent debt.
The new rules being consulted on include proposals for catalogue credit that:
- require firms that offer 'buy now pay later' and similar offers to provide consumers with clearer explanations as to the implications of not paying back within the offer period, with prompts to consumers when the offer period is about to end;
- give consumers more choice about credit limit increases;
- where customers are already in financial difficulties, firms must not provide credit limit increases or increase interest rates; and
- require firms to use customer data to identify those at risk of financial difficulties and take appropriate steps, and provide help to those customer in persistent debt to repay the credit more quickly. These final rules relating to CIFIDs would also apply to store cards.
Alternative forms of credit
CP18/12 concludes with the FCA taking a much broader look at some of the socio-economic factors that impact consumers who find themselves having to rely on high-cost credit products such as payday lending and RTO. In particular, the FCA has looked at the extent to which the RTO market may be partly driven by the social housing system and by the lack of availability or awareness of the alternatives to high-cost credit.
To fill the perceived gap in availability of "mid-cost" credit, the FCA is looking for public authorities to work together in a number of areas, including:
- Local authorities and registered social landlords (RSLs) acting as direct providers of furniture and household goods, or as brokers for others who may offer alternative sources of credit. The FCA questions here whether RSLs should be exempt from requiring to be regulated by the FCA for credit broking in the same way as local authorities currently are. RSLs are clearly being encouraged to help consumers understand the options that are available to them.
- The development of alternative lenders, such as credit unions (previously touted as the potential saviour for consumers from the high-cost credit market). The FCA is also encouraging innovative ideas via its Sandbox programme.
Turning now to look at CP18/13:
The paper quotes some significant figures relating to overdrafts: including that in the UK 52 million people have a personal current account (PCA) and it estimates that 37% use an arranged overdraft and 25% use an unarranged overdraft each year. In 2016, firms made an estimated £2.3bn in revenues from overdrafts, of which around 30% was from unarranged overdrafts.
The FCA's research shows that overdrafts are poorly understood, with low levels of consumer engagement and weak competition. Consumers are also reluctant to switch their PCA to another bank because they don't have confidence that they will be able to get an equivalent overdraft from their new provider. In the context of the above numbers, this is an issue that the FCA sees a pressing need to address.
The research highlights in particular the high level of unarranged overdraft fees in relation to the amount borrowed. Figures show that in 2016 firms earned around £2.50 for every £1 lent out through unarranged overdrafts over the year, compared with an average 25p for every £1 lent out through an arranged overdraft. Although very difficult to compare on a like for like basis with payday loans, some estimates suggest that fees for unarranged overdrafts may be up to ten times higher than the fees for borrowing similar amounts through a payday loan. Vulnerable consumers are said to be more likely to use unarranged overdrafts and pay more in charges. The FCA believes that "there is a case to consider fundamental reform of unarranged overdrafts and whether they should have any place in any modern banking market".
The CP is generally split between a consultation element (Chapter 3) and a discussion element (Chapters 4 and 5).
In the former, the consultation is on interventions designed to encourage competition through increasing consumer awareness of how they are using their overdrafts and how the facility works. This builds on work that has already been carried out by the Competition and Markets Authority (CMA) that led to the publication of its Final Report and Order and heralded the maximum monthly charge for overdraft fees. The proposed new rules include:
- a requirement that firms provide online or in-app tools that assess eligibility for overdrafts. This will reduce barriers to consumers when they are considering switching their PCA or are searching for a PCA with an overdraft;
- improve the visibility of key information regarding overdrafts, particularly when a new PCA is being opened. This will include an online calculator to show the costs of overdrafts for different patterns of use and help consumers understand how overdrafts work. This would help address the inadequacies of using an APR as a measure of relative cost; and
- a requirement to send customers overdraft alerts to address unexpected overdraft use. Many of the high street banks have developed these alerts as part of their measures to comply with the CMA's Order.
In the discussion element the FCA is perhaps at its most controversial, and has set out a straw man as to how to address consumer harm. As regards addressing the complexity of the facility, the following measures are proposed for discussion:
- Simplifying pricing structures, and in particular:
- banning all fixed overdraft fees, other than fees for refusing a payment due to lack of funds;
- requiring firms to charge a single interest rate for arranged overdrafts on each PCA - and so an end to tiered pricing;
- (perhaps most controversially) requiring the rate for unarranged overdrafts to align with arranged overdrafts, with any difference to be based on significant and reasonable differences in proving the credit; and
- requiring an APR in advertising for arranged overdrafts: though this would require to be standardised to be of any value.
- A possible price cap for overdraft charges
- Guidance on which costs firms can include when ensuring refused payment fees reasonably reflect the actual cost of processing.
As regards addressing the repeat use of overdrafts, the FCA is considering requiring firms:
- to have adequate systems and policies to properly manage customers with overdrafts who are in, or at risk of, financial difficulties.
- to intervene with customers at prescribed intervals to prompt customers to consider changing their behaviour around the use of their overdraft, remind those who have not reacted to the prompt, and then exercise forbearance through the use of repayment plans etc.
Clearly there is a lot to discuss, and the potential for the FCA to create seismic change around the structure and use of overdraft facilities for retail consumers, particularly around unarranged overdrafts. The FCA acknowledge that any change may lead to a loss of access to credit for some consumers. It may also have an impact on the wider provision of PCA services, which might include a significant restriction on the availability of so-called "free banking" to PCA holders. The FCA intends to consult on specific proposals later in 2018. The main providers of overdraft facilities will no doubt continue to be actively engaged in the discussion process in the meantime.
In closing, it is worth speculating whether the FCA in CP18/13 is taking the opportunity to impose the restrictions on overdraft charges that was at the heart of the issue behind the bank charges case that went all the way to the Supreme Court in 2009, only to be lost by the OFT. The whole regulatory landscape has changed considerably in the last nine years, and the shape of the overdraft market with it, but in the eyes of the FCA there are clearly some wrongs that still need to be put right.