FCA must act urgently on high interest borrowing or Government should intervene
The FCA must deliver cap on “sky-high” lending fees to stop the exploitation of customers, says Business, Energy and Industrial Strategy Committee Chair, Rachel Reeves MP.
The Financial Conduct Authority (FCA) has spent nearly two years probing the crippling cost of high interest borrowing.
An extensive investigation has revealed appalling incidents of families paying more than £1,500 for everyday essentials like an electric cooker that could have been bought on the high street for less than £300.
The FCA report published today laid bare the unscrupulous practices of banks, providers of rent-to-own goods and doorstep lenders who bring misery to millions of households across the country.
It offered hope and a golden opportunity to undertake a long overdue crackdown.
The staggering backdrop to the report is that high-cost credit is now used by three million people in the UK.
Single-parents aged 18 to 34 are three times more likely to have a high-cost loan - such as a payday loan, doorstep loan or pawnbroking loan - than the national average.
This report was an unmissable chance to come down on the side of vulnerable people locked out of affordable deals.
For those who have fallen into the clutches of lenders offering a little material comfort in return for eye-watering interest rates and debt it gave hope…if only momentarily.
Because while the FCA is now fully aware of the toll this scourge is taking they intend to move at a snail’s pace to do anything about it.
More worryingly, they appear to be following a well-trodden path of hesitation and delay, leading to the long grass where some vested interests hope the issue will disappear.
Only a year ago there was renewed cause for optimism when the FCA announced that they would be looking at overdraft fees.
I have been campaigning to introduce a cap on unarranged overdraft fees for some time, and introduced legislation in Parliament to do so last April.
The Competition and Markets Authority called it “the single biggest issue in the personal banking market” two years ago.
Yet they simply introduced a few lacklustre measures, such as the highly ineffective self-imposed maximum monthly charge set by the banks themselves, before passing the buck to the FCA.
In truth, they paid no more than lip-service to an issue blighting households and ruining lives nationwide.
Disappointingly, the remedies the FCA have put forward for consultation amount to little more than what the CMA put forward.
Any concrete actions that would help customers who are being ripped-off, such as a cap, have been put to ‘discussion’.
Although this points in the right direction, the FCA’s timeline indicates that any concrete remedies that come out of that discussion would not be consulted on until next year.
"The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer," said FCA chief executive Andrew Bailey.
But if a cap were to be introduced, it seems unlikely that this would happen before 2020.
Customers face charges up to £179 when borrowing £100 over the course of 30 days through an unarranged overdraft, according to research published by Which? last week.
That is 7.5 times higher than a payday loan.
In fact, 13 out of 16 banks investigated by Which? charge customers who borrow £100 more than payday lenders. Customers deserve to be treated better by their high street banks.
The FCA highlighted in its announcement that vulnerable customers are particularly at risk.
Debt charity StepChange estimates that 2.8 million people use their overdrafts to cover the cost of essentials like food and utility bills.
Unjustifiably high charges only add to the problems faced by customers who are already struggling. These customers are least likely to switch, even when they can get a better deal.
But it is not just banks that rip vulnerable customers off.
Where the FCA found examples of customers paying over £1,500 for an electric cooker worth just £300 on the high street it only highlighted how the cost of using rent-to-own could even be two to three times higher than if they were using other forms of high cost credit.
The announcement that the FCA will be looking at a cap on fees in the rent-to-own market is welcome.
They must deliver on putting in place a cap by April 2019 to stop the exploitation of customers by providers like BrightHouse.
It is disappointing that the FCA has not been as decisive in addressing the outrageous charges in the doorstep lending market, where interest rates can be over 1,500%.
Of the estimated 30,000 people Citizens Advice helped with home credit debts in the last year clients with home credit debts have unsecured debt totalling nearly half (49%) of their annual income
One in 10 have more than £2,500 in home credit debt, and a third (34%) had outstanding debt on two or more home credit loans.
If the FCA is not prepared to take that action as a matter of urgency the Government should step in.
Payday loans were capped in 2015, following legislation by the Government.
The successful introduction on this cap has shown that action by the Government and the regulator can work.
This should serve as a blueprint to tackle sky-high fees in other markets. But it hasn’t.
It is a shame that the FCA does not have to endure the same debilitating interest rates and penalties on the period of time this is taking them to sort.
Only then would they begin to feel the agonisingly painful pinch being felt by those they are supposed to be protecting.
Rachel Reeves is Chair of the Business, Energy and Industrial Strategy Committee and Labour MP for Leeds West MP.
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