Clean up credit

Which? calls for a clamp down on irresponsible lending

As regulation of consumer credit transfers from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA), Which? calls on the new financial regulator to clean up credit and introduce tough new rules to stamp out irresponsible lending. New Which? research reveals that people are over-reliant on credit for essentials and find themselves caught in a spiral of debt, forcing them into using high-cost credit to repay other debts. At a time when the availability of mainstream credit has dried up, over a quarter of credit users say they dont like debt but see it as a necessary part of their life. Worryingly, more than half of people with credit card debt use their credit card to pay for rent, bills or essentials, like food. As the high cost credit industry has boomed, regulation has failed to keep up to date. The limited resources and powers of the OFT has left the market without proper supervision enabling lenders to take advantage of consumers who rely on credit. The transfer of credit regulation to the FCA is a golden opportunity to bring rules up to date and clamp down on practices that have helped to push many consumers into a spiral of debt. A competitive, well regulated credit market can play an important role in supporting a healthy economy and helping people to manage their budgets and put consumers in control. Which? wants the Government and the FCA to send a clear message to lenders that they are committed to cleaning up credit. Which? challenges the FCA to: 1) Ban excessive default fees and charges Which? research shows that 20% of payday loan users and 21% of unauthorised overdraft users have experienced unexpected charges on a credit agreement in the last year, with the cost of defaulting ranging from 12 to 30 depending on the lender.

Which? wants the FCA to prevent lenders levying excessive charges by introducing a cap on the level and total cost of default charges. The cap should be fair and reflect lenders' actual costs. 2) Crack down on irresponsible lending Half of people who used a payday loan or unauthorised overdraft had been rejected for credit within the past year and 49% of payday loan users have taken out credit it turned out they could not afford. Which? wants strong rules for affordability assessments that consider the borrowers income, expenditure and ability to repay the debt in a sustainable manner. This must include any outstanding credit commitments, particularly where credit is being taken out to repay existing debt. Thorough affordability assessments will enable consumers to make more informed choices about whether a credit product is suitable. 3) Put people in control of their credit Over half of credit users agree that credit is too easy to get hold of. The FCA can give more power to consumers by ending unsolicited increases in credit limits and requiring lenders to provide overdraft facilities on an opt in only basis. Limits should also be introduced on the amount of times a payday loan can be rolled over. 4) Give consumers clear and transparent information Consumers are over-optimistic about their ability to pay off credit on time and in full. A third have regretted taking out credit, rising to over two thirds (69%) for payday loan users. Which? wants the cost of credit and all fees and charges to be transparent. For high-cost credit to be displayed clearly as pounds per 100 borrowed over 30 days. This would enable consumers to compare the cost of credit products at a glance, giving them a clearer understanding of their commitments before proceeding. Like mortgage statements, all credit products should come with clear health warnings explaining the consequences of missed payments, and all costs and charges should be transparent. 5) Swift and early intervention for people in financial difficulty Which? found that many credit users are taking out credit to service existing high cost debt. The FCA should replicate the Mortgage Conduct of Business rules on dealing with borrowers in financial difficulty to other credit products. This will prevent lenders taking advantage of consumers in financial difficulty and set expectations for how lenders should deal with borrowers struggling to make repayments. These rules should include: preventing lenders from levying excessive charges on borrowers in financial difficulty (freezing charges); preventing lenders from charging interest on high-cost loans beyond 30 days after the borrower defaults;
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prioritising repayment of the amount borrowed before repayment of default charges; requiring lenders to take measures to assist consumers in difficulty before taking action to recover the debt; and requiring lenders to refer borrowers to free independent debt advice.

This is a critical point in the future of credit regulation and Which? welcomes your support in keeping pressure on the FCA to deliver a strong and proactive regime that delivers for consumers. For more information, contact miranda.akhurst@which.co.uk / 020 7770 7353.
In August 2012 Which? surveyed 4,031 people (including 3195 credit users) to gain a better insight into credit users attitudes toward and experiences of credit (Which? Credit Britain survey). We followed up the survey with in-depth telephone interviews in December 2012 and January 2013. For our Quarterly Consumer Report (QCR) research, Populus, on behalf of Which?, interviewed 2,060 UK adults online between 4 and 7 January 2013.