“Markets are not perfect, but regulation is often a very poor substitute”

Published 11 March 2018

Last week, the think tank, Institute of Economic Affairs accused politicians of ‘jumping on the anti-finance bandwagon’ in a report[i] which reviewed the contribution finance makes towards economic life. The UK’s financial sector is one of the economy’s most productive, but it has taken quite a bashing since the previous financial crash and suspicion still surrounds the industry. The IEA report considers several points including: is the financial sector short term oriented; is it creating inequality and is it ‘duping’ consumers and investors. The argument that financial firms are ‘duping’ or harming consumers and investors through mis-selling (e.g consumers signing for products they do not understand and would not buy if they did) has since become the justification for a large amount of consumer finance regulation in the UK. “In 2011 alone, the UK financial regulator introduced regulation or issued guidance, advice, discussion documents or consultations totalling 4.3 million words. This is more than five times the number of words in the Bible.” The introduction of the payday loan cap is used within the report to demonstrate how regulatory intervention is often ‘grossly miscalculated’ as the subsequent shrinking of the payday market was between three and five times more than the regulator expected. When the FCA placed the cap on lenders, it expected the volume of loans to drop by 11% and the number of customers to drop by 21%, yet the actual figures in the first year were 56% and 53%, respectively. One can therefore conclude that consumers who benefited from borrowing have now been shut out of the market. Indeed, the typical payday borrower is now somebody who is better-off and who borrows for longer, yet for those at the lower end of the income scale who can no longer borrow but require access to credit in an emergency, have been hurt by the cap. The report notes how “this particular regulatory intervention has had detrimental consequences because it is impossible to design regulation that only targets perceived problems, whilst leaving well-functioning parts of the market unaffected. Regulators simply do not have the knowledge to be able to distinguish between people who will benefit and those who will suffer from the regulation and the interventions cannot be sufficiently fine-tuned. This is in the nature of markets and regulators. “ Critics of the financial services sector may point to a need for increased statutory regulation, however it is simply not possible to know in advance whether regulation will improve a market as “the perfectly informed regulator is just as much a textbook fiction as the perfectly informed consumer.” Greg Stevens 8th March 2018   [i] https://iea.org.uk/wp-content/uploads/2018/02/Socially-Useless-f1-web.pdf  

Concern Mounts on the Impact of Interest Rate Rises on Struggling Households

Published 16 February 2018

With the Bank of England expected to increase interest rates as early as May, what will be the impact of this on the UK’s financially constrained households? A report published this week by the Resolution Foundation[1] examines the possible consequences. It maintains that whilst the majority of UK borrowers are relatively well placed for an interest rate hike, regard needs to given to lower income households already experiencing ‘debt distress’. The increase in the UK’s use of consumer credit has been well documented over recent years. Annual growth in consumer credit reached 10.9 per cent towards the end of 2016 – its highest rate since 2005 and while it has slowed down slightly, it remained at 9.5% in December 2017. The report attributes much of this to car finance, interest free credit cards and personal loan growth rates. It states that most of the increase in consumer debt since 2014 was among middle and higher income groups, who are well placed to absorb the potential increase in interest rates. The think tank notes that while average debt servicing ratios remain low by historical standards, there are signs that financial distress may be making a comeback. The emergence of household debt over recent years has prompted signs of growing debt distress, making low-income household borrowers particularly vulnerable to economic change. Importantly, the report considers the number of households who have been put off spending by not having access to credit.  28% of households reported this constraint but the figure rose to 37% for the poorest fifth of working age households. Our view, as is the view of many, is that credit remains sensibly available to those with lower incomes to allow for smooth income flows in the times ahead. [1] http://www.resolutionfoundation.org/publications/an-unhealthy-interest-debt-distress-and-the-consequences-of-raising-rates/    

FCA roundtable discussion: ‘Approach to Authorisation’, 12 February 2018.

Published 13 February 2018

The CCTA’s Head of Legal & Regulatory Affairs, Graham Haxton-Bernard, attended the FCA roundtable meeting, which was was well attended by interested Trade Associations including representatives from the FLA and the CFA. The roundatable was hosted by various FCA staff including the Director of Authorisations. The discussion was lively and concentrated on the contents of the FCA’s Mission document:‘Our approach to Authorisation’. The discussion focused on four separate matters: 1) Understanding the Threshold Conditions 2) The FCA’s approach to supporting firms and individuals to meet minimum standards and promoting competition 3) The revised set of FCA commitments to firms when they apply for authorisation 4) The FCA’s strategic goals in relation to Authorisation and FCA’s performance. We will contine to keep members appraised of all developments.   Graham Haxton-Bernard 13th February 2018

Is the bubble bursting? Bitcoin falls amid global clampdown

Published 06 February 2018

As governments worldwide are nervously clamping down on investors speculating on cryptocurrencies, the value of Bitcoin fell to its lowest level since mid-November dropping below $6,000.  Lloyds and Virgin Money have now banned customers from purchasing cryptocurrencies with their credit cards amid concerns they could be exposed to large unaffordable debts should the digital currency value continue to fall.  Plus, with mortgage lending rates at a 3 year low, the housing market is also showing signs of a wobble. One wonders if this cautious approach now reflects the start of a painful correction – with the consequent risks of making access to responsible credit even more difficult in the process?

CCTA Comment on the FCA’s update on its High Cost Credit review

Published 31 January 2018

We have seen a very significant concession from the FCA today. The regulator has acknowledged that ‘the provision of high cost credit can have a socially valuable function’ and that access to legal, regulated sources needs to be maintained.  This is music to the ears to hundreds of responsible, specialist lenders serving small local communities up and down the country. These businesses are being choked out of the market by wave after wave of regulation designed to protect consumers but actually causing them harm by reducing their access and choice to legal products.  Making the case for ‘high cost credit’ is a thankless but necessary task. My hope is that today we have drawn a line in the sand on the level of regulation the sector is able to bear. Greg Stevens, 31st January 2018

Carmakers Finance Accelerates to Record Level

Published 19 January 2018

Last month Volkswagen Financial Services published provisional figures for 2017 which revealed their number of worldwide customer financial contracts is expected to rise by 5.2% to 6.85 million.[1] In the UK, Volkswagen’s loan book is £15million, so it’s not surprising that Volkswagen has made an application for a UK banking license in order to continue providing consumer finance after Britain’s exit from the EU[2]. Carmakers Renault, who also operate their own banking division, form part of the expansive growth in lending that is currently being seen by some of Europe’s largest car companies. But what effect will this have on independent car retailers? The AM Outlook Survey for 2018 reports 54% of independent retailers are expecting to see a decrease in turnover this year[3] in addition to the challenges they face from regulatory scrutiny and possible further intervention, through to issues around diesel. Our view is it’s entirely plausible that we may see a number of departures from the market this year. Yet another reason to continue our campaign for sustainable, fair and responsible access to credit. Greg Stevens 19th January 2018 [1] https://www.autofinancenews.net/volkswagen-financial-expects-record-earnings-for-fiscal-year-2017/   [2] https://www.pymnts.com/loans/2017/volkswagen-banking-license/   [3] https://www.am-online.com/news/latest-news/2017/12/19/what-does-2018-hold-for-uk-car-dealers  

CCTA Commentary on today’s IFS Report

Published 16 January 2018

The CCTA welcomes the IFS report today, but we would guard against rash decisions on blunt instruments such as rate-capping suggested by some third parties. The ongoing dialogue and regulatory changes are resulting in meaningful solutions and positive outcomes for consumers. Further regulatory instruments and unwise intervention would mean reduced access credit and increased cost of credit. It should also be noted that the recent FCA Insight research found that short-term, high cost credit is not the cause of growing debt levels. Much of the growth is produced by the borrowers least likely to suffer financial distress. Motor finance and 0% credit cards have accounted for the majority of consumer credit growth since 2012 and about half of outstanding consumer credit is held by those with mortgages. Around 40% of households with consumer credit debt hold savings in excess of their debt. You can read the IFS report at this link: https://www.ifs.org.uk/publications/10336 Greg Stevens CEO   16th January 2018

Personal debt crisis will not be solved by curbing credit: CCTA commentary (Telegraph 11 January 2018)

Published 11 January 2018

The simplistic view of John McDonnell and others is credit equals debt, therefore get rid of the credit industry and you get rid of debt. Her Majesty’s Opposition is very clear that Britain is in the grip of a personal debt crisis. In a series of articles over the Christmas period, John McDonnell, the shadow chancellor, warned of an “alarming increase” in UK household debt. McDonnell’s solution to the problem is equally clear: reduce demand by giving more public money to consumers; and restrict supply by imposing rate caps on “high cost” lenders and tighter controls on the industry in general. Constructing a counter-argument on behalf of credit companies is not an easy task, such is the populist appeal and seeming common sense of tighter controls and caps. But one needs to be made as a matter of urgency. The real threat to consumers is not the one identified by McDonnell in his warnings about the debt levels of those least able to afford it. The danger is not too much credit, it is reduced access to credit for consumers caused by wave after wave of regulation. Two important surveys in the last week show this very clearly. They present an accurate picture of the state of consumer borrowing in the UK and a better guide as to where legislators should be focusing their attention. First, Thursday’s Bank of England quarterly Credit Conditions survey reported that the availability of unsecured credit to households had decreased again in the last three months of 2017, and that reductions had now been reported in all four quarters of 2017. It also found that lenders expect a further significant decrease in the first quarter of 2018; and that while credit card lending was reported to be unchanged in the fourth quarter, demand for other unsecured lending was reported to have fallen significantly. Secondly, on Monday of this week, a jointly published article from the Bank of England and the Financial Conduct Authority provided answers to two crucial and related questions: Which types of borrowing have accounted for consumer credit growth? And how worried should policymakers be? The answers, drawn from credit reference agency data for one in 10 UK consumers going back six years, were emphatic. They showed that credit growth has not been driven by sub-prime borrowers. Rather, the majority of growth since 2012 is attributable to motor finance and 0pc credit cards. Or put another way, the growth in lending is going to the borrowers who are least likely to suffer financial distress. Collectively, these two reports paint a very different picture to the one painted by Opposition politicians. The supply of credit is contracting, not expanding; and where there is growth, it is into prime markets, not sub-prime. This is good news for policymakers in one respect – personal debt levels are coming down. But it is bad news in another: consumers on lower incomes are finding it increasingly difficult to access regulated sources of credit. Hence, policymakers have a wholly …

FCA insight finds consumer credit growth is not driven by ‘subprime’ borrowers

Published 11 January 2018

Until recently, many regulators have relied on aggregated data from larger lenders to monitor which lenders and products are driving credit growth. However, this data doesn’t include use of short-term high cost credit and non-mainstream products that many people with low incomes rely on. It also doesn’t show overall debts across different lenders and products. It is often questioned how far credit growth is driven by ‘non-mainstream’ borrowers and assumptions are often made – and then made real – in the media. We were pleased to see this week insight from the FCA into ‘who’s driving consumer credit growth’. The FCA requested and analysed CRA data on one in ten UK adults to “build a better, fuller picture of borrowing” and to identify any potential risks stemming from the UK’s growth in credit usage. Three important insights emerged from their analysis: Credit growth has not been driven by subprime borrowers People without mortgages have mainly driven credit growth Consumers remain indebted for longer than product-level data implies Credit growth is not being disproportionately driven by subprime borrowers The FCA found that “only a small proportion of all consumer credit debt (is) held by subprime customers.” Rather, it is individuals with the highest credit scores who are taking advantage of motor finance deals and 0% interest free credit card opportunities that are driving the credit growth. This flies in the face of the assertions made by many economists that another ‘subprime debt bubble’ is growing. On the contrary, the FCA clearly states that the high cost credit market is “not rapidly expanding” but rather contracting following recent changes to the market. People without mortgages are driving credit growth People without mortgages are contributing to current consumer credit growth, following a tightening of mortgage lending requirements. Perhaps an unintended consequence of reducing access to home equity release, or a greater need for credit amongst renters who are experiencing increased costs? This is an area that the FCA will need to monitor as rental payments rise and renters are left with less disposable income. Consumers remain indebted for longer than product-level data implies The analysis also finds that consumers are remaining indebted for longer than product level data implies, with consumers opting to clear their debt on one credit product but merely transferring the balance; drawing down on existing credit lines or taking out a new product instead. Access to responsible credit is as important as ever It is welcome news that the FCA insight signals healthy growth in consumer credit and that much of this growth is generated by the borrowers that are least likely to suffer financial distress. The importance of access to credit for everyone, including those that can’t or choose not to access mainstream products, will not wane and continues to be as important as ever. The FCA’s insight shows that well-regulated, responsible products are serving the non-standard market well and that “credit growth not being disproportionately driven by subprime borrowers is reassuring”. The FCA’s open consultation on ‘Future …

310,000 Households Nationally are Borrowing from Loan Sharks*

Published 21 December 2017

We applaud that Credit Unions are continuing to help raise awareness of anti-loan shark campaigns, as the need for access to affordable, regulated credit remains more vital than ever. A release published by ABCUL on 15th December, highlights that an estimated 310,000 households nationally are borrowing from illegal money lenders, many of whom charge exorbitant rates of interest to trap people into a spiral of debt. Nationally, Illegal Money Lending Teams have secured more than 380 prosecutions for illegal money lending and related activity, leading to nearly 328 years’ worth of custodial sentences. They have written off £72.5 million worth of illegal debt and helped over 27,000 people. The CCTA will continue to work with government, regulators and stakeholders such as ABCUL and the money advice charities to ensure there is access to affordable, responsible credit facilities for those in need of short-term financial assistance. *As estimated and published by ABCUL – http://www.abcul.coop/media-and-research/news/view/961    

Retailers battle low consumer confidence at Christmas

Published 20 December 2017

As Christmas consumer spending heads towards its final hurdle, retailers will no doubt be hoping for a continuance of the slight uplift in sales as reported by the Office of National Statistics last week. Earlier this year, the British Retail Consortium (BRC) and KPMG reported like-for-like sales across the sector rose by a “meagre” 0.6% in November compared to the same period last year.[1] However, more recently, the ONS reported that sales volumes, boosted by Black Friday, were up 1.1% in the month, ahead of the 0.4% that City of London analysts had expected. It seems retail customers decided to take advantage of some of the offers available, driven perhaps by the constraints on household finances and a consequential need to reduce the overall cost of the festive period. A more measured consumer approach has therefore meant “household goods stores had a good November, with a number of businesses saying that Black Friday promotions boosted sales,” said Rhian Murphy of the ONS.[2] Generally retail sales account for around 30% of household expenditure, yet it was the purchase of electrical household items which received a particular uplift last month and contibuted to the ONS figures. The story is not quite so positive for food purchases, with the ONS reporting that the quantity of food bought in November fell by 0.1% compared to the same month last year, yet the amount spent increased by 3.5%, reflecting a rise in food prices that has contributed to the increase in inflation[3]. Consumer confidence remains low This is perhaps a more telling picture of low consumer confidence levels. Consumers have taken advantage of the sales in November, rather than those in December, as part of a measured approach to spending, meaning Black Friday sales were an exception. It seems that retailers will continue to face challenging conditions. Indeed it is highly probable that retailers will still face daunting sales figures due to inflation rising to 3.1% in November, the highest it has been for 6 years.[4] High mortgage debt Constrained household finances, stagnant wage growth and rising inflation mean families will continue to feel the squeeze – a view which is supported by a recent study of over 6,000 households for the Bank of England. This showed UK finances dipped following the Brexit vote, with an increase in people reporting high mortgage debt. The survey, carried out by the research firm NMG Consulting on behalf of the Bank in September, also reported the average borrowing on consumer credit was c.£8,000 but warned that the latest survey data did not appear to pick up the continuing trend in the official data – which shows an annual growth rate of almost 10%[5]. Yet as banks have tightened their lending criteria and the fact the cost of living is rising at the fastest rate in five years[6] it comes of little surprise to learn that consumer confidence remains low. Indeed as Close Brothers Retail Finance Managing Director Alex Marsh notes; “The final run up to Christmas may prove …

2018: What’s on the horizon?

Published 06 December 2017

As we approach 2018 – and with it GDPR – we wanted to share the foresight of Mike Bradford from Regulatory Strategies Ltd, who has drawn up what he sees from clients as being ‘front of mind’ and what we consider to be the likely trends for next year. Likely trends and actions in 2018: There will inevitably be increased GDPR awareness and with it the media picking up on enhanced consumer rights, potentially fuelling a rise in subject access requests (SARs) and requests under the new data portability provisions. Organisations need to be prepared for this.   It remains to be seen how tough the ICO and other supervisory authorities (SAs) will be on breaches of the GDPR.  Some early-day examples of non compliance may be set.  Any major breach or GDPR failure will involve more global cooperation between data regulators and the potential for the ‘highest common denominator ‘approach to levels of fines and sanctions.  Individual regulators will not have the same levels of discretion as they do now.   With the GDPR requirements around appointing a Data Protection Officer (DPO), this role should – and will – become far more influential across the business and its executive and Board.  Supplier management i.e. relationships, contracts and due diligence checks in respect of data processors will be even more important to get right.   We are increasingly seeing data protection compliance moving from being seen (by some) as a necessary evil to not only a form of compliance badge but as a real business differentiator, with organisations promoting their compliance status and using it to attract and win business in an increasingly privacy aware consumer marketplace.   One of biggest challenges will be having governance and accountability that is sufficiently robust to meet GDPR requirements but is also sufficiently flexible and dynamic to meet the ever-changing and evolving data world.  At the same time operational aspects of systems must remain compliant and this will be a challenge for organisations with legacy systems.   The world of ‘big data’ will continue to evolve – and GDPR compliance is key to how businesses optimise this opportunity.   More data breaches will come to light post GDPR as reporting obligations come into effect and focus attention on what previously would have been unreported breaches.  Consumers will become even more aware of the need to protect their data and the ramifications of any breach – legally, reputationally and commercially – will be significant.   Both pre and post 25 May, the GDPR will continue to be a compliance and core business challenge.  There is no ‘period of grace’ or transition period.  GDPR compliance is mandatory from 25 May 2018.  We are already seeing clients looking to seize the commercial advantage of GDPR readiness as a key business differentiator and early GDPR compliance i.e. pre 25 May is part of their operational and strategic planning.  Brexit will have no impact on the fundamental requirement to ensure full GDPR compliance by 25 May next year. …