FCA takes a cautious approach to consumer credit intervention

Published 31 May 2018

In the FCA’s report published today on the outcome of its high-cost credit review, the FCA is quite rightly taking a cautious approach, which is to be welcomed. The focus on overdrafts is welcome too: this is where the bulk of high cost borrowing takes place. Providing credit to low income consumers will always be an emotive topic. You can’t simply wish-away the costs of servicing this customer group. The FCA gets this and it is taking its time to get the balance right. We are 100% committed to working with them to make sure consumers can get access to the credit they need on the best possible terms.  On rate caps We are pleased the FCA has listened on caps – they look great on paper but they are counterproductive in practice. We’re not surprised they have committed to considering one for the rent-to-own sector: they were under intense pressure from the debt campaigns to bring one in. We’ll have to see where the review gets to, but we’re pleased the FCA will be undertaking a proper cost-benefit analysis. On doorstep lending We welcome the cautious approach to doorstep lending. When we had this exact same debate 15 years ago, the country’s most respected researchers went away to design an ideal product for low income households and they came up with home credit. It is designed around customers’ needs. Any sensible measures to improve sales practices are welcome, but moves to change a model that customers like and value would be counter productive.  On the waterbed effect We are pleased that the FCA is finally acknowledging that there is a ‘waterbed effect’ when you introduce rate caps. FCA Director of Strategy, Christopher Woolard, acknowledged as much on the radio this morning. Previously the FCA insisted there was no waterbed effect when it capped payday lending in 2015. Now it admits it has to ‘encourage more alternatives’ to absorb the spike in demand that caps cause. The evidence is clear from its own statistics. There was a doubling in borrowing from home credit and rent-to-own businesses in the two years following the introduction of the payday cap. The Treasury estimates there are 300,000 people using illegal lenders, others put the number much higher. The FCA says 3.1 million are borrowing from ‘friends and family’, for many a euphemism for illegal lenders. The lesson is clear: cap legal sources and borrowers find second choices — these might be regulated, equally they might not. Greg Stevens CEO, CCTA 31st May 2018      

Lenders who operate in the shadows

Published 16 May 2018

When the Treasury announced that £5.67 million of funding will be provided to Britain’s Illegal Money Lending Teams (IMLT) and bodies in Northern Ireland to tackle illegal lending, this was of course met with a welcome response, representing a 16% increase compared to the previous year. This sum will be used to crack down on so-called ‘nasty lenders’ while also encouraging people in England who are deemed to be at risk of being targeted to join credit unions, as well as supporting a new project in Northern Ireland to raise awareness of the dangers of loan sharks. England’s Illegal Money Lending Teams (ILMT) has already made over 380 prosecutions leading to 328 years’ worth of sentences since it was established in 2004, so the additional funding will provide further support for investigations into unscrupulous, unregulated practices. Unlike regulated lenders, illegal lenders are not transparent and are often initially viewed as family or friends to the victim yet they leave no paper trail and often resort to threats, intimation or even violence.  Victims of loan sharks are often too scared to report any incidents meaning the number of lenders operating in the shadows is difficult to quantify. A press release from the Treasury attempted to quantify this at over 300,000 people in debt to illegal money lenders in Britain.  However, in 2017, the Financial Conduct Authority published a report detailing consumer experiences of illegal lending in the UK which said they were unable to establish hard evidence of the number of consumers involved in unauthorised lenders, so the figure could potentially be substantially more. The spectre of illegal lenders perhaps takes on more significance when set against a background of stagnant wages, rising living costs, ‘just about managing families’ and a reduction in the availability of consumer credit. It means many vulnerable borrowers may resort to using the local “friendly lender” who has always been part of the community culture – aka the dangerous, illegal loan shark. The FCA’s Financial Lives Survey (2017) also found that of those surveyed, 7% of UK adults were borrowing from friends and family, or had done so in the previous 12 months, while 0.2%, (just under 100,000 UK adults) had used an unregistered lender in the last year.  Yet once a loan is given, many victims will find it impossible to repay as “the lenders seek them out, put them in their debt and seek to keep them there – providing the lender with an ongoing income stream.” Last week the Illegal Money Lending Team issued a press release encouraging community groups to bid for grants up to £5,000 for projects which will raise awareness of illegal lending.  The funds have been made available from monies confiscated from convicted loan sharks through the Proceeds of Crime Act (2002) and the overall aim of this national scheme is to see the illegal earnings being used wisely to benefit key areas and reinvest the money back into local communities. The scheme is to be applauded as the …

Provident Financial is back ‘on the up’

Published 09 May 2018

It is excellent news that Provident Financial has turned the corner and normal service has been restored to satisfy their customers’ needs. This comes at the same time as RBS announces that it is shutting another 162 Branches across the UK on the wider assumption that consumers will go online. There will be many more small towns and villages where banking services will have to be provided by the post office, which in many circumstances does not provide the service the customer would like. Home collected credit providers, and other community lenders in various sectors, have provided a service over countless years, and for many, they provide a local service and excellent customer care. Access to responsible and affordable credit that is priced for risk, provides a financially smoothing effect for many consumers especially in the JAM category, and across all socio-economic groups. The forthcoming FCA Report on High Cost Credit will hopefully reiterate the importance of smoothing and the ‘water bed effect’ as previously stated by Andrew Bailey CEO FCA. Consumers and the Industry will be looking for comfort that smoothing does not disappear by regulatory default, through pandering too much to consumer activists’ (sometimes) unrealistic concerns. Greg Stevens CEO, CCTA 9th May 2018

A Mixed Bag of Concerns

Published 28 April 2018

The reported recovery in real wage growth has failed to promote optimism among households. The consumer confidence barometer by GfK, (Times 27th April) – the bellwether indicator which is tracked by the Bank of England and others – fell from minus 7 in March to minus 9 this month. It has now been negative for 28 months in a row. GfK’s survey revealed a steep decline in consumer confidence towards financial situations for the past 12 months, and the year ahead. The above indicative figures arrived shortly after another bleak survey for retailers. The CBI distributive trades survey of 100 retailers showed sales volumes recovered weakly from the atrocious weather in March. The balance rose from minus 5 to minus 2, but fell a long way short of economists’ forecasts for plus 5. CBI’s survey revealed a steep decline in consumer confidence towards financial situations for the past 12 months, and suggests the same for the year ahead. To amplify the potential problems ahead, Britain’s growth rate weakened to 0.1% in the first three months  of 2018, the lowest quarterly reading in more than five years, according to preliminary figures published today by the Office of National Statistics (ONS). The ONS stated that aforesaid weather in March had some impact on construction and some areas of retail, but the overall effect on GDP was limited. Rob Kent-Smith (ONS) stated: “Our initial estimate shows the UK economy growing at its slowest pace in more than 5 years, with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly.” Figures published by UK Finance on 25th April showed a 10% drop in mortgage approvals in March compared to the previous year, citing declining consumer confidence. In London market the hotbed of property price increases is stalling, and asking prices not being achieved. There is still slight growth in the provinces but there are early signs it is stalling as well. The Bank of England has raised concerns over the risks posed by equity release mortgage books after its analysis found borrowers aged between 55 and 64 now make up 15% of the market, double the level in 2015. Householders who have a nest egg in their property are accessing their equity, sometimes unwisely with little regard to the future. This is happening as homes have become less affordable in the past year as house prices have risen faster than wages. ONS figures released on 25th April state that full-time workers spent around 7.8 times their annual salary on buying a home in England & Wales in 2017, a significant increase of 2.4% since 2016. The economy is still extremely bumpy and there will be peaks and troughs over the coming 12 months. However the underlying trend is difficult times ahead for consumers, and with a potential slow down in house prices, equity values falling, and banks being more prudent and raising their credit granting cut-offs, the ‘Just About Managing’ (JAMs) consumers will find loans difficult to get. Politically this could be …

CCTA Commentary – Financial Claims & Guidance Bill

Published 26 April 2018

On Tuesday 24th April, MPs debated the Report Stage and Third Reading of the Financial Claims and Guidance Bill in the House of Commons. We applaud and support the aims of the Bill to ensure access for all to free and impartial money guidance, debt advice and high-quality claims handling services. The opposition broadly supported the Government’s Bill but called for a full ban on cold calling by Claims Management Companies, which we, the CCTA, support. We welcome the move to provide Debt Respite for those in Mental Health care – an issue that we consider to be part of the wider responsibility that our members have towards their customers in ensuring they are treated fairly if they encounter repayment difficulties through unexpected circumstances. Access to credit for all is a vital part of a well-functioning economy and we know that lack of access to financial services can contribute to mental health issues through the plethora of other social and economical difficulties this creates. At CCTA, we will always campaign for access to responsible, fair and affordable credit to be available. Regulation, when applied appropriately, does indeed help to ensure healthy, functioning markets. But over-regulation can, as we know, create a multitude of unintended consequences with negative impacts on both the consumer and business. We therefore support the Minister’s view that the new Single Financial Guidance Body’s role is to provide impartial advice rather than regulate the market.

Financial education must give this a permanent place in the education syllabus

Published 11 April 2018

The new report from Prudential on their Cha-Ching programme makes gloomy reading regarding the lack of momentum behind meaningful and permanent financial education programmes in the educational syllabus. As a previous Non Executive Director/Trustee of Credit Action ( now Money Charity ) I am dismayed that financial education still lacks a political leader with the political will to place this subject in a permanent place within the educational pecking order.  I am pleased that Julian Knight MP has shown that the topic needs discussing and addressing, and I hope that there is a coalition of the willing to deal with the cause, rather than just stirring the symptoms yet again. Charities such as Money Charity and others have played a marvellous role in supporting the Financial Education, but their great work should be underpinning a national curriculum in schools on financial education. It is rather disturbing to see how much money is poured into the FCA to regulate the financial markets, compared the small amount of effort and money into financial education. Research shows that consumers mostly do not read T & C’s, and maybe do not understand them, and as regulation increases T & C’s get longer. Basic mathematics, like financial education is a building block for life. Sometimes we need to stand back from a problem and take a fresh look, with financial education that time is now. The old Chinese Proverb rings true: “You give a poor man a fish and you feed him for a day. You teach him to fish and you give him an occupation that will feed him for a lifetime.” Greg Stevens CEO 11th April 2018

All aboard the Gravy Train… Has compensation become a largely profit making enterprise and why should this stop.

Published 13 March 2018

All aboard the Gravy Train… In the 1960s it was said that the British did not complain enough. Perhaps it was because those then in their mid-life had lived through the deprivations of the second world war less than twenty years before, and believed Prime Minister Harold Macmillan’s famous declaration that “most of our people have never had it so good” in July 1957 at a time when the country was riding high on the post-war economic boom. So there was not much to complain about. The youth of the ‘60s were far too preoccupied discovering sex, drugs and rock and roll to spend time complaining. But times have changed. Over the intervening decades a wide variety of complaint and compensation processes have developed to the extent that there is probably no consumer facing activity that does not have a complaints and compensation system. And quite right too! If we suffer detriment at the hands of a private or public body it is only fair that there is restitution. However, the pendulum has now swung to the farthest opposite extreme. From hardly complaining at all, the British appear to be leading the way in seeking to profit from the complaints and compensation systems, not simply to receive just restitution. And there are profits to be made, not only by complainants themselves making inflated or entirely false claims, but also for a massive industry that has evolved to help people make claims and to take a substantial cut of the pay-out. No-win-no-fee law firms and claims management companies are cashing in. In 2011 there were 3,213 claims management companies, specialising primarily in personal injury claims, many of which were entirely fictitious. By 2017 the number of firms had fallen to 1,388, due in part to a concerted effort to prevent false injury claims by local Councils in the main. A claims management regulator had to be created in 2007 and has licenced over 6,800 claims management companies since its inception. It has also imposed £2.8 million in fines and cancelled 1,387 licences. Personal injury remains the largest claims management sector in terms of the number of firms in operation, but the financial claims sector has superseded it for the last four consecutive years, generating more than twice the turnover of the once dominant personal injury sector. Between 2007 and 2017 claims management companies overall earned almost £6.3 billion. Those dealing with financial products and services claims made £3.4 billion of that. The Solicitors Regulation Authority is demanding that law firms prove how they source holiday sickness claims, which have risen by 500% since 2013, with a large number being fraudulent. No-win-no-fee law firms and claims management companies are firmly behind the increase and some claimants have recently faced jail sentences for fraud as a result as the travel industry fights back. Ironically, action has been taken against some claims management companies themselves because they have failed to return fees due to their clients and have delayed passing on pay-outs that have …

Credit Week 2018!

Published 12 March 2018

This week marks an important week in consumer credit as Credit Week brings together Europe’s largest gathering of credit professionals. The annual event, run by Credit Strategy reviews the current issues of the day through a variety of events that focus on the innovative, dynamic, and vitally important consumer credit industry. This includes the outlook for digital lending and open banking, and all set against a background of the never-ending trials and tribulations of Brexit. Chief Executive, Greg Stevens will be attending all of the events commencing with the Credit Week Parliamentary Reception tomorrow and ending with a Gala which is attended by the most influential members of the credit industry. At both events and all others in-between, the CCTA will be fighting the cause of large firms and SME alike, as both provide products and services needed and appreciated by consumers. We will also be taking the issues of access to responsible credit to parliamentarians, and discussing access and vulnerability with consumer groups, amongst other issues. We will provide a summary of events and outputs on our website in due course.  

“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?