The FCA’s HCC Review and Affordability Proposals under the Microscope

Published 18 September 2017

These two dossiers will have long lasting impacts on all credit businesses, but particularly CCTA members. In this month’s podcast, Greg Stevens is joined by two regulatory experts to assess the effects and ask what can be done, if anything, to offset the more damaging aspects. Click the ‘play’ button on the media player below and enjoy! Greg Stevens CCTA Chief Executive

Access to Credit and Funding

Published 18 September 2017

A key theme for the CCTA in 2017-18 will be ‘Access to Credit and Funding’.  It will be a central theme of our conference in November and our engagement with the regulator and policy makers throughout the autumn and into 2018. Put very simply, unless ‘access’ is maintained and safeguarded, the regulator will have failed — consumers will have lost a vital ‘coping mechanism’ that helps them keep their personal and household budgets afloat; and businesses will quickly go under, particularly SMEs for whom access to cost-efficient finance is a lifeline. Happily, the Head of the FCA, Andrew Bailey, agrees — certainly as far as consumers are concerned.  And he said so explicitly at a BBA conferences in June: “There is an issue around access to credit, which for me is at the heart of our interest in high-cost credit.  Put simply, it would not be an acceptable outcome to cut consumers off from access to credit when they have a justifiable need for credit, for instance to smooth erratic or lumpy income.” Mr Bailey’s comments are important because they put down a marker and enable us to hold the regulator to account.  And this is precisely what CCTA sought to do at two important events last week, both of which had ‘access’ at their heart. The first was a meeting of the Parliamentary Group on Alternative Lending in the House of Commons on Tuesday 12 September.  CCTA is a founder member of the Group and was instrumental in its establishment.  Chaired by former BBC personal finance correspondent, Julian Knight MP, the Group provides a forum for the CCTA and the wider credit industry to engage policy makers and share concerns about regulatory and policy issues. The topic of the meeting was the FCA’s latest response on the High Cost Credit Review, and the long-awaited consultation paper on Affordability and Creditworthiness, both of which were was published on 31 July. At a combined length of 1,000 pages, these documents have kept the CCTA busy over the summer. There is an awful lot to digest but a clear picture is emerging. On High Cost Credit, there are very significant challenges for businesses in the home credit, rent-to-own and catalogue lending industries.  The FCA’s proposals presage fundamental changes to these business’ lending models. The impact is potentially worst for home credit businesses, who face the prospect of limits on refinancing and imposed ‘time gaps’ between loans.  As anyone familiar with the product will know, home credit customers use it as a safe and dependable ‘smoothing mechanism’ to absorb additional costs at four key times of the year — Easter, summer holidays, back-to-school and Christmas.  Customers have been doing this for years; and they won’t necessarily appreciate the FCA telling them when they can and cannot borrow. The proposals on rent-to-own are perhaps less worrisome — many of the changes the FCA wanted to see have been introduced as a part of the authorisation process, and its prescriptions therefore focus on promoting competition …

More Bank Closures Herald Further Access to Credit Issues

Published 14 September 2017

This week, consumer body, Which? has reported that bank branch closures are occurring at a faster rate than ever, with 703 set to shut this year. The report reveals that 461 branches closed in 2015, while 583 shut last year, bringing it to a total of 1,747 in three years. Part of these closures are formed by Barclays who advised 62 branches would close by the end of the year as its face-to-face customer base had dropped by almost half in the past five years. The closures mark a significant departure from the traditional banking infrastructure and heeds further warning for access to credit for all. Rising food prices, a sharp fall in the value of sterling since the Brexit vote in June 2016, combined with stagnant wage growth are continuing to reduce the size of consumers’ pockets. At a time when banks are closing at an alarming rate, there is little sign yet that the squeeze on spending is easing. Perhaps more concerning are reports that nearly 1 in 5 people struggling with debts had their credit card limit raised without submitting a request. Indeed, credit card usage has increased by 12% in the last year – the fastest annual rise in the number of card transactions since 2008 – as UK consumers struggle to cope. As we go forward, lenders and consumers must continue to navigate the choppy waters of Brexit; a potential rise in interest rates and a rise in employee pension contributions in April 2018 – all of which will further squeeze disposable incomes. Access to responsible credit will be crucial during these times, whilst ensuring that customers are not exposed to unaffordable debt. The CCTA and its members will continue to work hard to ensure that responsible, innovative and transparent consumer credit firms are ready and able to serve.

Assessing Creditworthiness in Consumer Credit (aka Consultation Paper on Affordability)

Published 31 July 2017

The easiest way to understand what the FCA wants to see on creditworthiness and affordability is to look at Table 1 on Page 7 of the Consultation Paper published this morning. This contains a schematic for ‘profitable and affordable’ lending (good) versus ‘profitable but unaffordable’ lending (bad).  The FCA wants to see more of the former and less of the latter; and to ensure that lenders’ attempts to eradicate the risk of the latter do not adversely affect the achievement of the former. Clear?  There are 57 pages of consultation paper and 34 pages of Annex to provide clarification. These pages amount to a long description of how the FCA would like to see lenders bring about affordable and creditworthy lending without restricting access to borrowing (and undermining the economy into the bargain). There’s an awful lot to say about this particular consultation paper, which will have lasting implications for every lender in every sector of the credit market, except mortgage providers who are not covered. What follows is a quick take on the ‘top notes’, with much more to follow in the weeks and months to come. The FCA has a fine balance to strike, to put it mildly.  As it says, it needs to require firms to make reasonable assessments of consumers’ ability to repay loans without adversely affecting their wider financial well-being on the one hand, while on the other avoiding being overly prescriptive and thereby causing unwanted and unintended consequences on access to credit. Some task. To achieve this, it proposes to use a combination of ‘Principles’ to which lenders should adhere and ‘Outcomes’ that lenders should seek.  This, it hopes, will obviate the need for the bit in the middle — ‘prescription’, or hard rules — which it recognises are nigh on impossible to set in a market so diverse. The FCA is recommending more continuity with its current approach than change.  As it says, ‘We do not think our basic approach to creditworthiness needs any fundamental change. It is based around high-level principles with an emphasis on proportionality. We consider that outcomes matter more than process, and firms can satisfy themselves on affordability in different ways.’ However, the proposed rules do include a new and explicit definition of ‘affordability risk’. Crucially, this sets out ‘the factors which firms should consider when assessing whether the credit is likely to be affordable for the borrower.’ So there is an element of prescription in there too.  Chapter 4 of the CP is dedicated to this. The third part of the FCA’s scheme after ‘principles’ and ‘outcomes’ (and a small amount of ‘prescription’) is ‘supervision’.  As the FCA states: ‘We will evaluate the success of our proposals through our supervision of firms and monitoring regulatory returns and complaints. We may also undertake research or multi-firm work to assess the changes firms have made.’ So it’s up to firms to make the judgements, but the FCA will be ready with its own judgements as to whether firms have got …

High Cost Credit Review: Feedback Statement 17/2

Published 31 July 2017

The FCA starts by giving itself a big regulatory pat on the back for saving 760,000 consumers some £150 million thanks to its actions on High Cost Credit and in particular the introduction of the payday price cap.  As expected, it has decided to keep the cap in place in its current form and carry out another review in three years’ time in 2020. So the first headline point to note is a notable victory for the CCTA and other lobbyists acting on the industry’s behalf – namely, the FCA has been persuaded of the need to resist calls for either a tightening of the existing cap, or an extension of it to other sectors of HCC market beyond payday. This is no small achievement in the face of vociferous lobbying from Citizen’s Advice, StepChange and a host of other debt charities. However, further interventions (or ‘targeted solutions’ in FCA language) loom for certain HCC sectors identified by the FCA as problematic, namely rent-to-own, home collected credit and catalogue credit. The Feedback Statement lists the FCA’s specific concerns with each of these sectors and promises a Consultation Paper on its proposed remedies in Spring 2018.  So these sectors will have their work cut out over the next 6 months to justify current practices and make a case for leniency (a battle which the CCTA will be joining on their behalf). On the rent-to-own, the FCA flags concern about ‘the high costs of borrowing for vulnerable consumers and the consequences of that borrowing’. It will look to see if ‘more affordable alternatives are available […] and foster cross-agency public policy solutions such as social housing providers supplying essential goods’. On home credit, the FCA notes ‘similar concerns to RTO about the potential for high levels of financial distress’ and flags potential (or likely) ‘restrictions on refinancing and rollovers, imposed time gaps between borrowing and / or time limits on the total duration of borrowing’. On catalogue, the regulator flags ‘concerns about the high level of arrears and the fees triggered by them’ and the ‘high levels of interest charged outside interest-free periods and the transparency of those interest-free periods’. But, crucially — and it’s a point that warrants repeating — the FCA has specifically ruled out caps for any of these sectors.  At least for now, proposed final remedies will become known in Spring 2018. There is also recognition throughout of the need to maintain ‘access’ to credit for HCC consumers, another point the CCTA has been ramming home in successive meetings with the regulator.  The FCA states it is ‘aware that measures to protect certain consumers may deny access to credit for others’. Accordingly, it commits to look at the evidence to ‘make the right judgements about where and how to intervene’. To this end, the regulator will analyse HCC consumers’ credit ratings and what influences them, as well as multiple and repeat use of products and patterns of longer term indebtedness, and then incorporate insights from this analysis into …

Bank of England Puts the Focus on Affordability

Published 18 July 2017

Hot on the heals of Andrew Bailey’s speech, two announcements from the Bank of England revealed its concern about personal borrowing levels and the impact they could have on the nation’s economic prospects more generally. First, the Bank’s June Financial Stability Report identified consumer lending as a “pocket of risk” and instructed banks to hold an extra £11.4bn in ‘countercyclical buffers’ to guard against related losses. It also flagged new measures from the PRA and FCA as soon as “next month” to make sure customers are able to repay their debts (code for the consultation paper on ‘affordability’). Second, the Bank’s monthly Money and Credit report for May showed annual growth in consumer credit running at 10.3%, only slightly down from its peak in November 2016 (closer to 11%). These figures further sharpen the focus on ‘affordability’. The FCA remains vague on the timing of its consultation paper: its most recent update on 14 July still says ‘Timing TBC’.  But the two BoE announcements appear to have shortened the timeline. We are in for a busy summer on multiple fronts!

Andrew Bailey on HCC Review and Access to Credit

Published 18 July 2017

Away from the chaos and confusion of Westminster, the regulator delivered a welcome dose of clarity in a thoughtful speech to the BBA retail banking conference on 29 June (the last such to a BBA conference following the body’s official integrated into UK Finance). There were two passages of particular note to the credit industry.  First, on the High Cost Credit review, Bailey said this: “Last November we issued a Call for Input covering high cost products, overdrafts, the high-cost credit short-term price cap and report and multiple such borrowing.  We are looking at all high-cost products to build a full picture of how these are used, whether they cause harm and, if so, to which consumers.  We will then be able to decide if we need to intervene further […] We are also reviewing the price cap on short-term high cost loans which came in force in January 2015.  We intend to publish our findings on this over the summer.” Speculation remains over the regulator’s intentions, but at least we have a vague date.  Lloyds Bank caused a flurry of anticipation last week when it announced a wholesale simplification of its charging structures for overdrafts, seen by many commentators as a pre-emptive move ahead of the FCA’s announcement.  It is entirely typical for the regulator to ‘clear the decks’ before the summer holidays, so end of July would seem a sensible bet. The second passage of note in Bailey’s speech addressed the crucial question of ‘access to credit’ as a public policy issue: “There is also an issue around access to credit, which for me is at the heart of our interest in high cost credit.  Put simply, it would not be an acceptable outcome to cut consumers off from access to credit when they have a justifiable need for credit, for instance to smooth erratic or lumpy income.  Now, before the headlines get written that I am justifying current household debt levels, that is not the point I am making.  I am not talking about that subject today.  Put simply, there is a point about access to credit which is a broader public policy question, and needs to be considered as such.” During questions, Bailey highlighted the particular threat of a rise in illegal lending if legal sources were to be restricted by regulatory action. These comments are significant. For one, they reveal the combination of pressures that bear down on any regulatory authority charged with balancing consumer demand for credit on the one hand, with debt campaigners’ distaste for it on the other.  But, more significantly, it is the regulator putting down a firm marker for maintaining access to credit in spite of the political flak he will inevitably receive for doing so. CCTA has consistently been banging the drum on ‘access’ in meetings with the FCA, so it is heartening to see the message getting through. And there’ll be no let up: from summer into autumn, we will be holding a series of parliamentary and industry events to impress upon …

Politics Round Up – 18 July 2017

Published 18 July 2017

After a brief period of relative calm and respite for the Government, things have turned precarious again.  The announcement by Labour last week that it will not be supporting the Government’s flagship ‘Withdrawal from the European Union’ Bill at Second Reading in the Commons raises the very real prospect of defeat for the Government and, quite possibly, another General Election in a matter of months rather than years. It is, of course, highly unwise to engage in political prediction-making in the current atmosphere.  Nevertheless, there has to be a question as to whether the Government will get the Bill through; and almost no question that the Bill will be subject to very significant amendment by the Opposition. If this is the case, given that the Bill is the Government’s flagship legislative measure, it follows that the Government would be very close to having lost the confidence of the House of Commons. Quite what the electorate would make of another election is anyone’s guess.  Rest assured, the media will make a beeline for Bristol to hear Brenda’s reaction (she of “Not another one!” fame). If the Government did fall, so would four pieces of legislation relevant to our sector.  These might eventually reappear in some shape or from, but there would be no guarantee. Chief among these bills is the Financial Guidance and Claims Management Bill, which has already had its Second Reading in the Lords.  The focus is very much the claims management part, although peers are already lining up to insert the ‘Breathing Space’ commitment outlined in both the Conservative and Labour election manifestos. The Government’s proposal was that struggling debtors should have 6 weeks respite from fees and charges; Opposition Lords will seek to extend the period to a year. There will be more scope for mischief making by the Opposition when (if) the Bill reaches the Commons.  But the Labour leadership has credit-related problems of its own. On the Andrew Marr show at the weekend, Shadow Chancellor John McDonnell pointedly refused to stand by Labour’s commitment to write off students’ existing debt if Labour were to win power. He described it as “an ambition, not a promise”, despite Jeremy Corbyn having made the promise to students days before the election.  The clip has ‘gone viral’ on social media in much the same as anti-Tory memes did during the campaign. Student debt could present the Opposition with a stumbling block of its own. In other important news, the new chair of the influential Treasury Select Committee is Nicky Morgan MP, who defeated arch-Brexiteer Jacob Rees Mogg MP thanks to backing from Remain-supporting Labour MPs.  She is the first female MP to hold the post.  In comments after the result was announced, Morgan said she wanted to focus on a “wider Treasury remit” including “household debt and tax policy”, rather than limiting the committee to the financial services sector and Brexit.  “These are all the things that actually our constituents put us in the House of Commons for”, she …

Opportunities and threats for creditors in the new Parliament

Published 10 July 2017

Our second CCTA podcast features Julian Knight MP and Chris Pond, two heavyweights on credit policy and politics. They talk to Greg Stevens about Breathing Space, Affordability, the new Minister for Financial Inclusion, runners and riders for the TSC chair, and other topics that will dominate the next 12-24 months in Parliament. Click the ‘play’ button on the media player below and enjoy! Greg Stevens CCTA Chief Executive

Bank of England

Published 03 July 2017

Meanwhile, two announcements from the Bank of England were closely scrutinised for what they reveal about the state of lending markets and the nation’s economic prospects more generally. On Tuesday, the Bank’s monthly Financial Stability Report identified consumer lending as a “pocket of risk” and instructed banks to hold an extra £11.4bn in ‘countercyclical buffers’ to guard against related losses. As well as holding more capital against credit card debt and consumer loans, banks have also been warned that next month the FCA and the PRA will publish new affordability measures to make sure customers are likely to be able to repay their debts. Second, on Thursday, The Bank issued its monthly Money and Credit report.  This showed annual growth in consumer credit at 10.3% in May, down slightly on its peak in November 2016 (closer to 11%). As always and expected, monthly statistical announcements from the BoE, ONS, etc, trigger a wave of newspaper punditry with familiar faces lining up on each side to claim vindication for what they have been saying all along. But one thing is for sure, the figures place a closer focus on the crucial issue of ‘affordability’. The FCA remains vague on the timing of its consultation paper: its most recent update in June said ‘Timing TBC’.  The two BoE announcements would appear to have shortened the timeline.  We could be in for a busy summer.

Andrew Bailey

Published 03 July 2017

Away from the drama at Westminster, Andrew Bailey delivered an important and revealing speech to the BBA retail banking conference on Thursday (the last such to a BBA conference following the body’s official integrated into UK Finance). The speech was notable for its intellectual breadth and insight into banking models, perhaps unsurprising given the speaker’s record of service in the Bank of England and the PRA. There were two passages of particular note to the credit industry. First, on the High Cost Credit review, Bailey said this: “Last November we issued a Call for Input covering high cost products, overdrafts, the high-cost credit short-term price cap and report and multiple such borrowing.  We are looking at all high-cost products to build a full picture of how these are used, whether they cause harm and, if so, to which consumers.  We will then be able to decide if we need to intervene further […] We are also reviewing the price cap on short-term high cost loans which came in force in January 2015.  We intend to publish our findings on this over the summer.” So at least we have a vague date, if not clarity over the regulator’s intentions. There had been speculation as to the latter in the media in recent weeks — that the payday cap might even be raised.  The FCA seemingly scotched that rumour, a spokesman responding “This does not reflect our position” and reiterating that the FCA intends to publish a feedback statement “later in the summer” setting out next steps in the review.  These are expected to be FCA proposals for consultation. The second passage of note addressed the crucial question of access to credit as a public policy issue: “There is also an issue around access to credit, which for me is at the heart of our interest in high cost credit.  Put simply, it would not be an acceptable outcome to cut consumers off from access to credit when they have a justifiable need for credit, for instance to smooth erratic or lumpy income.  Now, before the headlines get written that I am justifying current household debt levels, that is not the point I am making.  I am not talking about that subject today.  Put simply, there is a point about access to credit which is a broader public policy question, and needs to be considered as such.” During questions, Bailey highlighted the particular threat of a rise in illegal lending if legal sources were to be restricted by regulatory action. These comments are significant. For one, they reveal the combination of pressures that bear down on any authority charged with balancing consumer demand for credit on the one hand and debt campaigners’ distaste for it on the other.  But, more significantly, it is the regulator putting down a marker for maintaining access in spite of the flak he will inevitably receive if and when he does. CCTA has consistently been banging the drum on ‘access’ in meetings with the FCA, so it is heartening to see …

Politics

Published 03 July 2017

As tiresome as it might be, it is hard to get off the topic of national politics at the moment.  Every day Parliament serves up new drama and a kaleidoscope of uncertainty. On the Conservative side, last week brought U-Turns on flagship economic policy led by Cabinet ministers, not the Prime Minister.  On the Labour side, intra-party rebellion followed by multiple frontbench sackings. In normal times, these would be catastrophic to any party, but these are not normal times.  It all begs the question, how long can it last? The deepest fault line is, of course, Brexit. As Adam Boulton pointed out in yesterday’s Sunday Times, we have a paradoxical situation in Parliament. Neither party’s manifesto commands a majority of MPs and yet, with the passing of the Queen’s Speech on Thursday, the country is on course for exactly the kind of Hard Brexit advocated by Theresa May when she triggered Article 50 at the height of her powers in March. This despite over 70% of MPs thinking that leaving the EU is a bad idea that will hurt the nation’s prosperity. If anything, the pro-EU majority increased at the election. Whatever your personal preferences with regard to Brexit, it is hard to see this fault line holding between now and MPs’ “meaningful vote” on the final deal in two years time. Westminster has become an earthquake zone.