Worrying number of householders may be 'in too deep' with borrowing - regulator

Worrying numbers of householders may be "in too deep" with their borrowing, a city regulator boss has told a credit conference.

Jonathan Davidson, executive director of supervision - retail and authorisations at the Financial Conduct Authority (FCA), said credit levels were close to a peak seen in 2008.

He said the FCA would take action against firms whose businesses were based on people being unable to clear their debts.

More can be done to pre-empt future harm to customers, he said, warning: "There are a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads."

He said it was "far from certain" that some customers who could just manage to afford loans now would be able to do so in future.

Mr Davidson told the audience: "A business model that is predicated on selling products to customers who can't afford to repay them is not acceptable.

"We will take action against firms who run their businesses this way."

He said that while most borrowers could still comfortably afford their credit, the industry should "think strategically about the issues facing your customers", adding that this was "the right thing to do, not only for your customers, but for the future of your businesses".

Mr Davidson said the consumer credit sector, which comprises nearly 40,000 firms registered with the FCA, was part of everyday life, serving around 39 million people, whether it was to help finance a car, a big purchase or to make ends meet towards the end of the month.

He said some arrears and default rates, while still low, were on the rise, begging the question: "If we're seeing this pattern now, what would happen if there was an economic downturn?"

Speaking at the Credit Summit in London, Mr Davidson said: "Total credit lending to individuals is currently very close to its September 2008 peak.

"The circumstances are different now than 10 years ago, but there are still worrying numbers of householders who may still be in too deep.

"For example, one in five mortgages today are interest-only mortgages, many of which were made at the height of the credit boom to borrowers with little equity in their homes and not a lot of disposable income. And they won't mature until about 2032."

Mr Davidson said a number of customers were vulnerable to any changes in their circumstances, and to changes in the external economic environment.

He cautioned: "They might be able to just about afford any loans you grant them today, but it is far from certain that they will be able to do so in the future."

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Mr Davidson highlighted a 9.3% growth in consumer credit over the past year.

He said: "This growth has been attracting a lot of attention. Which is not surprising given the link between excessive debt and the last financial crisis.

"Credit losses led to the near collapse of many lenders."

Mr Davidson told the industry gathering his sense was that the sector had not reached levels of debt which were likely harmful to lenders.

He continued: "You are part of everyday life for most of us and by and large you do a good job for us, your customers.

"But we also need to recognise that excessive debt can be as harmful to the borrower as it is to the lender."

The number of motor finance agreements for new and used cars had grown from around 1.2 million in 2008 to around 2.3 million in 2017, he said.

Mr Davidson said: "We are also seeing younger people borrowing a lot more relative to their incomes than my, baby boomer, generation. Why is this? It's because of more student borrowing."

Among 25 to 34-year-olds, 19% had no savings, he said.

In the credit card market, more than three million credit cardholders with a total of four million accounts were in persistent debt, he added.

Mr Davidson said: "Ultimately, harm coming to consumers means harm coming your way as well - be it through action on our part, or action taken by consumers themselves who vote with their feet.

"And a business model based on customers who can't afford to pay you back is hardly a long-term strategy for success."