High cost credit firms should review their re-lending practices, says FCA

Many customers who repeatedly use high cost lenders end up regretting decisions to borrow more money, the City regulator has found.

The Financial Conduct Authority (FCA) published the findings from a review into re-lending by firms offering high cost credit.

It is particularly concerned that people may be taking on additional debts in an attempt to manage their existing financial difficulties.

One 47-year-old man from Glasgow who was quoted as part of the review said: “I was borrowing from Peter to pay Paul, and robbing Paul to pay someone else.”

In cases where customers may be trying to deal with financial difficulties through further borrowing, the regulator expects the firm to assess whether further borrowing is in the customer’s best interests.

The FCA’s review covered a range of firms, including those providing guarantor loans, payday loans, logbook loans, home collected credit and rent-to-own lenders.

Many firms, particularly those offering small value loans, do not make a profit on a customer’s first loan, the FCA said.

Profitability among high cost lending firms is therefore mainly driven by re-lending, it added.

For nearly all firms, profitability increases for subsequent loans, in many cases substantially, according to the regulator.

The FCA said it is concerned about some firms not doing enough to balance their messages to customers by highlighting the risks of further borrowing – including potentially taking on more debt than they can afford.

It said online accounts and apps may encourage consumers to borrow more, and some marketing messages have emphasised the ease, convenience and benefits of taking more credit.

It found some firms suggested that consumers could use additional borrowing to take a holiday, and reinforced the message by including imagery of exotic locations.

Firms also appeared to use “nudge” techniques, conveying a message that re-lending is common and part of normal behaviour, the FCA said.

The review, which was completed before the coronavirus crisis, found levels of debt tended to increase as consumers took additional credit from high cost lenders.

Some consumers experienced financial difficulties including missing payments and prioritising repayment of debt over other expenses.

This led to anxiety and stress for some.

Some 45% of customers told the FCA they regretted taking out additional lending and 16% of customers reported their most recent re-lending was taken to repay debt with other firms.

The regulator said that high cost credit customers are more likely to be vulnerable, have low financial resilience and poor credit histories.

They often hold multiple credit products and have to juggle repayments.

The FCA said that protecting vulnerable people and ensuring consumer credit markets work well is a key priority.

Last week, the FCA published a guidance consultation on the fair treatment of customers, setting out its expectation that firms should exercise particular care where consumers have characteristics of vulnerability.

Jonathan Davidson, executive director of supervision, retail and authorisations at the FCA, said: “We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer.

“Before the pandemic we saw increasing numbers of complaints about high-cost lenders’ re-lending practices, which showed that firms had failed to adequately assess affordability, and they were not re-lending in a way that was sustainable for customers.”

He said the FCA expects firms to review how they lend in the light of the findings and make any necessary changes to improve customer outcomes.

Mr Davidson continued: “We will continue working with firms to raise standards, and we will continue to take action where we see harm.”