The Government must clean up the credit market to protect squeezed consumers
As the long financial squeeze takes its toll on UK households, new Which? research paints a worrying picture of desperate consumers who are over-reliant on credit for essentials, and of vulnerable people forced into high-cost credit to repay other debts and at risk from irresponsible lenders exploiting the situation.
With mainstream credit less widely available, the market for high-cost credit, which is less tightly regulated, has grown rapidly. Many households, after exhausting cheaper forms of credit, feel that they have no choice but to resort to high-cost credit – half of people who used a payday loan or unauthorised overdraft had been rejected for credit within the past year. Many are then locked into a vicious cycle, taking on more debt just to get by, with a quarter (24%) of people with payday loans using it to repay other credit.
Over a quarter of credit users (28%) say they don’t like debt but see it as a necessary part of their life and more than half (57%) of people with credit card debt use their credit card to pay for rent, bills or essentials, like food. While credit is clearly useful and necessary for a healthy economy, with many households becoming increasingly reliant on loans just to get by Which? is calling on the Government to make sure that the new regulator, the Financial Conduct Authority (FCA), takes early and tough action to clean up the whole of the credit market.
Which? research also found that credit users are less resilient to financial shocks – one in five (21%) have no savings buffer to pay for unexpected bills and a quarter (24%) say they would have to cut back on essentials in a financial emergency.
Which? executive director Richard Lloyd said:
“For an increasing number of people, using credit to pay for essentials has become the norm. This has led to people being forced into a vicious cycle, taking out further, expensive credit to pay off existing debts.
“Irresponsible lending goes on across the whole of the credit market and lenders must clean up their act. The new regulator must be strong, proactive and willing to take action, especially against lenders who are exploiting consumers struggling in the current economic climate.”
With the FCA taking responsibility for regulating credit next year, this is a unique opportunity to clean up the credit market and give consumers the confidence to use credit responsibly.
Which? has set out five ways the FCA should act to clean up credit and send a clear message to irresponsible lenders:
- Ban excessive default fees and charges – the FCA should require that the level of default charges should reflect lenders’ actual costs, and there should be a cap on the total amount of default charges.
- Crack down on irresponsible lending – the FCA should enforce strong rules on affordability checks that properly take into account a borrower’s income, expenditure and ability to repay the debt, including any outstanding credit commitments.
- Put people in control of their credit – end unsolicited increases in credit limits, unauthorised overdrafts should be opt-in only and there must be a limit to the number of times high-cost loans can be rolled over.
- Clear and transparent information – the cost of credit and all fees and charges should be transparent, and for high-cost credit should be displayed clearly as pounds per £100 borrowed over 30 days. Credit products should come with clear health warnings explaining the consequences of missed payments.
- Swift and early intervention for people in financial difficulty – the FCA should force lenders to freeze charges for borrowers in difficulty, and prevent them from charging interest on high-cost loans beyond 30 days after borrowers default. Lenders must help borrowers in difficulty and refer them to free independent debt advice.
Which? wants all lenders to voluntarily clean up their act, otherwise they should expect to face tough action from the regulator.
Our survey found that 79% of people, approximately 38.5 million adults, use some form of credit.
Notes to editors:
- Populus, on behalf of Which?, interviewed a random sample of 4,031 GB adults aged 18+ online between 10th and 12th August 2012. Surveys were conducted across the country and the results have been weighted to the profile of all GB adults. All stats referring to credit users are based on 3,195 consumers who said that they use at least one credit product. Populus is a founder member of the British Polling Council and abides by its rules.
- By extrapolating the results of our nationally representative survey through the ONS 2011 population estimates (GB adults), we have found approximately two and a half million people are reliant on high-cost credit with little or no access to mainstream credit, while a further four million are mixing high-cost credit with mainstream credit and are in danger of falling into the same situation as their access to mainstream credit is becoming more restricted.
- The latest information and research on consumer credit and spending can be found on the Which? Consumer Insight Tracker http://consumerinsight.which.co.uk/