More action needed to clean up the credit market

Which? calls on the Financial Conduct Authority (FCA) to broaden its efforts to clean up the credit market, as our new report uncovers problems that are making it difficult for consumers to manage their borrowing and shop around.

Despite an improving economy, UK consumers’ total unsecured debt remains considerable at £158 billion and new Which? research reveals that eight in ten (79%) people used a credit product last year. A significant proportion of them (21%) run out of money by the end of every month, a rise of two percentage points since 2012.

At the same time, our new report identifies problems with all forms of credit and failures at every stage of the customer journey, making it difficult for consumers to manage their credit, to compare the cost of different types of credit and find the best deal for their needs.

We have found evidence of:

  • Unclear and misleading information – credit card providers advertising 0% balance transfer offers when a fee applies.
  • Unfair and irresponsible lending practices – retailers automatically setting up credit accounts when a card payment is declined, and ‘buy now pay later’ deals offered by catalogue companies that punish consumers for small changes in their repayment behaviour.
  • Failure to explain risks – for example, a lack of upfront warnings from logbook loan websites that customers could lose their vehicle if they do not keep up with repayments.
  • Penalties for shopping around – consumers can’t easily shop around for many credit products because making a number of credit applications close together can damage their credit score and potentially even result in a refusal or higher charges.

Which? is calling for the FCA to build on its work in tackling payday lenders and ensure that poor practices are being eradicated right across the credit sector. This includes capping default fees for all credit products, cracking down on irresponsible lending by withholding authorisation for firms found to have business models that rely on customers defaulting, and putting borrowers in control of their credit by requiring lenders to use ‘quotation’ searches so that consumers aren’t penalised for shopping around.

Which? executive director, Richard Lloyd said:

“The regulator has so far rightly focused on the unscrupulous practices of payday lenders, however, we have found problems across the whole of the credit market. It’s now more important than ever that all credit products are up to scratch, so that consumers can more easily manage their borrowing.

“The FCA must crack down on poor practices and help put consumers back in control of their credit, and lenders should step up and improve their products and practices.”

Last year, ahead of the FCA taking on responsibility for regulating credit, we set out five ways we wanted the new regulator to clean up credit.

Following our latest analysis we’ve identified further areas for action:

Ensure that lenders provide clear, transparent, easily comparable information

  • Ban the term “0%”on credit products that charge more than 0%, for example credit card deals with an upfront fee.
  • Ensure all high cost credit products, including unauthorised overdrafts, come with clear health warnings and that they signpost people to free debt advice.
  • Require high cost lenders (including those providing unauthorised overdrafts) to show the cost of credit as pounds per £100 borrowed over 30 days as APRs are not always suitable in these circumstances and can mislead consumers.

 Put borrowers in control of their credit

  • Prevent consumers from being penalised for shopping around by requiring firms to use ‘quotation’ searches.
  • Force lenders to set minimum repayments on credit cards at a level which strikes a fair balance between affordability and ensuring that the debt is paid off over a reasonable time. Ensure all repayments made in branch or online before midnight are received on that day.

Crack down on irresponsible lending

  • Withhold or withdraw authorisation for firms that are found to have business models that rely on irresponsible lending or customers defaulting.
  • Prevent retailers from automatically signing up customers for a credit account they didn’t actively apply for.

Ban excessive default fees and charges

  • Ensure that default fees are not used to cross-subsidise the headline cost of credit or the borrowing of other consumers.
  • Cap default fees for all credit products.

Swift, early and effective intervention for people in financial difficulty

  • Lenders must have strategies in place to proactively offer early intervention when they see signs that consumers are in financial difficulty.

Notes to editors:

1.    The latest Which? report on the state of the credit market is published here

2.    Methodology for consumer survey: Populus, on behalf of Which?, interviewed 4,157 GB adults online between the 10th and 12th January 2014. Data were weighted to be demographically representative of all GB adults. Populus is a member of the British Polling Council and abides by its rules.

3.    In October 2013 Which? set out five ways the FCA should act to clean up the whole of the credit market and send a clear message to irresponsible lenders. We called on the regulator to:

  • 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.

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