Katie Evans, Head of Policy and Research, Money and Mental Health

Capping the human cost of high-cost credit

Earlier today, financial services regulator the FCA published results of a call for input on high-cost credit, including a review of the payday loan regulation. The immediate good news for consumers is that, having successfully saved 760,000 borrowers a total of £150 million and reduced the number of people seeking debt advice, the price cap on payday loans (or “High-Cost Short-Term Credit”) is to remain in place until at least 2020. It is fantastic that the regulator’s decisive action in this market has made a real difference to thousands of consumers – and appears to have done so without causing other problems like an increase in illegal money lending.

Looking beyond payday loans

Even more promising is the fact that the FCA has promised to review the markets for other types of high-cost credit, including unauthorised overdrafts, rent-to-own loans and catalogue credit, to help reduce the harm being done to consumers in these markets too.

This is particularly positive news for Money and Mental Health, as, in our submission to the FCA and our more recent work on credit offered by retailers, we have set out how these products appear to be causing harm to people experiencing mental health problems. People experiencing mental health problems are three times as likely to fall behind on rent-to-own payments, and five times as likely to fall behind on mail order payments (including catalogue goods). Today’s FCA report picked up many of the characteristics that most concern us about credit offered at the point of sale – including the transparency of ‘buy now, pay later’ deals, the complexity of pricing across catalogues and rent-to-own stores which make it harder to compare prices, and rolling use of catalogue credit over time.

“I took out hire purchase [rent-to-own] and catalogue borrowing without fully being able to understand how it would affect my situation in order to make repayments. As a result, I am left with little or no spare money every month to be able to enjoy life.”

Unarranged overdrafts under scrutiny

The FCA have also issued a stark and welcome warning about the current provision of unarranged overdrafts, issuing a call for ‘fundamental reform’. With the cost of payday loans significantly reduced by the cap, unarranged overdrafts are increasingly the most expensive way to borrow. Customers who just dip into the red find themselves facing substantial charges. Many mental health problems can affect a person’s short-term memory, and we regularly hear from people who have found themselves using an unarranged overdraft simply from forgetting about a bill payment. Furthermore, there is no effective way for consumers to opt-out of this unplanned borrowing, apart from taking out a basic bank account.

“I have been having issues with anxiety and low mood for the past couple of years. Initially this was work related, but more recently I had an extremely difficult pregnancy, which has also resulted in post-traumatic stress disorder. Whilst all of this was going on I mistakenly submitted a direct debit mandate for a current account I had recently stopped using. I also did not realise that one of my old direct debits had not been changed over by my new bank. I initially went overdrawn by around £10, but the overdraft charges built up and amounted to over £600 before the bank closed the account… All in all the whole thing has been a huge blow to my confidence at a time when I am trying to rebuild my life and address my mental health issues.”

Part of the problem is that banks do not assess whether a person can afford an unarranged overdraft. Lack of adequate affordability assessments are a problem across many of the markets the FCA has committed to review, and we are glad to see them strengthening guidance on what firms must do to make sure a customer can afford repayments.

Next steps

The reviews announced today don’t mark the end of the story, however. At Money and Mental Health, we will continue to work with the financial services industry towards a solution which allows people with mental health problems to choose to exclude themselves from credit altogether for a set period of time, if they know that access to borrowing is particularly problematic for them. We would also like the FCA to update its guidance around consumer understanding, to make sure that firms are doing enough to support consumers who take out credit online.

We look forward to working with the FCA over the coming months to ensure that the experiences of people with mental health problems are heard, and that regulation does as much as it can to reduce the impact that problem debt has on our mental health, and to protect people experiencing mental health problems from financial difficulty.