Katie Evans, Head of Research and Policy, Money and Mental Health
Our response to the FCA’s action on high-cost credit
This morning, the body responsible for regulating consumer credit in the UK, the Financial Conduct Authority (FCA), set out a range of measures intended to offer better protection to people who rely on high-cost credit products. Money and Mental Health is delighted to see that the FCA has heard and acted on some of our concerns about the particular problems faced by people experiencing mental health problems in these markets – including rent-to-own, store cards and catalogue credit.
Credit driven by desperation
Experiencing a mental health problem can make processing large volumes of complicated information – like that involved in taking out a new credit product – much more difficult. At the same time, people experiencing mental health problems are more likely to be managing on lower incomes and may face additional costs related to their illness. In these circumstances, people may have no choice but to turn to high-cost borrowing options – when they urgently need to replace an essential household item, like the fridge, or need new clothes for their children.
The evidence shows that when people are looking at these credit options, it’s hard to see beyond the weekly cost that the advertising focuses on, to the longer term financial implications. This is likely to be particularly difficult for people experiencing mental health problems, which can increase impulsivity and make comparing options difficult. When your bandwidth is limited, your options reduced, and your motivation low, shopping around for a cheaper way to buy the cooker or washing machine you desperately need might just be too much to face.
“If I was thinking rationally at the time I don’t think I would have taken out [rent-to-own]. I worry now that I owe money making my depression worse.”
A victory for consumers
So we’re delighted that today the FCA has shown its willingness to cap the price of rent-to-own credit. We look forward to continuing to engage with the FCA in the coming months to ensure that the eventual policy works for people experiencing mental health problems.
Buy now, pay later
We are also pleased to see that the FCA plan to take steps to offer greater protection to other customers taking our credit at the point of sale, including through store cards, catalogues and other ‘buy now pay later’ offers. Here, we know particular problems emerge when credit limits are increased without asking consumers, facilitating impulsive spending associated with some mental health problems, which can leave people in serious financial difficulties.
“Keep buying from catalogues to ‘cheer myself up’ and they keep raising the amount of credit available and now I am really struggling to pay them.”
New measures announced by the FCA today will protect people from these unwanted credit limit increases.
We’re disappointed, however, not to see greater action to ensure that customers really understand the terms of catalogue or store credit. We have particular concerns about the growth of store credit being offered online, where consumers can buy things with borrowed cash in just a few clicks, and hope the FCA will revisit this in the future.
The FCA has also decided against capping the price of doorstep lending. While we are pleased to see that doorstep lenders will face greater restrictions on their ability to pressure customers to take out new loans or refinance during home visits, without significant improvements in enforcement, we worry that these regulations will be ineffective and further action may be needed.
First steps in a broader debate?
While the FCA has stepped back from making dramatic changes to the rules around how banks provide overdrafts to customers today, there is a sense, both in today’s papers and the remarks of Chief Executive Andrew Bailey this morning, that stronger action is around the corner. Many people experiencing mental health problems have experienced difficulties with overdrafts – often incurring fees when they are too unwell to understand and take action, without any simple way to protect themselves. We will be watching the FCA’s further steps in this area closely.
More surprisingly, the FCA has issued strong words today on the need for a broader conversation about the drivers of high-cost borrowing, including the lack of affordable alternatives and the fact that many people moving into social housing are placed in unfurnished properties, with no way of paying for furniture apart from turning to rent-to-own. Our recent research on informal borrowing also shows how these pressures can leave people taking risky loans from family and friends, which put both their financial and emotional wellbeing at risk.
We hope this challenge will lead the government to seriously consider what more it could do to support people in difficult circumstances, particularly those reliant on benefits or in social housing, to access sustainable incomes and affordable sources of credit. You can read our suggestions here.
You can read our response to the high cost credit consultation in full here, and find our response to the overdraft consultation here.