UK's financial watchdog launches crackdown on high-cost lending and overdraft charges

Caps on rent-to-own rates and unauthorised overdraft charges under consideration as part of radical overhaul 

Chris Baynes
Thursday 31 May 2018 18:33
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The Financial Conduct Authority is considering calling for a cap on unauthorised overdraft charges
The Financial Conduct Authority is considering calling for a cap on unauthorised overdraft charges

Britain’s financial watchdog has launched a sweeping crackdown on high-cost lending as part of plans to protect vulnerable consumers.

The Financial Conduct Authority (FCA) is proposing a radical overhaul of bank overdraft charges, rent-to-own operators, door-step lending and catalogue credit and store cards, following a wide-ranging review of the sector.

Banks raked in an estimated £2.3bn in revenue from overdraft charges in 2016, with 30 per cent of that paid by a small minority of customers through expensive unarranged borrowing.

Young single parents are far more likely to turn to high-interest borrowing, such as payday loans or pawnbrokers.

“High-cost credit is used by more than 3 million consumers in the UK, some of who are the most vulnerable in society,” said FCA chief executive Andrew Bailey.

“Today we have proposed a significant package of reforms to ensure they are better protected including the possibility of a cap on rent-to-own lending.

“The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.”

The FCA said the majority of unarranged overdraft charges were paid by only 1.5 per cent of customers, who stump up an average of £450 a year in fees and charges.

The watchdog is considering a number of measures to make it easier for customers to manage their accounts, including mobile alerts warning of potential overdraft charges and a ban on referring to overdrafts as “available funds”.

The FCA has also proposed online tools to make the cost of overdrafts clearer, new mechanisms to assess the eligibility for overdrafts, and greater clarity on whether overdrafts are credit or borrowing.

Mr Bailey added: “Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place.

“However, we believe more fundamental change is needed in the way banks charge customers for overdrafts. Given the size of the market our work here will be completed as part of our wider review into retail banking.”

The FCA said the package of measures proposed would save customers up to £140m a year.

Beyond that, the watchdog will consider more radical changes such as a ban on fixed fees and reform of unarranged overdraft charges.

It is looking “seriously” at recommending a cap on charges for use of unarranged overdrafts, Mr Bailey told BBC Radio 4’s Today programme.

The FCA has also scrutinised rent-to-own arrangements, a form of hire purchase for expensive goods such as fridges and washing machines.

The FCA said costs for the 400,000 customers who rely on the rent-to-own sector could be “exceptionally” high.

It cited examples of customers paying more than £1,500 for an electric cooker that was for sale on the high street for less than £300.

Last year The Independent reported how BrightHouse, the UK’s largest rent-to-own firm, was charging far higher rates over shorter periods than retailers selling the same goods on payment plans.

The FCA is now considering imposing a cap on rent-to-own merchants such as BrightHouse, who have been accused of “exploiting” the poor.

In the home-collected credit market, the watchdog is introducing new requirements to raise standards in “disclosure and sales practices”.

They will prevent firms from offering new loans or refinancing during home visits without the customer “specifically requesting this”.

In catalogue credit and store cards, the FCA will ask lenders to “do more” to help customers avoid persistent debt.

However, consumer groups reacted with disappointment to the proposed crackdown, saying it failed to address “unfair” overdraft charges or extend to a cap on the doorstep lending market.

Which? Money spokesman Gareth Shaw said it was “wrong” that the regulator was not taking action on unarranged overdraft fees.

“Just last week we revealed that unarranged overdraft charges can still be more than seven times more expensive than a payday loan,” he said.

“As the FCA continues to drag its heels, the government must urgently intervene to ensure unarranged overdraft charges are brought into line with arranged overdrafts, to finally help all those struggling from these rip-off fees.”

Citizens Advice chief executive Gillian Guy said the FCA’s willingness to cap rent-to-own was good news for the thousands of people who relied on it to cover essential items but made it “even more disappointing” that it had not extended these measures to the doorstep lending market.

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