FCA warning on relending by high-cost lenders

The Financial Conduct Authority (FCA) has sounded alarm bells about the relending practices used by firms that offer high-cost credit, saying they risk pushing vulnerable borrowers into further debt

The warning comes as a result of a review of the borrowing history of around 250,000 customers who had taken out payday loans, guarantor loans, doorstep credit or rent-to-own products.

Nearly half said they regretted their decision to borrow more money, and for some products this rose to over 60%.

The review found that levels of debt increased as consumers took additional credit from high-cost lenders. Some consumers said they experienced financial difficulties as a result, including missing payments and prioritising repayment of debt over other expenses.

The FCA review raised several concerns about firms’ conduct, including poor practice in the use of online accounts and apps to encourage consumers to borrow more, and marketing messages which emphasised the ease, convenience and benefits of taking more credit.

Some firms suggested that consumers could use additional borrowing, for example to take a holiday, and reinforced the message by including imagery of exotic locations.

Some firms also appeared to use ‘nudge’ techniques such as appealing to social norms by conveying a message that relending is common practice and normal behaviour.

The FCA says it is concerned about the failure to balance these messages with the risks. There are also concerns about the increased costs to the consumer of refinancing compared with other ways of accessing further credit.

The regulator points out that high-cost credit customers are more likely to be vulnerable, have low financial resilience and poor credit histories. They often hold multiple credit products and have to juggle repayments.

The report highlighted concerns about behaviour which suggests some customers may be trying to deal with financial difficulties through further borrowing. In these cases, the FCA said it expects the firm to assess whether further borrowing is in the customer’s best interests, including whether forbearance or debt advice might be more appropriate than additional lending.

Jonathan Davidson, FCA executive director of supervision, retail and authorisations, said: ‘We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer.

‘Before the pandemic we saw increasing numbers of complaints about high-cost lenders’ relending practices, which showed that firms had failed to adequately assess affordability, and they were not relending in a way that was sustainable for customers.

‘We expect firms to review their relending practices in light of our findings as they start to lend again, and to make any necessary changes to improve customer outcomes. We will continue working with firms to raise standards, and we will continue to take action where we see harm.’

Relending by high-cost lenders

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