The Financial Conduct Authority (FCA) have issued a stark warning to high-cost lenders in regards to their re-lending practices.
They have raised ‘significant concerns’ over the marketing practices used by high-cost lenders which they believe drive vulnerable borrowers into further debt. The warning comes after a review of 250,000 customers of the short-term, high-cost credit industry.
But why does the FCA consider it harmful to ask the customer if their financial situation has changed since last loan? According to our experts here at Quadrin, the view is that borrowers (particularly those reliant on debt) will, out of good faith, tend to say their financial position has not changed, whereas the FCA expect lenders to have carried out their own responsible assessments of borrower affordability.
This review looked into customers who had taken out payday loans, guarantor loans, rent-to-own products or doorstep credit. The UK watchdog’s concerns stem from the fact that repeat borrowers make up around 80% of high-cost credit customers as this is cheaper for credit firms than taking on new customers.
Some of the behaviour by high-cost lenders highlighted in the review includes firms only asking customers if their financial situation has changed since their last loan, a practice that the FCA believes causes ‘customer harm’.
Concerns were also raised over the marketing tactics employed by high-cost lending firms such as pop-up adverts on online accounts that encourage borrowers to take out loans outside of their means, plunging them into further debt.
FCA Executive Director Jonathan Davidson said the watchdog is asking lenders to assess their lending methods and marketing tactics before they restart their business following the coronavirus lockdown.
“We expect firms to review their re-lending 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.”
The warnings from the FCA also explicitly state that lenders are expected to only lend to customers at a level that they can sensibly manage, with failure to do so causing long term harm.
The warnings from the FCA come at a time when the high-cost lenders are wary after seeing firms fold as a result of customers complaining about exploitative lending practices. High-cost lenders Wonga collapsed in 2018 with CashEuroNet UK and Money Shop both folding in 2019.