It is a great privilege to join everyone and a great pleasure to welcome the consumer credit industry to the FCA ‘fold’.
Our paths converge following one of the most extraordinary economic events the world has witnessed: a financial crisis that not only ended organisations that we imagined would last forever. But also created new ones, like the FCA, to help move things forward and learn the lessons of the past.
And it’s in this context, so looking at regulation as a positive mechanism for repair, that I want to offer some broad observations today on the FCA approach to consumer credit regulation.
So, what happens post-convergence, if you like? What are the regulatory priorities?
And how do we ensure the market works well within this rapidly changing context – bearing in mind, of course, that the consumer credit industry has a long history of managing transition. Adapting practice and process to fit the times.
So, we see paper credit vouchers in the 19th century became metal payment cards at the turn of the 20th century. Then metal became plastic. And plastic becomes contactless.
And with each innovation, each step forward, the industry has expanded into new technological and commercial fields. Encouraging and responding to the broader shift in societal attitudes to credit that we’ve seen over the last 60 years.
So, where once the UK was relatively ambivalent about the value of lending – a reflection of pre-Second World War attitudes to money – today we’re in a position where total unsecured borrowing by households, as a percentage of GDP, is higher than any other major economy in Europe. Currently, some £158bn in aggregate.
Clearly then, there is a very strong growth story here against a backdrop of significant technological, political and attitudinal change.
And I think it’s important for people outside the industry to remember how valuable this expansion and reinvention has been to everyday life in the UK. It reflects a strong social desire for credit. The ability to spread payments and plan for the future. The ability to purchase goods that would, frankly, otherwise be impossibilities.
So, for the FCA there is a significant responsibility here – to both firms and customers – to help this market work well. Our overarching statutory objective.
Moreover, there’s an implicit responsibility, within this aim, to protect responsible firms from the irresponsible – and to protect consumers from poor value products.
Expansion of the market creates opportunity and risk
And this, effectively, is why our paths now converge.
Strong sectors require strong regulation – and as the consumer credit market has grown, so the importance of forward-looking oversight has escalated in lockstep, with more potential risk to manage.
And almost inevitably, this placed the Office of Fair Trading (OFT) – which had less statutory reach than the FCA – in a difficult position.
The National Audit Office (NAO) talked in 2012 of some £450m of potential financial harm not being addressed under the previous regime. The true figure could be much higher.
On top of this, StepChange, Citizens Advice, Debt Helpline, Christians Against Poverty and the like have all reported increasing concern over issues like debt management practice; lack of effective competition; mis-selling; high prices; and products not meeting consumers’ needs.
And the Centre for Social Justice last year released a report suggesting almost half of UK homes in the lowest income decile, the most vulnerable consumers if you like, spent more than a quarter of their income on debt repayment in 2011.
Now, for some these figures will be a reflection of wider cultural attitudes to credit – the fact that the UK population generally has a very different relationship to consumer credit lending than, say, France, Italy or Spain. For others they are all about industry practice or regulatory infrastructure.
Frankly, I’m not convinced there’s an easily defined answer here. But there are questions and it’s been clear for some time now that strong, forward-looking oversight is important for all concerned: firms as well as consumers.
Hence the reason we find ourselves where we are today, with the financial regulator having taken responsibility for some 50,000 consumer credit firms. At a stroke, more than doubling the number of businesses we regulate. And also, of course, bringing us closer to firms for whom finance is not a primary focus but is often an ancillary business.
The FCA approach
The immediate priority – and the most pressing from the FCA perspective – is to make sure all those providers of credit, as well as satellite services like credit broking, debt management and debt advice, have sustainable and well-controlled business models, supported by a culture that is based on ‘doing the right thing’ for customers.
In other words, there is an emphasis here not only on being compliant with the rules from day one. But also revisiting more fundamental questions of culture, ethics, business models and the like.
So, are the right products pitched at the right customers? Are the costs of credit clear at point of sale? Is there an effective assessment of the ability to repay debt? What should happen if the customer is over-indebted? Is there proper forbearance if the customer gets into arrears?
And, if not, who has responsibility in firms for making sure the necessary changes are applied?
Over the last year, these are the kind of questions and reflections that the FCA has been applying more broadly right across the financial sector, with more emphasis on moving things forward, post-crisis, in key areas like prevention, consumer protection and competition.
As a result, there’s a less narrow focus today in financial services on rules and what you might describe as more traditional regulatory interventions…
…areas like disclosure, for example, which were often based on flawed assumptions: that we’re all perfectly rational consumers of financial products; that prices always respond perfectly to new information; that we are absorbed and interested by terms and conditions, and so on and so forth.
So, an immediate priority here for firms is to adjust not only to new rules – threshold conditions, guidance and principles of business – but also to these wider FCA expectations of good conduct.
And this applies equally to those operating, or supplying, relatively low-cost, vanilla products to low-risk consumers – as it does to those who are engaging in the high-cost end of the market. Large industries are never the same in all directions so it’s important to distinguish between the spectrums here.
And it’s also important for regulators to reflect the differentiation of the consumer credit market in the way we make interventions and manage change.
Consumers in vulnerable circumstances
In other words, for some the regulatory interest will be greater than others because they present more risk to more people in more ways.
And this is one of the reasons why it is an imperative for the consumer credit industry to take a step back in 2014 and consider, again, how it engages with consumers in vulnerable circumstances.
So, the almost nine million people, or 18% of our adult population, who are over-indebted.
As well as those who lack confidence with numbers and products – including the one in five who do not understand whether a lower or higher APR represents the better deal.
The 8.4m households who have no savings at all. And the 3.9m lower income families who would be unable to meet rent or mortgage commitments for more than a month if they lost employment.
And, linked to these figures, all sorts of related issues to consider, like income volatility; like high debt to income gearing; consumerism; lack of access to credit; over-confidence; under-confidence and so on.
There are multiple issues and factors here.
As many here will know, the FCA published its paper on consumer credit and consumers in vulnerable circumstances on Tuesday – and it reflects this complexity.
It also provides a broad indicator of the future direction for consumer credit firms – as well as context for much of the work we’ve set in train this financial year, particularly investigative analysis into areas like interest rate caps and high-cost, short-term credit; overdrafts; logbook lending; debt management; financial management and, of course, credit cards. Which is the issue I want to pick up on today, within this broader debate around consumers who find themselves in vulnerable, or difficult, circumstances. So, maybe, those for whom spending on plastic is not discretionary.
Credit card market study
A key question here for financial service leaders: how do we assess the broad impact on this group of the expansion of the UK’s credit card market over the last 40 or so years?
Clearly, we are many steps removed today from the 1960s and the launch of the first UK credit card by Barclays.
The market now has some 56m credit cards in issue. Gross spending on those cards was £150bn last year. And there was around £57bn in outstanding balances.
Now, even if few could have foreseen these numbers in the 1960s or 1970s, there’s no doubting the positive impact related to this growth in credit card usage. Its effect on the wider UK economy manufacturing, high street retailers, business, employment and so on.
As well as its impact on personal finances; planning; and the convenience it offers – the famous Access Card tagline, ‘your flexible friend’.
In many ways then, this is a product that is a success. There’s great commercial and personal value attached to credit cards in the UK. Some 30m of us carry one – or 64% of adults. In fact, more than 70 of all European credit cards, according to a UK card association figure I heard quoted yesterday, are held by Britons.
The debate for providers and regulators to consider in this context, is whether success here is always a product of truly effective competition.
On the face of it, yes, there are many brands and organisations to select our cards from – football clubs, charities, banks, and building societies – as well as rivalry for certain customers, 0% balance transfer periods and similar features.
The FCA is asking whether this surface competition is reflected more deeply in the value offered by products. So, as the credit card market has ballooned into this vast industry that so many of us engage with – absorbing more customers from more walks of life – has it always worked in our interests?
In particular, how do behavioural economic biases (a science we are increasingly engaged with at the FCA) rub up against the design, pricing and distribution of credit card products?
Are issues like consumer inertia, irrationality or lack of willpower (as economists describe them) significant factors in poor decision-making and indebtedness? And, if so, who is responsible for moving things forward?
The key priority here has to be those in the most vulnerable circumstances. Many of whom are clearly struggling to manage their commitments on credit cards, as well as other bills.
So, we know it’s not uncommon for the most ‘at risk’ households to hold multiple cards and revolve multiple balances month-by-month.
Among the UK’s 30m plus cardholders, something like 3.7% make minimum payments for 12 months or over – 2.3% for 24 months or over. Equivalent to more than a million borrowers making 12 or more consecutive minimum payments. 700,000 doing the same for over two years.
On top of this, there is significant anecdotal evidence of hardship from charities like StepChange, where around 10% of the people who visit for advice, with an average £27,000 of total debt, arrive with five or more credit cards.
There are some obvious questions and challenges here for regulators and industry: so, for example, why are card issuers providing the means, in some cases, for the most indebted consumers to escalate their way into further debt? The StepChange dilemma, if you like.
Is the issue here the product’s presentation and design? So, a sell-side issue. Is it a buy-side issue? Related to a lack of self-control over expenditure, or understanding of the product.
Or, perhaps there is a combination of the two at play? Firms maybe taking advantage of consumer biases.
Related to all these questions and complexities, a broader and equally difficult debate around responsibility.
So, while we know the majority of people are aware of their personal duty to plan for the future – does this mean there’s no corporate responsibility for issuers to minimise long-run hardship? Maybe by limiting lines of credit to those who are already stretched. Maybe by showing greater forbearance for those in arrears.
More fundamentally, is there a wider industry issue at play here around business models? Are lenders pricing risk correctly to all borrowers? Does the return on assets, by risk segment, imply a contestable and effective competitive market?
Is there sufficient debate at the margins of the industry, particularly where we see cards issued with low credit limits of a couple of hundred pounds and high APRs – pay-day loans with plastic, if you will?
Finally, do consumers who leave balances every month – so-called ‘revolvers’ – subsidise those who pay off their credit card balances at the end of every month, the ‘transactors’? This might not be the case in a classic two-sided market, where the transactor may be generating a strong level of merchant fees from retailers every month.
These are all questions the FCA has a statutory responsibility to consider as part of its competition remit. And this is why we will be launching a full-scale competition review into the UK’s £150bn credit card market by the end of this year.
As part of this review, or ‘market study’ as we call it, we will be engaging with the industry ahead of time and it’s important to say there’s no pre-determined terms of reference, outcome or agenda here.
There is, however, a duty of care to consumers, and I think it’s important for there to be clarification of whether competition is working in their interests.
Credit cards are, and will remain, enormously important products in UK wallets. It’s also important to say the industry has moved things forward substantially over the last four years in areas like right to repay; right to control; right to reject; compare; and minimum payments letters.
So, there is much to applaud and admire in the UK but no market operates perfectly. The right thing for us to do is to look at the market, the good and bad, and assess how it is working.
Conclusion
Finally, a point I’ve mentioned many times over the last year, but bears repeating today given Tuesday’s takeover of consumer credit, is that the FCA’s principle objective is to make markets work well – for firms as well as consumers.
In other words, regulation as we see it is not a zero-sum game, as Bill Clinton used to describe it, where for one side to win the other has to lose: like a game of cricket or football.
This should always be a non-zero sum game – where all sides benefit. The consumer credit market from greater stability, so less risk from outliers in the industry who threaten the large majority. The regulator from a more positive, long-run relationship with firms. And consumers from improved outcomes.
We are acutely aware of our responsibility here. We are also acutely aware of the long-run commercial and social benefits your industry has bestowed on the UK, and continues to bestow on a day-to-day basis, with each step forward.
As our paths finally converge, we look forward to creating new possibilities. To being that positive mechanism for repair.