FCA highlights concerns when credit firms allow repeat borrowing

The review[1], which was completed prior to the coronavirus pandemic, highlights concerns about poor practices by some firms and notes that nearly half of consumers regretted borrowing more money. As firms in this sector begin to lend again, the report sets out the FCA’s expectations on how they must treat consumers.

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. In some cases, this led to anxiety and stress. Nearly half of consumers who took part in research commissioned for the review said they regretted their decision to borrow more money, and for some products this rose to over 60%.

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, sometimes having to decide which priority debts to pay when they don’t have enough for all.

Ensuring that consumer credit markets work well is one of the FCA’s key priorities[2], including protection for vulnerable people. Last week the FCA published a guidance consultation[3] on the fair treatment of customers, setting out its expectation that firms exercise particular care where consumers have characteristics of vulnerability.

The review raises 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 is concerned about the failure to balance these messages with the risks – including those that can come from taking on more debt than you can afford. There are also concerns about the increased costs to the consumer of refinancing compared with other ways of accessing further credit.

Jonathan Davidson, 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.’

The report also calls out concerns about behaviour which suggests some customers may be trying to deal with financial difficulties through further borrowing. In these cases, the FCA expects the firm to assess whether further borrowing is in the customer’s best interests. They should do this by considering the customer’s overall financial situation and whether forbearance or debt advice might be more appropriate than additional lending. 

The review follows the publication of a letter sent in March 2019[4] to all high-cost lenders where the FCA highlighted the risk that repeat borrowing could indicate a pattern of dependency on credit that is harmful to the borrower. Rigorous affordability assessments are key to avoiding harm in this area, and firms should ensure they are making proportionate and responsible assessments of the sustainability of borrowing.

The FCA has made a number of temporary interventions to help consumers who are under additional financial pressure due to the impact of coronavirus.

Jonathan Davidson continued:

'We are closely engaged with firms to understand the impacts of the pandemic on consumers. Where consumers are experiencing payment difficulties, we encourage them to contact their credit provider as soon as possible and explain their situation and get the help that lenders have agreed to provide.'

The Money and Pension Service[5] also offers free and impartial support.

Notes to editors

1. The FCA reviewed the borrowing history of around 250,000 customers to better understand the customer journey; a sample of firms’ loan books to see how much relending is taking place; and firms’ marketing materials, to understand how firms promote relending to existing customers.
2. Publication of the review was initially planned for March 2020, but was delayed due to the onset of the coronavirus pandemic, to allow the FCA and firms to focus on urgent issues for consumers.
3. Multi-firm review: Relending by high-cost lenders[1]
4. The FCA also commissioned consumer research[6] to look at customers’ experiences of relending and the impact it has on them.
5. High-cost lenders Portfolio Strategy letter[4]
6. Coronavirus support page[7]