Credit where it's due?

In introducing the transfer of responsibility for consumer credit from the Office of Fair Trading to the Financial Conduct Authority (FCA), the Government stated that the FCA “will be better equipped to tackle the consumer detriment and malpractice that has taken place under the current regime with stronger powers and resources to protect consumers and promote effective competition in the consumer credit market”.

But six months into the new regime, is this actually the case? As with any transfer there is a period of adjusting. However, now that the FCA rulebook (“CONC”) has taken full effect, are we seeing an improvement, and crucially, are the safeguards introduced doing their job?

The payday lending test

To date, much of the recent focus of the FCA has been the very public review of payday lending; the politicians demanded it.

The FCA has been heard to voice an opinion that by the end of the review process there may be only four authorised payday lenders left. I don’t believe I’m alone in thinking that it should not be an aim of a regulator to put people out of business unless they are not fit to be authorised and, if they are fit, it should not matter whether there are two or 200 in the business. However, FCA has published proposed new rules dealing with caps on repayments, which appear to be reasonably balanced between fairness to customers and keeping the credit flowing, while not satisfying some of the politicians. It is talking of a maximum cost of £24 per £100 of credit, which suggests it has listened to those telling it that reliance on an APR (annual percentage rate) as the sole measure of the cost of credit was misunderstood by the public in looking at short term credit. This possible new comparator is less emotional and at the same time more meaningful. So, maybe their previous thinking has been revised and this may be a positive tick on the FCA’s review card.

One problem with cutting back the payday lenders is that the poverty which gives rise to the customer base requiring short-term loans doesn’t go away, so other wider societal solutions need to come forward, if the void is not to be filled by those none of us want to see filling it.

Next in line

Debt management companies are the next sector of the consumer credit industry in the FCA firing line. And we await the FCA’s final views on the selling of GAP (guaranteed asset protection) insurance, where it may follow PPI and ban its being sold at the point of sale of a car – though it will have to be careful as it is hard to see many consumers taking out this insurance at any other time and it can be of considerable importance if a car is written off while an HP agreement has to be paid off.

Affordability is another key theme for consumer credit, although the process is far from clear. CONC has a long list of issues a finance company might check before giving credit, but the guidance states that they may not all be necessary in each case and the requirement is to act proportionately, whatever that means. It also says that affordability is not the same as having enough income not to default on the payments, and that passing a credit score is not enough.

We know that applicants for credit tend to be better at stating their income than their expenditure, and there is undoubtedly a growing trend to demand income and expenditure statements and bank statements to back this up. This has already been introduced for mortgage applications, but is not what the customer necessarily wants when trying to leave the point of sale with a new sofa or car.

If there is one overall concern six months into the FCA, it is the vagueness of CONC, and the lack of clarity in its wording and guidance, but everyone is in the same boat.

The passing of time should help us all understand what the FCA means, and as it gains more experience in dealing with applications for authorisation, let’s hope it will be able to give better guidance to those who have yet to apply.

Bruce Wood, partner, Morton Fraser LLP