FCA highlights poor re-lending practice by high-cost credit firms

The FCA said it had identified poor practice in a number of areas in the course of its review into re-lending by firms that offer high-cost credit. This included 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.

The regulator said firms were also encouraging consumers to borrow more by conveying a message that re-lending is common practice and normal behaviour, or by encouraging them to use additional borrowing for luxuries such as holidays.

Data provided by firms and consumer research conducted by the FCA revealed breaches of the regulator’s rules and principles for business. The FCA said levels of debt increased as customers took on additional loans, and it did not “generally observe” additional credit being used to maintain existing debt levels. Repeat borrowing accounts for more than 80% of customers at many firms, according to the report.

Financial regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said: “Given some firms don’t make a profit from the first loan to a customer, perhaps unsurprisingly, they are focusing on the ease of re-borrowing in their marketing and sales practices."

“The FCA’s concerns are clear. With easy repeat borrowing in the high cost credit market, already potentially vulnerable customers over time can find themselves with debt that that has escalated to unserviceable levels. Firms reliant on repeat borrowing need to look at their models now and take action to change their lending practices, before the FCA does it for them through further rule changes,” Barber said.

The review highlighted that high-cost credit customers are more likely to be vulnerable with poor credit histories. The FCA said it expected firms not to encourage refinancing of credit agreements where the customer’s commitments are not sustainable, or where they believe it is not in the customer’s best interests.

The FCA said firms should re-assess lending practices and operations to ensure they are lending responsibly.

While the regulator said marketing to customers was “persistent”, it said the number of communications was not generally excessive. However, it said firms could do more to give consumers relevant information about re-lending to put them in control of their decisions about when to apply for additional credit.

In particular, the review said firms should review marketing content to meet financial promotion rules, with a focus on pre-approvals, marketing emphasising the daily interest rate rather than the annual interest rate of the loan, or a failure to include the required high-cost short-term credit warning to customers.

The FCA also raised concerns about online account messages encouraging customers to re-borrow. It said these constituted marketing, even though some firms disagreed. It also said these online account messages must not restrict access to consumer accounts by requiring a customer to accept or reject offers for further borrowing before they can proceed to manage their account.

The FCA found that some firms were making an early settlement charge when a customer was refinancing a loan, compounding the costs of borrowing. It said it expected firms to immediately stop requiring or encouraging borrowers to serve a statutory notice that they wish to settle an existing loan early, removing firms’ ability to make the charge.

“In light of its findings, the FCA has now very plainly said it expects firms to review their lending practices and make the changes needed to improve outcomes for customers. The bottom line is that the ease of taking on repeat borrowing, and the marketing approaches facilitating it, must be revisited by firms to ensure they are clear, fair and not misleading and comply with the FCA’s rule and principles,” Pinsent Masons’ Barber said.

“The FCA conducted its review before the pandemic. Its findings then of debt dependency, lending resulting in consumer harm, combined with customer anecdotes that themselves make sobering reading are, because of Covid-19, likely to be all the more relevant now,” Barber said.