Today the FCA has published the findings from its review of re-lending by firms in what it calls the 'high-cost lenders portfolio'. A lot of what the FCA concludes isn't particularly new - it's reminding lenders that the detailed existing rules on creditworthiness and affordability apply to lending to existing customers, not only new customers. That's no surprise, but here's a few points that I suspect will be of more interest to many lenders:
1. The high-cost lender portfolio is (almost) defined, at last
The FCA has referred to 'high cost' lending previously, but now we have it set out in detail what it means. The high-cost lender portfolio is (mostly) a product-based definition. I suggest it's useful to see the portfolio in there parts:
High cost short-term credit (HCSTC) i.e. former payday loans
Products where interest rates are typically quite high (perhaps above 40%, noting that's just my figure): guarantor loans, home collected-credit, logbook loans and rent-to-own
Unsecured loans aimed at subprime customers, when they are high cost. The FCA doesn't define high cost in this context, but we know a 40% to 50% rate is 'high-cost' (because this is where the guarantor lenders sit) so presumably similar rates would apply here.
Does this matter? I think it really does. It confirms that any lenders in these categories are far more exposed to compliance risk than those who are (as a corollary) 'low-cost'. In the last two years, many firms in the first two parts of the high-cost lender portfolio have closed or seen dramatic falls in their market value following uncertainties over compliance with the FCA consumer credit rules.
The stakes now seem highest for unsecured loan providers in the third part of the high cost lending definition. Meanwhile near-prime lending (e.g. rates from 20% to 40%) - apparently out of scope of 'high cost' lending - seems set to to continue its strong pre-Covid growth in due course. That's reflecting some formerly prime customers losing access to the cheapest loans, and some formerly sub-prime customers finding they can access slightly cheaper loans from specialist lenders.
2. Question: Who sets Policy, is it FCA or FOS? Answer: It's official, it's both
If anyone wanted confirmation that in consumer credit, regulatory requirements are increasingly being defined by the FOS rather than the FCA, it is here. In reminding firms that they need to assess affordability for existing as well as new customers, the FCA feels a need to suggest "this is a view shared by the Financial Ombudsman Service".
If ever it was needed, a reminder that lenders need to manage compliance by looking not only at the FCA's website to see the rulebooks, but the FOS's guidance based on cases it has reviewed.
3. The FCA seems to have missed the benefits of re-lending
The FCA provides detailed analysis, backed up by a report from PwC, of the harm that can be caused by re-lending. That is important and I'm sure all lenders will want to study the details and adapt policies and procedures accordingly. However, it seems unfortunate that the FCA hasn't recognised that re-lending can be in consumers' benefit.
Rather than immediately offering a larger loan at a higher rate, the lender can offer a smaller loan and once it is clear the customer is successfully paying for this, offer to increase it. It doesn't always work like that, but where lenders follow good practices (i.e. most firms, most of the time) it should work.
Nobody wants to be in a position where they have to borrow money at a high rate. Nobody enjoys repaying these loans. There's plenty of evidence of that in the PwC analysis. But re-lending can genuinely deliver consumer benefit, and it's unfortunate this side of the story isn't more clearly reflected in the report.
If all re-lending is considered 'bad' - as is the tone of the paper - then the practices described in the paper (for example, 'anchoring' where customers are offered loans of "up to £1,000") become seen as universally harmful and grounds for complaints to the FOS.
In my view the high-cost unsecured loan providers should respond to today's report with evidence that re-lending can be good for consumes, whilst learning from the analysis of what can go wrong and making appropriate changes to ensure ongoing regulatory compliance.