UK watchdog urges costly lenders to act responsibly

Personal Debt Updates

Payday lenders and other high-cost credit providers must revisit practices that lure some customers into a debt spiral, the UK’s financial watchdog has warned – just as concerns grow over borrowing levels during the coronavirus pandemic.

In a review of repeated loans by high-cost credit providers, released Thursday, the Financial Conduct Authority attacked irresponsible practices by some companies that have resulted in increased overall levels of debt – and stress -.

In particular, the regulator highlighted “the use of online accounts and applications to encourage consumers to borrow more” as well as “messages that emphasized the ease, convenience and benefits of taking more credit.”

In some cases, lenders have sent “pictures of exotic places” to encourage clients to finance their vacations with additional debt. Some companies also appeared to use so-called “nudge” techniques – which can shatter individuals’ reluctance to act – suggesting that repeat borrowing is now a social norm.

According to the FCA, these lenders have failed to balance their seemingly positive messages with warnings about the risks of taking on unaffordable debt. As a result, some of the 250,000 high-cost clients he studied said they encountered financial difficulties and ended up missing reimbursements or favoring reimbursements over other household expenses. In some cases, “it led to anxiety and stress,” the FCA said.

Overall, nearly half of consumers who took part in the study said they regret their decision to borrow more money – a proportion that rose to 60% among users of more products. expensive.

Although the review was carried out before the coronavirus pandemic hit the UK, the regulator has warned lenders that it expects them to act more responsibly as the response measures against viruses – such as three-month repayment holidays – end.

“Before the pandemic, we saw a growing number of complaints about the lending practices of high cost lenders. . . We expect companies to review their lending practices in light of our findings when they resume lending and make the changes necessary to improve client outcomes, ”said Jonathan Davidson, Executive Director of Oversight , retail and FCA licensing.

Among the changes the regulator wants to see are more rigorous affordability assessments, reviews of credit offers via online and in-app messaging, and rewording of marketing materials to ensure they are more balanced. .

High cost credit has grown in popularity in recent years, despite the fact that some loans charge annual interest rates above 100%. The most recent data from the FCA shows that 3.1 million consumers use high-cost credit products per year, to borrow £ 3.9 billion per year – figures which exclude overdrafts. Under shorter-term deals, such as payday loans and home loans, customers now borrow £ 1.3bn per year but repay £ 2bn.

However, the regulator has become increasingly concerned with research showing that high-cost credit customers are more likely to be vulnerable, have low financial resilience and poor credit histories.

Last week, the FCA ordered all financial firms to do more to protect vulnerable customers, after finding that nearly half of all UK adults – some 24 million people – could be “particularly susceptible to harm. damage ”and that some had been“ exploited for profit ”. He also warned that more people would have become vulnerable to financial damage since the coronavirus began to spread in the spring.

Financial advisers hailed FCA’s latest action on high-cost credit. “While much of the population has been forced into debt due to the current COVID-19 crisis, the regulator is clearly concerned that debt companies are using deceptive marketing and arrogant tactics to keep customers in high cost debt. Said Laura Suter, personal finance analyst at the AJ Bell investment platform. “With debt levels set to skyrocket amid the end of the leave scheme and spike in unemployment. . . any crackdown on these practices would be good news for consumers.

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