Tough action can break debt misery facing vulnerable consumers - Greg Wright

“I was borrowing from Peter to pay Paul, and robbing Paul to pay someone else.”
The regulator is demanding that firms do not sanction relending which causes harm to high risk customers.The regulator is demanding that firms do not sanction relending which causes harm to high risk customers.
The regulator is demanding that firms do not sanction relending which causes harm to high risk customers.

Not my words, but those of a man who has fallen victim to high cost lenders who prey on the vulnerable.

A new report from the Financial Conduct Authority provides a disturbing insight into the pressures facing people who have borrowed beyond their means and cannot find an escape route.

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The regulator is demanding that firms do not sanction relending which causes harm to high risk customers.

The FCA’s analysis of data provided by firms and its own consumer research, has uncovered breaches of rules intended to protect the public.

Those who have suffered include a man from Sheffield, who said: “When I started, I would take £100 at the beginning of the month and another £100 later in the month. Then I started taking out £500 at the beginning of the month. Then I began to take out loans to pay my other loans, and just to get by.”

A woman said: “I started missing payments and hit a really bad period when I was struggling to pay back my existing payday loans, which meant I had to take out new ones to cover the previous ones. I became so depressed I couldn’t leave the house.”

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High-cost credit customers are more likely to be vulnerable, have low incomes and poor credit histories. The FCA found that 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 to cover all of them.

To quote the FCA report: “We have significant concerns that repeat borrowing could be a strong indicator of a pattern of dependency on high-cost credit and levels of debt that are harmful to the customer.”

The FCA expects firms not to encourage refinancing of credit agreements where the customer’s commitments are not sustainable.

They also expect firms to only agree to refinance if they “reasonably believe” that it is not against the customer’s best interests to do so. These demands are wise, humane and sensible. But the FCA believes some operators are not complying.

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The FCA said: “From our analysis, we have seen that this is not always the case and we set out our views of the potential drivers of harm and request that firms assess their relending operations to ensure they remain appropriate and consistent with our principles.”

Customers have told the FCA they rely on credit and, despite wanting to be in a better financial position, they are used to living in debt and expect to need to continue to borrow in the future.

Many firms, particularly those offering small value loans, do not make a profit on a customer’s first loan. Profitability in high-cost lending firms is mainly driven by relending. For nearly all firms, profitability increases for subsequent loans.

Most high cost lending firms behave with integrity. However, the FCA is clearly worried about the wellbeing of many consumers.

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In particular, the FCA is concerned, in some instances, to see levels of relending double within a two to three year period. The regulator believes - quite reasonably - that additional borrowing should not be used, in effect, as a debt management solution.

It’s because you end up with cases like this 54-year-old woman, who told the FCA: “It’s a feeling of helplessness. You don’t sleep, you worry. You feel guilty about not being in a better position to support your family and about having made poor decisions in your life.”

With the pandemic reducing incomes for millions of people and also leading to a rise in unemployment, the pressures faced by people who are shackled to a pile of debt will surely grow.

But there are steps responsible lenders can take to reduce the burden for people who are struggling to cope.

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Early settlement charges should not be imposed when a customer refinances their loan. Home-collected credit firms must take pains to explain the different relending options and associated costs to all customers.

Responsible firms already do this. A ban or fine for the recalcitrant is the best way of putting a stop to this misery.

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Thank you

James Mitchinson

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