BRITAIN’S financial regulators resemble a medieval baggage train struggling to keep pace with a rampaging army.
Just when they appear to be on the brink of getting on top of abuses which are causing misery for millions of vulnerable consumers, the regulators find themselves floundering in the predators’ wake.
The latest figures from the Financial Ombudsman Service (FOS) show that many consumers are facing hardships due to the unethical behaviour of an unrepentant core of financial services firms.
The FOS saw a “startling” 130 per cent increase in new complaints about payday loans, with nearly 40,000 new complaints brought last year.
A more than 40 per cent surge in consumer complaints about fraud and scams helped to push the overall number of complaints seen by the financial ombudsman to its highest levels in five years.
And what is the most effective way of sending the unscrupulous operators packing? It has to be a regulatory system that strikes fear into the miscreants. Sadly, such a system is lacking, despite repeated complaints from pressure groups and MPs.
Stella Creasy, the Labour MP, has written to the Treasury to express concerns about the effectiveness of regulation on all forms of credit.
Analysis of the Bank of England’s Household Debt Survey from 2017 by the Centre for Responsible Credit for the End the Debt Trap Coalition showed that around eight million people were paying out more than one quarter of their income in repayments to their consumer credit lenders.
The End the Debt Trap Coalition has said that, without any cap on the total costs that they can charge, lenders are using credit reference and other data to identify people who they know will struggle to repay.
Ms Creasy said: “They do so in the knowledge that the high cost of credit paid by those who keep to the terms of the agreements, or repay at least partially, will cover the overall cost of those who default and still deliver a profit.”
Without a cap on the total costs that they can charge, or if a cap is set at too high a level, lenders are incentivised to structure products in ways which take advantage of people who will struggle with repayments.
According to Ms Creasy, they can, for example, regularly hit people with default fees and other charges.
They can also encourage people to refinance or ‘roll over’ debts which allows them to compound interest.
The cap on payday lending has had a positive effect, because it has prevented some of the very worst practices, although because of its high level it has not eradicated them completely, Ms Creasy said.
Regulators need to keep up with predatory practices in order to protect consumers. In particular, there are fears that credit card companies are evading Financial Conduct Authority rules which aim to provide more protection for credit card customers who are in danger of being overwhelmed by debts.
Ms Creasy has found evidence of a sub-prime lender which is requiring borrowers who have only been making minimum payments on their accounts for extended periods to make additional payments unless they opt out of them.
To quote Ms Creasy, “Requiring consumers who may be in financial difficulty to ‘opt out’ of higher payments is at odds with the spirit of the rules which seeks to ensure that lenders identify people who may be in trouble, and offer effective help.”
There are around four million credit card accounts in persistent debt and firms have few incentives to help these customers because they are profitable .
Caroline Wayman, the chief ombudsman, said that the interests of consumers are often not hard-wired into financial services. That is putting it mildly.
The lack of effective financial education in schools means that many people do not realise when they are living beyond their means, or facing unnecessary charges. Scandals such as the mis-selling of payment protection insurance show that financial services firms cannot be trusted to keep their house in order.
A public inquiry into the quality of credit regulation would shine a welcome light into a very dark corner.