High-cost credit covers a range of financial products including bank overdrafts, loans, buy-now-pay-later and rent-to-own. Each product has its own benefits to consumers, but they also carry a risk of consumer harm, especially for vulnerable customers. This harm may include high repayment costs and a greater risk of problem debt. The regulator, the Financial Conduct Authority, has been taking action to reduce this harm and it has ongoing monitoring work in this area. This briefing describes the action that has been taken over recent years to stop unfair high-cost credit practices and gives information on the support available to those who find themselves in problem debt.Jump to full report >>
High-cost credit covers a large and diverse range of financial products including bank overdrafts, loans, buy-now-pay-later and rent-to-own schemes. Each product has its own benefits to consumers, but they also carry a risk of consumer harm. This harm may include high repayment costs and a greater risk of financial problems.
The regulator’s review of these products
The Financial Conduct Authority (FCA) regulates credit. It began a large-scale review of the sector in November 2016. The different financial products that were included within the FCA’s review were overdrafts, store cards and catalogue credit, home-collected loans and rent-to-own services.
The review found that 3.1 million UK consumers were using these products in 2017, running to billions of pounds in debt. It also found that these products created particular risks to the most vulnerable people.
The FCA review led to several changes to various financial products in late 2019 and early 2020.
The FCA said that it will continue to monitor other forms of high cost credit. This may include on motor finance, guarantor loans and the Credit Information Market Study.
What alternatives are there to high-cost credit?
In conducting its review of the sector, the FCA found that many households had come to rely on high-cost credit to replace domestic items that had broken and could not be lived without such as ovens or fridges. In order to avoid such circumstances, the FCA called for more assistance from numerous stakeholders in promoting the use of second-hand appliance markets.
The FCA also indicated that consumers wishing to avoid using high-cost credit might consider joining a credit union, which are limited by law in how much interest they can charge.
Help for those struggling with debt
Those struggling with debt can agree a Debt Management Plan. These are voluntary agreements between a debtor and some or all their creditors to repay their debts in an extended time period. While these can be a solution for some of those who may be struggling, some creditors may not agree to the Plan for some customers.
The Government is therefore considering how to introduce a ‘breathing space’ period for those with problem debt. This would give respite from creditor action, so that consumers can get debt advice and seek a sustainable solution to their debts.
Complaints about high-cost credit
Consumers who feel that they have either been given unaffordable credit, or that the lender acted irresponsibly in providing the product, can complain to the Financial Ombudsman Service. If the Ombudsman believes that a customer was treated unfairly, or there was a mistake, the customer may get their money back with compensation. Please consult the Library FAQ briefing on Personal Finance for more information about that process
Commons Briefing papers CBP-8810
Authors: Oliver Bennett; Terry McGuinness