Consumer credit on menu at FLA Dinner01/03/2018
For many the events season really kicks off with the Finance and Leasing Association ("FLA") Dinner on 27 February. Guest speaker at this year’s dinner was Andrew Bailey, chief executive at the Financial Conduct Authority (“FCA”), and his speech focused on consumer credit.
Since 2014 the FCA has been looking at developments in consumer credit to ensure that lending is affordable and sustainable. Andrew Bailey said, “Consumer credit is not a monolith”, and explained that the FCA was intervening on specific products including credit cards, overdrafts and rent-to-own.
Bailey explained that long-term real interest rates have been on a downward path since the 1980s. Indeed, since the 2008 global financial crisis, in many industrialised countries they have fallen well below zero. He described this situation as “unprecedented over such a long period of time in conditions of peacetime and stable inflation.”
The FCA has recently published a report asking the question ‘Who’s driving consumer credit growth?’. Carried out along with staff at the Bank of England, this report analysed credit reference agency data for one in ten UK consumers covering most types of borrowing, going back six years, and it led to three main conclusions: credit growth has not been driven by those with the lowest credit ratings; it has mainly been driven by people without mortgages; and people remain indebted for longer than product-level data suggest. Borrowing on credit cards with 0pct offers and motor finance are concentrated among people with higher credit scores. Motor finance and 0pct credit cards have accounted for a majority of consumer credit growth since 2012. In contrast, people borrowing on interest-bearing credit cards tend to have lower credit scores.
Andrew Bailey explained the FCA’s aims as having a reasonable level of “hands-off”. He said, “We are not looking to be prescriptive. We want firms to have reasonable discretion to make decisions according to the individual circumstances, [but within] clear parameters…Affordability assessment can never be an exact science.”
These comments follow on from the FCA’s publication of new rules requiring lenders to work on helping persistently indebted customers. These rules, to be implemented from today (1 March), demand that if a consumer has been in persistent debt for 18 months and making low repayments, the credit card issuer must contact the consumer and warn them to increase their payment or risk having the card suspended. Consumers who have been in continual debt for 36 months must be shown what is described as "forbearance" by the card issuer, including the offer of a repayment plan.
Andrew Bailey summarised by saying, “It is reassuring that credit growth has not been disproportionately driven by those who are most vulnerable. But I am not sanguine here.”