personal finance

Watchdog warns UK high-cost lenders about exploitation


The UK’s financial watchdog has warned high-cost lenders about irresponsible repeat lending and exploitative marketing that risks pushing vulnerable borrowers into a cycle of debt.

The Financial Conduct Authority warnings follow a review of the high-cost, short-term credit industry that involved the borrowing history of 250,000 customers who had taken out payday loans, guarantor loans, doorstep credit or rent-to-own products.

The watchdog said it had “significant concerns” over repeat borrowing, which is cheaper for firms than onboarding new clients, and accounts for about 80% of high-cost credit customers.

It explained that the profitable practice can cause “customer harm”, with some firms fast-tracking affordability applications by simply asking whether there have been any material changes to customer finances since their last loan.

“We are concerned that firms are lending to customers beyond levels which they can sensibly manage and causing customer harm as a result,” the report said, adding that some people had seen their debt escalate after two to three years of repeat lending.

It also raised red flags about marketing materials and pop-up adds on consumers’ online accounts that can encourage customers to take on more debt than they can afford.

The report said some firms were recommending users take out cash to fund a holiday and added photos of exotic locations to make the idea more appealing. Others set default borrowing amounts in online applications and advertised the upper borrowing limit – for example, sending texts saying “you can get a loan of up to £1,000” – which could encourage customers to take out larger loans.

The regulator said it wanted companies to review their marketing materials and lending practices as they restart lending, following a brief pause during the UK lockdown.

Jonathan Davidson, an executive director at the FCA, said: “Before the pandemic we saw increasing numbers of complaints about high-cost lenders’ re-lending practices, which showed that firms had failed to adequately assess affordability, and they were not re-lending in a way that was sustainable for customers.

“We expect firms to review their re-lending practices in light of our findings as they start to lend again, and to make any necessary changes to improve customer outcomes. We will continue working with firms to raise standards, and we will continue to take action where we see harm.”

It adds further pressure on the industry, in which a number of firms have collapsed following a surge in customer complaints about a lack of proper affordability checks. It has led to the failure of firms including Wonga in 2018, the Money Shop and CashEuroNet UK last year.

The Consumer Finance Association, which represents payday lenders, said: “For millions of families, repeat lending successfully helps those with regular shortages in their budget, either temporary dips in income or additional expenditure.

“No one will deny that this is a challenging area. Ahead of this delayed report, there have been talks over the last year between lenders and the FCA to make changes that protect customers. I know that lenders will welcome any additional clarification that the FCA can provide us.”



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