Guest Comment: FCA on why “fundamental changes to unregulated overdrafts may be necessary”

Chris Woolard, executive director of strategy and competition for the Financial Conduct Authority, sets out what the FCA has learned in its review of high-cost credit and where it will focus next. Views do not necessarily reflect those of MoneySavingExpert.com.

Three years ago, we took on responsibility for regulating the payday lending market, and we told MSE readers that we wanted to make significant changes. We listened to your views at the time, and we now have clear evidence that things are moving in the right direction. Tougher rules, close scrutiny of firms and the price cap have brought substantial benefits for consumers.

The cost of interest and fees on payday loans has come down – a typical loan now costs around £60 when this was previously over £100, leading to a total saving of approximately £150m for the 760,000 people taking out payday loans each year.

Firms are making better lending decisions, too. Far fewer payday borrowers are defaulting on their loans, and debt advice charities have seen reduced numbers of clients with payday loan debts.

We've also taken a careful look at what's happened to people who haven’t been able to get payday loans since FCA regulation came in.  63% of the people we surveyed who have been refused a payday loan in recent years told us that this was for the best. 85% of people who applied for a loan and were declined chose not to take out an alternative credit product – most (60%) decided not to borrow at all, and those who did borrow went mainly to friends and family rather than using other forms of high-cost credit or overdrafts. We've seen no strong evidence of a rise in illegal money lending because of the price cap.

These statistics back up one of the initial findings from our current review of high-cost credit. We are looking at how people use products like overdrafts, home-collected credit and catalogue credit and where they’re at risk of harm, as well as reviewing the effects of our work on payday lending. We've found that while there are similarities between high-cost credit markets and products, there are significant differences in how they work and how people use them, so we need a tailored rather than 'one-size-fits-all' approach.

The rent-to-own market, which we’re focusing on closely, is a good example. These providers lend to a particularly vulnerable group of people at a very high cost, but this might be the only way that some of their clients can afford to buy household goods like ovens or fridges, and the nature of the product means that solutions like price capping would be very hard to apply. So we need to look carefully at new ways to resolve our concerns that leave rent-to-own customers in a better position. 

Similarly, we're also working on solutions for unarranged overdraft charges, which I know have long been an issue for MSE. As well as being very high and very complex, our evidence shows that a large proportion of these charges fall on a small minority of consumers – 60% of one bank's unarranged overdraft charges in 2016 were paid by less than 5% of its current account customers.

We have significant doubts about whether unarranged overdrafts can continue in their current form in a well-functioning market, and believe that fundamental changes in the way that unarranged overdraft charges are provided may be necessary. We want to resolve these issues while preserving the parts of the market that work for consumers too. 

We've made a big difference in our three years in charge of consumer credit, but there is more for us to do – particularly in markets with more vulnerable consumers and high risk of harm. The work we've done in the last few months has helped us build a much better understanding of high-cost credit markets and how people use them. We'll be working hard to develop solutions and we will produce proposals for action to better protect consumers in Spring 2018.