The financial regulator has drawn up new proposals designed to protect millions of people who use overdrafts and high-cost credit - and hopes they could save consumers more than £200m a year.
The proposals unveiled today by the Financial Conduct Authority (FCA) would change the way overdrafts, the rent-to-own sector, home-collected credit and store card firms operate.
The regulator says it has identified a need to intervene in the rent-to-own sector, where it says customers are often paying "exceptionally" high fees for items they could get much cheaper on the high street.
It says the harm to customers in the rent-to-own sector is sufficient to consider a cap on rent-to-own prices and that it will now carry out a detailed assessment of the impact that a cap could have. It hopes to introduce a cap, if needed, by April 2019.
None of the changes proposed by the FCA will come in immediately - they will now be consulted on. See below for a full rundown of what's been proposed.
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What changes has the FCA proposed?
The FCA's proposals follow its review of the high-cost credit market - some of the proposals are being consulted on from today, while others may be consulted on in due course.
Here are the key changes which have been mooted:
- Overdrafts - the FCA's considering a ban on fixed overdraft fees. It is also considering an end to the distinctions between how arranged and unarranged overdrafts are priced, as well as tackling harm from repeat use. It says it will consult on any proposals in late 2018.
The FCA is also consulting now on mandatory rules to make it easier for customers to manage their accounts, including:
- stopping the inclusion of overdrafts in the term 'available funds'
- requiring online tools to make the cost of overdrafts clearer
- introducing online tools to assess eligibility for overdrafts
- introducing mobile alerts warning of potential overdraft charges
- making it clear overdrafts are credit or borrowing
It believes these changes could save consumers up to £140 million a year.
- Rent-to-own - a cap on rent-to-own prices could be introduced within a year. The FCA says costs for the 400,000 customers that use the rent-to-own sector can be exceptionally high. It says it has seen examples where people have paid over £1,500 for essentials like an electric cooker, which could be bought on the high street for less than £300.
It says it believes the harm identified in this market is sufficient to consider a cap on rent-to-own prices and it will now carry out a detailed assessment of the impact that a cap could have on the rent-on-own sector and how it might be structured. It says it is also open to other suggestions. The FCA will undertake this work over the next few months with the aim of introducing changes, if appropriate, in the rent-to-own sector by April 2019.
It is also consulting now on a ban on the sale of extended warranties at the point of sale.
- Home-collected credit - firms may be told not to visit customers to offer new loans unless requested. This is being consulted on now. The FCA is also consulting on guidance to make it clear that firms must not visit customers to offer refinancing unless requested by the customer.
The FCA is also consulting on rules requiring firms to give consumers a clear explanation of the comparative costs of taking out a new loan and refinancing an existing one.
- Catalogue credit and store cards - firms will be required to do more to help customers avoid persistent debt. The FCA's consulting on new rules to require firms to do more to help customers in long-term persistent debt to repay more quickly, and to find and help customers in financial difficulty.
It is also consulting on rules that will give customers more choice about whether their credit limits are increased and ensure that firms do not raise limits for customers in difficulty or the interest rate on their accounts.
Martin: 'The current regulation is farcical'
Speaking about price cap plans, MoneySavingExpert.com founder Martin Lewis said: “The current regulation is farcical. While rightly the cost of payday loans are capped, other short-term high-cost lenders are allowed to charge what they like – and many are far more expensive. This includes doorstep lending, rent-to-own and bank charges for busting your overdraft limit.
“While the FCA is thankfully considering capping rent-to-own costs, the rules should apply to all forms of short-term lending. Regardless of what type it is, a simple rule like ‘no one should pay more interest than the amount they borrowed’ for lending less than a year should be looked at."
On overdrafts, he added: “It’s now nearly a decade since the Supreme Court overturned bank charges reclaiming on a technicality – that bank charges didn’t need to be fair. Until then over £1 billion had been paid back.
“The impact of that campaign did work to get rid of those hideous £35 per transaction fees for being past your overdraft limit, which meant people could rack up £100s of charges in minutes without being aware. Yet things still aren’t good enough – those who struggle cross-subsidise those who don’t.
“The changes today are a step in the right direction. Stopping overdrafts being part of ‘available funds’ and reframing the language so that they are thought of as borrowing is right. After all, many people think credit cards are ‘bad’ and debit cards ‘good’ – yet if you’re overdrawn a debit card is a debt card too. But whether simply relying on pushing competition and transparency is enough is questionable, regulating the costs for some of society’s most vulnerable people should be considered.”
What does the FCA say?
FCA chief executive Andrew Bailey said: "High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society. Today we have proposed a significant package of reforms to ensure they are better protected including the possibility of a cap on rent-to-own lending.
"The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.
"Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place. However, we believe more fundamental change is needed in the way banks charge customers for overdrafts. Given the size of the market our work here will be completed as part of our wider review into retail banking.'
"Under legislation the FCA is required to formally consult on rules it proposes to introduce. Consultations must be open and transparent, and the FCA cannot prejudge the result. In order to consult, the FCA must have a sufficient evidence base on which to base its proposals and develop a cost-benefit analysis, which is why the FCA has launched this call for input. These checks and balances ensure any proposed measures are proportionate and necessary to protect consumers."