The findings from the FCA’s joint review into overdrafts and high-cost credit products are faintly damning and a potential death knell for firms operating under the auspice of the regulator.
The FCA has been under pressure to deliver on better protection for vulnerable consumers for some time, and the results of this review will not be surprising to those who have lobbied for tighter controls on expensive credit.
Directly in the firing line is Rent-to-own. The FCA’s findings make clear that the costs of Rent-to-own (RTO) are indefensibly high and are leading to consumers paying an average premium of 3 or 4 times the typical retail price of goods. At the extreme, this can be nearly 5 or 6 times.
As a result, the City watchdog is planning to introduce a price cap for rent-to-own retailers as part of its crackdown on high-cost credit and overdrafts to save consumers what it believes will amount to more than £200m a year.
Although stopping short of capping charges on overdrafts, the FCA did outline a series of measures for the product, highlighting that the market required fundamental reform and that it would consider taking radical steps as part of a wider review into retail banking practices.
Research has shown that banks made an estimated £2.3bn from overdrafts in 2016, while almost a third of that amount came from unarranged overdrafts.
Yet despite the gloom of the report, there is cause for optimism. The FCA has acknowledged that for some individuals, high-cost credit is often the only form of credit available and rather than simply abandoning this cohort, the FCA has committed to working with industry stakeholders to develop innovative products to help this underserved section of society.
As a result, firms with an innovative offering could find that this is a perfect time to partner with the regulator to develop their product.
The review also commits the FCA to working with potential providers beyond just the credit union sector, including banks and building societies, to discuss new ideas and innovative business models that could expand responsible lending options for consumers.
Putting their money where their mouth is, the FCA has confirmed this will include an exploration of why relatively lower cost, mid‑price, lower risk credit options are not more widely available and what might be done to address these barriers.
While the review is probably the beginning of the end for some business models, it also presents an opportunity for firms to engage with the FCA about the development of responsible, consumer-friendly financial products.
To find out more about how GK can help your financial services business engage with regulators, contact Johnny@gkstrategy.com