Finance organisations say FCA crackdown on high-cost credit is ‘a long time coming’
PUBLISHED: 13:20 31 May 2018 | UPDATED: 16:51 31 May 2018
The finance watchdog must put its money where its mouth is in a proposed crackdown on high-cost lending, according to finance professionals.
Following its review into high-cost credit, the Financial Conduct Authority (FCA) has presented recommendations to “fundamentally reform” fees and charges on bank overdrafts, rent-to-own contracts and store and catalogue credit.
It estimates the changes to overdraft fees alone – which include immediate plans to stop classifying overdrafts as “available funds” and make the associated costs clearer – could save consumers up to £140m a year.
While consumer groups such as Which? have questioned the efficacy of the proposals, East Anglian finance organisations have broadly welcomed them.
Becca Cotton, project manager at credit union Eastern Savings and Loans (ESL) in Ipswich, said many of its customers had fallen foul of high-interest loans, with overdraft charges a particular problem.
“We do loans of up to £7,500 which has helped customers to clear their overdraft – this builds their credit rating back up and gives them more money in their pocket to improve their situation,” she said.
“It is great the FCA want to do something about it, and we hope they will.”
Rachel Springall, a finance expert at financial advice service Moneyfacts in Norwich, said the clampdown on overdraft fees had been “a long time coming”.
She said: “Customers who use their overdraft for the convenience of short-term borrowing have likely paid the price in fees over the years, particularly due to the rise in usage fees versus standard interest.”
Ms Springall added that a discrepancy still remained between flat fees and interest rates on overdrawn balances, with the former often costing borrowers disproportionately more.
Andrew Hagger of Moneycomms in Lowestoft agreed that an overhaul of bank overdrafts was well overdue.
“In recent years the introduction of fixed monthly or daily fees has seen the cost of authorised overdrafts soar – particularly for smaller sums and for short durations,” he said.
“Banks say daily fees easier to understand – that may be the case but for many people it can also prove to be far more expensive than a standard interest rate tariff without a fee.”
Rent-to-own contracts, which more and more consumers are using for household appliances, will also be subject to an intervention by the FCA, which believes the problem could be serious enough to warrant a price cap.
Ms Cotton said community credit unions like ESL, which covers Norfolk, Suffolk and Cambridgeshire, offered an alternative to such high-cost borrowing – but too few consumers know they are an option.
“It is wonderful that they [the FCA] are highlighting the problem but they are not highlighting the alternative,” she said.
In its original review the FCA set out a series of commitments to “support greater consumer access” to alternatives to high-cost credit.