When used well, credit can be a viable way to help make ends meet and balance the books – but the problem comes when that credit is of the high-cost variety. Things like payday loans are known for charging extortionate rates of interest and can leave people trapped in a cycle of debt, and so the regulator has announced that it'll be taking a closer look at the sector to see what else can be done to protect consumers.
The Financial Conduct Authority (FCA), the UK's financial regulator, is seeking evidence and feedback to further inform its work on high-cost credit, including a review of the payday loan price cap. The latter, while introduced almost two years ago, doesn't appear to be having a particularly significant impact, with there clearly being more work to do.
It isn't only payday loans, either. Other forms of high-cost credit are thought to be just as damaging, including the likes of catalogue credit, pawnbroking, logbook loans and some rent-to-own arrangements. Then there are the types of credit that may be high-cost to certain customers, or if they're not used properly, which can extend to things like credit cards, overdrafts and car finance.
In order to get a fuller picture of how this form of credit may be impacting consumers, the regulator is going to delve even deeper into the sector. It wants to look at how such credit is used and whether it causes detriment – and if so, to which consumers – and on the basis of that it'll determine if further interventions are needed.
It'll take a particularly close look at the payday loan cap to see whether it should be changed, and it'll also look at overdrafts, to see if there are consumer protection and competition issues (including the nature and level of charges) that need to be addressed.
"This is a significant moment for our approach to consumer credit regulation as we continue to ensure that this market works well for consumers," said Andrew Bailey, chief executive of the FCA. "As an organisation, we have already taken many steps to address the risk of consumer harm by putting in place new rules for high-cost short-term credit firms and taking action against non-compliance across all credit markets.
"We have come up to the point of reviewing the cap on payday lending, making now the right time to take a broader view of the issues around high-cost credit, including unarranged overdrafts, and to consider whether our requirements remain appropriate."
The decision to focus on this sector of the market has been welcomed by the industry, particularly given that high-cost credit is typically used by those who are financially vulnerable. "The cost and design of these products can trap people in cycles of repeat borrowing which deepens their financial difficulties," said Mike O'Connor, chief executive of StepChange Debt Charity.
"We think further FCA intervention is necessary to address the problems that still exist in the [payday loan] market, but let's not forget that it's selling to people who lack other options. The Government must support the financially vulnerable through the provision of better alternatives to high-cost short-term credit."
Mike added that he welcomed the fact that the regulator acknowledged that overdrafts can act as a form of high-cost credit, and hopes it could lead to a cap for unarranged overdraft fees – ideally as quickly as possible. "The need for caps in other markets has already been accepted, as with payday loans and credit cards," he added. "There is ongoing consumer detriment from overdraft fees. Unnecessary delays in action risks further harm to financially vulnerable consumers."
It could take a while before the regulator delivers its final response to the study, but that doesn't mean you have to be at the mercy of high-cost credit until then. If you feel you have to turn to credit, look to cheaper ways of borrowing – such as a 0% purchase credit card or a low-rate personal loan – and be on the ball with your current account so you don't end up with hefty fees.
Make sure your credit score is up to scratch before you apply for anything, and if it could do with some sprucing up, read our guide to get started. And, if you're finding that you're already struggling with debt, don't go it alone. Talk to your lenders to see if there's anything that can be done, and seek support from charities like StepChange or Citizens Advice – there are always people who can help.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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