Following their implementation of a cap on payday loans, the Financial Conduct Authority (FCA) has today announced plans to tackle other high-cost debt. Their proposals include a possible cap on rent-to-own as well as some welcome help when it comes to overdrafts.
While the newly proposed measures will have to undergo consultation before they can be implemented, they offer some hope for customers struggling with debt through overdrafts, rent-to-own schemes, store cards or home-collected credit. "High-cost credit is used by over three million consumers in the UK, some of whom are the most vulnerable in society," said Andrew Bailey, chief executive of the FCA. With so many affected, this is clearly an area that deserves attention.
Currently, the FCA's primary aim when it comes to overdrafts will be to make consumers more aware, by requiring mobile alerts and introducing online tools. There's also scope for more radical options such as banning fixed fees.
"It has felt like a long time coming, but the FCA's proposals to crackdown on overdraft charges is a welcome start, especially as it could save borrowers up to £140 million a year," commented Rachel Springall, finance expert at moneyfacts.co.uk. "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."
While many banks have already adjusted their overdraft structure to make things more transparent for their customers, firms still made an estimated £2.3 billion in revenue from overdrafts, with 30% of this coming from unarranged overdrafts. Additionally, those banks charging flat fees instead of interest have increased these fees, as Rachel found that "the average monthly usage fee on arranged overdrafts has shot up from £4.69 five years ago to £6.75 today."
Even without this increase, flat fees more often than not end up being more expensive than interest-charging overdrafts. Rachel gives the following example: "if customers were in the red by £300 for 15 days with the Santander Everyday Current Account, it would cost them £15 in charges (based on a usage fee of £1 per day). However, if they instead had a 1st Account with first direct, they would have only paid £0.33 in fees (based on 15.9% EAR)."
Anyone who ever dips into their overdraft would do well to compare accounts with overdrafts and find one without a flat fee – some might even come with a fee-free buffer which could see customers avoid additional debt altogether. Remember that the FCA's proposals won't be implemented overnight, and that the sooner you can deal with debt, the better.
Aside from overdrafts, the FCA is also looking to reform rent-to-own. "High street shoppers will be very familiar with rent-to-own by now," said Rachel. "This sector may help consumers who can't afford to spread the cost of a purchase on a short-term credit card and therefore opt for a rent-to-own arrangement instead, but ultimately these customers can be ripped off by paying back well over the value of the item.
"It's shocking to imagine some customers paying £1,500 for an electric cooker which could be bought outright for just £300. Clearly customers turning to these companies need to be protected, and hopefully we will see some changes introduced by April 2019." One of the main changes proposed is a cap, as has been implemented on payday loans. Other ideas include banning extended warranties, which could save the estimated 400,000 rent-to-own customers up to £7.7 million per year.
The FCA will furthermore look into tackling the home-collected credit sector, as well as catalogue and store cards. Proposed changes could save consumers up to £34 million and £27.5 million respectively, according to the FCA's own research. Rachel added: "If the FCA can force those companies to help customers get out of persistent debt it could make a world of difference, and could reduce the stigma felt by those who don't feel comfortable asking for help."
Not everyone has the luxury of waiting for the FCA to step in. If you're currently dealing with overdraft debt, a credit card with a deal on money transfers could give you some breathing space. And remember that using a 0% purchase credit card to pay for a £300 electric cooker could very well end up cheaper than using rent-to-own. Finally, those struggling with debt and not sure where to start may want to consider contacting a debt charity for help.
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