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What are Other FCA Caps on the HCSTC Market besides Payday Loans?

- by Becky Hall
Guide: The Effects of Payday Loan Regulation – Chapter 11

The FCA has placed strict regulations on payday loans market. But what about the other types of High Cost Short term Credit (HCSTC)? Cashfloat explores other FCA caps on the HCSTC market.

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The other FCA’s Caps on the HCSTC market: What are they?

One of the main concerns with placing strict caps on the HCSTC market was that many more applicants would be declined, and they would turn to similar, non-regulated products instead.

For example, if a person applies for a loan to buy a dishwasher, being declined may push him towards catalogue credit or rent-to-own. Instead of helping this consumer, the regulations are just pushing him into another high-cost credit solution.

However, as we saw in the previous chapter, this has not happened. While a small proportion of declined applicants did, in fact, turn to other sources of credit, the majority either sourced the money elsewhere or simply did without.

Many activists have pushed for the regulations and caps on the HCSTC market to be extended to other non-mainstream credit markets. Is there a case for this? As part of their report, the FCA looked into several of these options and analysed whether similar caps would be an effective option. In this article, Cashfloat, a payday express loan company, explore the FCA’s other caps on the HTSTC market.

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Below we discuss some of the types of credit examined in the FCA’s report.

Catalogue Credit

This type of credit, also known as home shopping catalogues or mail order, is becoming increasingly popular. A customer orders an item from a catalogue, often through an agent, and pays for it through weekly or monthly repayments. Often, there is an interest-free period, so if the customer pays it all off within that time, they do not pay any interest.

In the UK, approximately 7.6 million consumers have outstanding catalogue credit debt, with a median of £1,300 each. Around 30% of these arrangements go into arrears.

What has the FCA found regarding this market? There were some serious issues with the lack of transparency in the contract. There were some.

Here are some of the issues brought up:
  • Items are priced considerably higher than high street prices
  • Lack of adequate credit and affordability checks
  • Expensive add-ons such as insurances, a longer warranty and payment protection
  • Lack of transparency of the terms in the contract
  • Expensive rates charged after the 0% interest period ends
  • Interest charged retroactively from the time of purchase
  • Very high default and arrears rate
  • Lack of flexibility with struggling customers

The FCA is concerned about this market and plan to investigate it further.

Rent-to-own (RTO)

What do you do when you need something but can’t afford to buy it outright? You rent it at a fairly high price for a set term (usually 1-5 years), and by the end of it you own the item. This is often used for larger household appliances such as fridges and washing machines. Here is an example case to illustrate how Rent-to-own works:

Tracy urgently needed a new washing machine. She didn’t have the money to buy one outright, and so she decided to take out a Rent to Own loan. She got her new washing machine for the very affordable cost of £10.50 a week, with only a £55 charge for delivery and installation. It sounded reasonable.

The real cost

However, looking at the total costs gives a troubling picture. The weekly payment seems reasonable, but it will be continuing for 156 weeks – three years! While the washing machine itself costs £769.26, Tracy will be paying a total of £1,638.00 – more than double! This is more expensive than paydayexpress loans are, under the current caps.

other FCA regulations - cashfloat

Furthermore, the 400,000 people in the UK with RTO debt don’t usually just have one contract – the median number of products is 8, and the median outstanding debt is an eye-watering £4,300.

It’s not just the price. In their report, the FCA highlighted some other issues with RTO, such as the relatively high repossession rate. To make things worse, the items often lose value or need repairing before the repayment period is up, which often leads to further borrowing. To top it off, consumer groups have suggested that RTO retailers are offering inflated prices for goods and charging compulsory add-ons.

The FCA do see a need for reform in this market, although it has been pointed out that for many consumers, this is the only way they can buy these essential household goods. When the FCA placed caps on the market for quick payday loans, many high-risk consumers lost access. If caps were to be placed on the RTO market, what would these people do?

Another worry about placing caps on the interest rates is that the firms may just increase the original post of the product instead. So, while the FCA is concerned about the RTO market and does plan to look into it further, simply extending the caps on the HCSTC market to cover RTO would not work.

The FCA puts other caps on the HCSTC market - cashfloat

Home Collected Credit

Also known as doorstep loans, these are usually given in cash and repaid in weekly repayments directly to the lender or their agent. They come to the borrower’s house to collect it. 1.6 million UK citizens had this kind of debt at the end of 2016, with a total value of £1.1 billion. These figures indicate that this is a significant market and as such needs a thorough investigation.

Consumer groups have voiced their concerns about how adequate affordability checks were, as lending to consumers who were already struggling with repayments can have a very detrimental effect on their finances. To make matters worse, some agents are reportedly pushing customers into rolling over their loans or to take out a new one instead of settling on a new repayment plan. This can easily propel a customer into a cycle of debt from which it is very hard to escape.

The fact that the collections are done in person has both advantages and disadvantages. The lenders claim that this allows borrowers to explain their difficulties in person. So the agent can suspend or reduce payments for them. However, there have been reports of intimidation or other ways of influencing borrowers into making decisions that may not be best for them.

The statistics show that the levels of outstanding debt from home-collected credit is increasing. Worryingly, borrowers tend to be lower earners, and in a particularly vulnerable sector of society. The FCA is therefore concerned about this sector and has resolved to investigate it thoroughly in order to make it safer for the consumers while keeping in mind that this may be the only legal source of credit for some of the borrowers.

Guarantor Loans

If a person has a bad credit history (or none at all), lenders may be reluctant to take the risk of lending to them. One way of obtaining a loan is to use a guarantor. This is a person who takes on personal responsibility for the loan, should the borrower be unable to repay. In 2016, roughly 90,000 guarantor loans were signed, with a total value of £29.8 million. There have been some concerns raised about this type of loan.

Firstly, the guarantor is often not fully aware of the extent of their responsibility towards the loan, and do not usually have an adequate cooling off period in which to consider the potential ramifications of acting as a guarantor.

Furthermore, there is often a lack of understanding and flexibility with regards to defaulting on payments, with guarantors frequently being asked to make payments without much notice. One final issue that was raised was the relationship between the borrower and the guarantor – a recommendation was made that the lender should ensure that there was no coercion or strong influence involved in getting the guarantor to agree to their role. Cashfloat offer fast loans no guarantor with competitive interest rates.

The FCA has acknowledged the need to monitor this market. But as it is a relatively new one, they are unlikely to take action soon.

What can we conclude on other FCA caps on the HCSTC market?

There are other options in the sub-prime credit market, but they have not become far more popular since the regulations were introduced in the payday loan market. After analysing the FCA’s caps on the HCSTC market, with each market, the general conclusion of the FCA was that simply extending the caps on the HCSTC market would not work. Instead, they plan on investigating each sector thoroughly. This is in order to implement changes that would protect consumers but not remove access from those who truly need it.

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Becky Hall
Born a writer, Becky Hall figured she would use her talents productively. So, she became a content writer for Cashfloat, and she loves it. A Business and Accounting graduate, Becky scored high, graduating with a first, but also acquired a professional bookkeeping certificate in addition to her main studies. She always dreamed of becoming an accountant, something she still may achieve, but in the meantime, she is helping to break open a new industry of honest and ethical lending. Becky spends her spare time at the piano, with classical music her favourite choice, but will play jazz to keep her baby happy. Nowadays, though, she doesn’t always have much time; Cashfloat has a revolution to make.
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