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Consumer credit today
FCA has been regulated by FCA on credit for consumers for almost four years and remains a core industry for FCA. Our research examines the development of credit for consumers to make sure that credit is payable and durable. Recognising that credit for consumers is not a single entity we intervene in certain areas such as credit card, overdraft and rent-to-own credit.
There is no need to remember what an important part the members of the Finance & Leasing Association (FLA) are playing in business and social life. I' m gonna concentrate on credit for consumers this evening. Mr President, I will begin with some very comprehensive remarks, then go into what we are doing in the area of credit for consumers, and finally raise some points about our oversight.
The biggest thing that has probably occurred to the FCA in the first 5 years of its existence is the regulations on credit for consumers, which it adopted in 2014, around the date of its first anniversary. As a result, around 34,000 companies joined the overall number of FCAs, from around 24,000 to around 57,000.
Actually this is a net number, because in the last almost 4 years about 36,000 credit companies came in and nearly 2,000 went out. Well, I think I can say for sure that not all these companies are FLA, not quite so much - if they were, you'd be looking for a bigger location this evening.
However, we have also seen significant increases in credit to consumers in recent years, especially among younger consumers. Reassuringly, credit expansion was not drove by the weakest overproportionally. Recently we released another important paper that we did with Bank of England employees asking: "Who is pushing the expansion of credit for consumers?
Our analysis was of credit bureau credit report for 1 in 10 British users, which covers most forms of credit and dates back 6 years. There were three key conclusions: credit expansion was not pushed by those with the lower credit scores; it was mainly pushed by those without mortgage; and individuals stay in debt longer than the product-level figures suggest.
As an example, credit is taken out on credit with 0% credit card offerings and car financing is focused on those with higher credit ratings. Also, engine financing and 0% credit card spending have caused much of the increase in credit since 2012. On the other hand, those who borrow on interest-bearing credit lines tended to have lower credit ratings.
You know that credit to the citizen is not a mere one-way street. These are a number of different marketplaces. Reassuringly, credit expansion was not drove by the weakest overproportionally. How I will describe further, although the high costs credit market is small in relation to the overall credit market, and although it is not fast moving, as a behavioural market maker with consumers' responsibilities I conclude from our work that the key themes and concerns are in these credit marketplaces.
Businesses must make sure that all loans they grant are payable and durable, regardless of whether they are costly or not. However, it is important that companies protect themselves against this exposure by having in place efficient credit rating strategies and processes, as well as credit rating mechanisms, which include price sensitivity. While we want companies to have appropriate room for manoeuvre to make judgments based on personal considerations and taking into consideration the creditor' s exposure, we also want to establish clear benchmarks.
Obviously, assessing affordable prices can never be an accurate science, and things will come to pass that were unpredictable, which is why we want companies to supervise client account balances and act promptly when there are indications of real or possible fiscal difficulty, and handle clients who are in delay or in difficulty with leniency and due heed.
Credit for consumers is an important part of our regulatory and political agenda, as we remain working on topics that we consider to be relevant to the sector. Today we announce the implementation regulations for the changes resulting from our credit cart survey. Our work has shown that about 5 million individuals have genuine difficulty in settling their credit balances, and credit lines have become a resource for long-term costly debts for which they were not made.
Companies cannot have an incentive to address this as these clients are profit-making. Therefore, we have implemented a number of policies aimed at reducing the number of persons with ongoing credit cards indebtedness, giving greater individual oversight over increasing credit limits, and ensuring that companies step in to help clients with ongoing indebtedness, as well as the ability to move to lower cost credit and show leniency.
Let me emphasise that credit plays a part, e.g. in smoothening unpredictable income or buying substantial goods. We have debated whether we should be harder by demanding measures against credit cards debts earlier in the consumer exposure series.
However, there is a sensitive equilibrium between the requirement that action must be taken earlier, and the associated impairment of people's card use, and the fact that they leave the card not too late and the escalation of indebtedness issues. Do companies take the right actions to secure responsible lending, in particular through an appropriate assessment of whether prospective clients can buy the relevant products?
Are the information provided by companies to prospective clients sufficiently clear and understandable for them to be able to identify the associated threats and make sound choices? Do companies manage the downside exposure to assets and ensure that they value the downside exposure appropriately? Concerning high-cost loans and the supply of credit commodities to those who are less affluent and with lower creditworthiness, I would like to emphasise that credit plays a part, e.g. in smoothening unpredictable income or buying vital goods that would otherwise turn out to be too high.
Nevertheless, we are worried about the costs and conditions of such a loan and the willingness to over-indebtedness. If we can prove that consumer access to the market is not working well, we are ready to interfere and suggest new regulations. It presents a case for possible market entry in a number of countries, but also for recognising the limitations of what can only be accomplished through conventional regulation.
Specifically, we will try to interfere in certain parts of the markets to promote alternative to high-cost loans, in particular those from the mid-cost markets. Approve, monitor and implement our current policies - we have already taken significant actions when companies have failed to comply with our policies, which include credit ratings and fair treatment of clients.
If we can prove that consumer access to the market is not working well, we are ready to interfere and suggest new regulations. It is in the interests of the consumer that we can foster competitiveness and foster consumer interest by promoting new types of businesses that better benefit the consumer and by dealing with regulations that could best prevent the functioning of the market.
And we can work with others to affect demands in the marketplace by considering what is driving demands for high-cost credit, what options are available and how the consumer can develop fundamental economic resilience. What is more, we can work with others to affect demands in the marketplace by considering what is driving demands for high-cost credit, what options are available and how the consumer can develop fundamental economic resilience. How can we do that? On the basis of our work, we are considering whether we should take measures to streamline charging to make sure that it is clear and better reflects the real use and roll of unregulated arrears in today's competitive environment.
FCA has a work program for all companies that offer other types of high-cost loans. Companies are now more visible in presenting the present value of goods, the amount of interest payable and the overall costs to the customer. And we have seen how companies have changed their businesses in reaction to our concern - how they evaluate affordable products and what measures they are taking to help those in long-term fiscal difficulty.
When we see more cases of damage to customers, we will ask companies to put things right for all affected people. Furthermore, we are concerned about the costs of using this kind of credit, especially if additional items are used. As part of our high-cost credit review, we are collecting further insights and will present our findings in May.
With regard to the high-priced credit product portfolio, we examine why relatively inexpensive, low-priced, lower-risk credit lines are not more widely available, although we accept the importance of credit assessment. There have been obstacles to the availability of alternative solutions and we have thought about what could be done to remove them.
Expanding the available choices will help to mitigate the risk of bad results for users, in particular by decreasing the number of people who pay more for a given item than an alternate supplier. FCA has made a number of pledges on initiative to help improve better accessibility for users to credit other than high value loans.
These include working with the federal authorities to address our concerns about welfare renters and others so that they can safely provide their customers with signage on alternative high street loans. FCA will also emphasise best practices that reduce the need for expensive credit, such as the provision of household appliances when renters move into a new home.
However, I am not sure that we currently have a suitable system in this particular county for the sustained provision of such loans. It is important to have clear regulations, and there is a mismatch between the Consumer Credit Act and the remainder of our competences. Mutual communications with the FCA are too tricky for small businesses, the vast majority of our 57,000.
Consequently, it is difficult for small businesses to pinpoint proposed regulatory changes and there is a genuine danger that they will be disheartened and exit the mart. Bigger companies with committed regulators can thus benefit from a clear edge over their competitors. DC A should try to prevent being seen as a problem solver for a whole range of socio-political questions, but at least in some areas we should try to cooperate with those who have more immediate responsibilities.
Companies will be managed as groups or corporates with similar businesses. We shall periodically reach an agreement for each company profile on the main consumer or market risk represented by the Group, on our work program to reduce these risk and on the measures we ask companies to take.
Contacts will be maintained to make sure that companies comprehend our views and the measures we seek to take. Lastly, on the law on credit for consumers, we are examining the adequacy of the rules maintained and whether they offer the kind of consumers policy we consider appropriate today. Honestly, I think the credit dilemma we are now seeing is much larger than the one the EZV 2014 saw when it took over.
It also reflects how important consumer credit is for our societies.