What is Consumer CreditConsumer credit - what is it?
In April 2014, when the UK Financial Conduct Authority ("FCA") took charge of the consumer credit regulatory process from the Office of Fair Trade ("OFT"), it pledged to tackle inferior credit practice in order to safeguard consumer protection and re-establish consumer trust in the industry. OFT's historic ease of regulatory regimes and licence system, combined with minimum oversight, challenged the FCA to decide to what degree and how quickly it had to deviate from the OFT's practical consumer credit regulatory approaches.
The government proclaimed a maximum limit regulation for payment creditors under which consumer, payment creditors and other suppliers of high-priced short-term credit would use to reduce the credit charges and would never have to reimburse more than twice what they had initially used. EZV suggested that since the ceiling was set, consumer payments have been lower, more frequent and punctual, and less likely to require charitable assistance.
Can it therefore be assumed that the FCA will expand the extent of its interventions in high-priced short-term credit pricing schemes in the near term? It examines the UK regulator's approaches to monitor ongoing indebtedness and the impact this has had and could have on the consumer credit sector.
A number of different government agencies heavily regulate the UK consumer credit sector and companies working in it are now governed by high levels of supervision and conformity standard. Consumer Credit Act (the "CCA") is the most important legal provision governing consumer credit. CCA requires creditors (and any individual exercising the creditors' right and obligations) to comply with various requirements to grant creditors the right to rescind; to properly record credit contracts, warranties and indemnifications; to furnish information under the agreement, such as bank statement, notice of delay and payment order; to safeguard consumer purchases of goods or services from a related vendor; and to refrain from taking certain measures of repayment or execution until required form of post-contractual notice has been provided and required deadlines have expired.
Credit companies are also governed by privacy, counterterrorism and moneylaundering laws such as the 1998 Act on Privacy and Crime, the UK Proceeds of Crime Act 2002 and the UK Bribery Act 2010. In practice, before the transfer of regulation systems from OFT to FCA, consumer credit institutions were only obliged to meet the particular legislative needs of the current law.
Companies were not explicitly required to concentrate on, or even take into account, client results. The consumer credit businesses' operating model was largely focused on maximizing profits in line with legal requirements. A number of stricter steps were taken following the changeover of regulation systems from the OFT to the FCA to consistently move away from credit practice, which enabled companies such as daily payer Wonga to retain a prestigious annual percentage rate of charge of 5.853% in 2013.
EZV has made it clear that it regards non-standard financing as "risky" business and as such provides particular funding for intensive supervision of companies in this area. The Handbook contains a specific section on consumer credit (the "CONC" source book), which contains policies and guidelines relating, among other things, to physical transportation, pre-contractual responsibility and disclosures, affordable and credit ratings, dealing with sensitive clients, communication with clients, late payment, non-performance and collection, credit counseling, and statute-barred debts.
This set of regulations and guidelines reflects the overall objective of the FCA in its consumer credit regulator approach: consumerism. "in order to ensure an adequate level of consumer protection". At the end of September 2015, the UK regulator's system to protect the consumer against unfair contract term and practice was amended as part of the biggest ever process of consumer law reform and consolidation3.
Among the main changes was a broad interpretation of the concept of'consumer', which includes persons who act for a purpose which is entirely or mainly outside their sphere of commerce, economic activity, crafts or occupation. Among other things, the legislation now provides that an unlawful clause in a consumer agreement (a concluded agreement between a seller or supplier and a consumer) is not legally enforceable on the consumer.
In 2015, the Competition and Market Authority imposed further obligations on "high-priced short-term lenders", requiring them to be listed on at least one comparative pricing website and to make available to the borrower a synopsis of the ultimate cost of their credit. EZV's policy goal, consumer protections, has proved to be particularly important when one considers that the daily payer's account holders have overwritten the customer's debts a dozen consecutive years, so that the ultimate amount to be repaid was significantly higher than the initial credit amount.
The FCA responded by introducing the above-mentioned ceilings on creditor charges and charges and the stringent policy of ensuring that clients never repay more than twice their initial credit amount. Credit companies have had to adapt to a much more complicated regulatory framework than was previously the case under the OFT's control.
An entity requesting approval to carry out consumer credit must now deal with a long set of rules and regulations in the FCA Manual, the UK Securities and Exchange Commission's UK Securities Manual, the UK Securities and Exchange Commission's UK Securities and Exchange Commission's UK Securities and Exchange Commission's UK Securities and Exchange Commission's UK Financial Markets Act 2000 ("FSMA") and the UK Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. In addition, from 2018 the FCA has acknowledged that the British Senior Managers regime will be expanded to all segments of the finance sector (including consumer credit companies).
Aim of the law is to increase the behavioural standard for all in the area of finance related activities. Every violation of existing law, regulation, rules and/or contract obligations may lead to investigation, information collection, professional appointments, government censorship, fines, discipline and/or execution.
This could also affect the enforcement of the credit contracts that underlie a company's portfolio of debts and the risks that the FCA could withdraw or defer its approval. Indeed, the FCA has taken public actions and placed conditions on a number of well-known FIs, other FIs and public sector creditors.
By 2014, the FCA demanded that the payment day creditor Wonga should compensate its clients for dishonest and deceptive collecting methods, creating a business case for companies to grant injured clients monetary damages. Indeed, the proactive ombudsman's involvement in the investigation and resolution of client claims against companies subject to regulation is a further step towards regulation and, to a certain degree, even oversight of the commercial conditions of a consumer credit contract.
Tighter regulation of sub-prime and daily credit spreads - both in relation to the lenders' viability and the appeal of entry itself - should not be overlooked. A traditional paying day lender's approach is to provide short-term, high-yield mortgages with high charges to lower-value customers.
Although sub-prime creditors also specialize in providing financing to low -risk customers, the credits they provide are usually longer-term, low-interest credits, often repaid in installments and without the high charges associated with the traditional payment day lending markets. In 2014, the FCA forecast that the increased regulations in the consumer credit segment would significantly affect the payment day lenders' businesses and that 99 per cent of payment day creditors would be taken out of work.
In November 2016, she responded by reporting that 800,000 fewer individuals had received a daily allowance since taking over the regulations of the industry. Several of the major subeprime financiers have and still can profit from the niche created by the decrease in payment defaulters. Recently, however, mortgage providers such as Provident Financials have themselves complained of experiencing pecuniary problems as a consequence of an (to a large extent) ever more demanding regulated world.
While consumer protection groups can ring in the perceptual end of the payment day's prime, these creditors, together with sub-prime creditors, are nevertheless the main source of legitimately mandated, regular credit for lower creditworthy individuals. Thats raising the question: if stubborn indebtedness settlement would ultimately end the payment day and sub-prime economies together, where would these buyers turn for credit?
Andrew Bailey, Chief Executive of the FCA, recently voiced his concerns about the mere number of UK citizens who need credit to make ends meet and recognised that credit availability is a need in a global environment where returns can be irregular. Therefore, the focus on consumer protections must be reconciled with the need for non-standard creditors to introduce appropriate debt recovery procedures for those customers with bad credit and/or a history of overpayment.
Borrower return on investment and return on investment depend to a large degree on their repayment rate. Too much regulation in favor of short-term consumer protections reduces the possibility of recoveries and may make it more difficult for consumer credit institutions to solve poor consumer credit.
Its feedback statement even pointed out that it was now concentrating tightly on other high-risk areas in consumer credit, rent-to-own, home loans, catalog loans and overdraft. Increasing regulations may significantly restrict atypical credit in the near term, as they may place an additional burden on lenders' finances and cause them to reassess their businesses or withdraw completely from the sub-prime area.
A stronger regulator's emphasis on short-term high-cost lending in conjunction with the UK's business environment (i.e. labour freeze and imminent interest hikes ) may have a negative effect on credit repayment ratios and the challenge to the sub-prime markets may become more acute in the near future. Therefore, it is likely that we will begin to bring more sub-prime financiers into difficulties, such as Vanquis Bank.
So far, the FCA may not have found any reliable proof of a connection between regulation and the use of illicit moneylenders. However, if the major actors in the sub-prime credit markets do not succeed in reconciling their business needs with rising regulation requirements, the consumer protection regime may paradoxically lead to increased consumer credit concerns.
Consumer with lower credit ratings - who may already be in distress - may face fewer credit choices and be temptated in the long run by unauthorized creditors.