The FCA found that one in six people with debt on credit cards, personal lending and car loans were in financial distress. Photograph: Matt Cardy/Getty
The financial watchdog has announced fresh measures to protect consumers from spiralling debt as official data showed that borrowing through credit cards, overdrafts and car loans has topped £200bn for the first time since the global financial crisis. The Financial Conduct Authority said it was cracking down on the high cost of overdrafts and reviewing the booming car loan market.
The regulator’s latest intervention came as credit ratings agency Moody’s also warned about the growing household debt mountain, saying that some borrowers would struggle to repay their debt as the economy weakened and inflation ate into their salaries.
Unsecured consumer credit, which includes credit cards, car loans and overdrafts, peaked in the autumn of 2008 – just as the banking crisis was taking hold. It fell in subsequent years, but has been rising again since 2014 and is now in touching distance of the pre-crisis lending boom.
Data from the Bank of England on Monday showed that it grew by 10% in the year to June, to almost £201bn. The last time outstanding debt was above £200bn was December 2008.
In a paper published on Monday, the FCA said that one in six people with debt on credit cards, personal lending and car loans – 2.2 million – were in financial distress. They are more likely to be younger, have children, be unemployed and less educated than others.
As households grapple with rising living costs, charities and policymakers have raised concerns that consumers are increasingly turning to loans amid worrying signs of a return to reckless lending by the banks.
Last week the Bank of England’s head of financial stability, Alex Brazier, accused lenders of “dicing with a spiral of complacency” and warned that lending standards “can go from responsible to reckless very quickly”, and that this posed a risk to the economy.
The TUC has predicted that unsecured debt per household will hit a new all-time high of £13,900 this year. The TUC’s general secretary, Frances O’Grady, said the latest data from the Bank laid bare the financial strains on households. “Wages are still lower than before the financial crisis, so it’s no wonder that families are being forced deeper and deeper into debt. If working people don’t see extra cash in their pocket, borrowing will continue to spiral,” she said.
The FCA is targeting “fundamental reform” of charges for unarranged overdrafts. According to the consumer group Which?, people needing as little as £100 can be charged up to 12.5 times more by high-street banks than is legally allowed by payday loan companies.
Andrew Bailey, chief executive of the FCA, said: “High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers.”
A cap on the charges that can be levied by payday lenders introduced in 2015 will remain in place after the FCA said it had “delivered substantial benefits to consumers”. Some 760,000 borrowers were saving a total of £150m a year.
But Bailey said there was more to be done. “In particular, the nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option,” Bailey said.
The FCA highlighted concerns about several other types of lending, including:
- Rent-to-own loans used to buy white goods such as fridges, which left customers particularly vulnerable
- Home-collected credit and doorstep lending
- Catalogue credit, where shoppers can pay high rates of interest outside interest-free periods
- Car loans. The FCA will look at whether firms are lending responsibly and are managing the risk that car prices could fall
The Bank of England’s latest figures on consumer credit showed the pace of growth easing off slightly in June, with net borrowing rising by £1.5bn after a £1.8bn rise in May.
But Ruth Gregory, UK economist at the consultancy Capital Economics, said the fact that consumer credit was up by 10% on the year would be concerning for the Bank. “This will clearly do nothing to allay policymakers’ fears that unsecured credit is growing too quickly,” she said. “But this at least suggests that households remain confident enough in their financial position to increase borrowing to help smooth consumption, as their real incomes are temporarily squeezed by higher inflation.”
In signalling a clampdown on unauthorised overdraft charges, the FCA is going further than the Competition and Markets Authority, which, in its review of the sector last year, called for more transparency.
Gareth Shaw, a money expert at Which?, said the FCA “must act swiftly to crack down on these exorbitant fees and to restrict unarranged overdraft charges to the same level as for arranged overdrafts, as further delay will only cost consumers”.
Rachel Reeves, the Labour MP who has campaigned for action on overdraft charges, said the FCA needed to come up with solutions. “No one in debt or financial difficulty will find it easier to make ends meet just because a report confirms the problem. They need action to get rid of these charges.” Reeves is now chair of the business, energy and industrial strategy committee.
The FCA said its cap on payday lending charges – interest and fees are now restricted to 0.8% per day of the amount borrowed – meant lenders were much less likely to lend to customers who could not afford to repay .
The Money Advice Trust, which runs the National Debtline, said the intervention in payday lending had worked.
In April, the FCA announced measures to help people in persistent credit card debt, including the waiving or cancelling of interest and charges for customers who cannot afford to curb their liabilities through a repayment plan.
UK Finance, the body representing the industry, said its members were committed to lending responsibly. “With the current prudential regulatory focus on rising consumer credit, it is understandable that the FCA will also want to look closely at firms’ assessment of how customers can repay if economic circumstances change,” said Eric Leenders, head of personal lending.
In its update on the UK credit market on Monday, Moody’s downgraded the outlook on bonds backed by credit card customers, buy-to-let mortgages and car loans. Greg Davies, Moody’s assistant vice president, commented: “Household debt is high and still growing, leaving consumers vulnerable to an economic downturn, while higher inflation, weaker wage growth and levels of indebtedness leaves those in lower-income brackets the most exposed.”