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The FCA dilemma over consumer credit

Since April 2014, when it took over regulation of consumer credit, the UK’s Financial Conduct Authority (FCA) has been investigating financial products that it argues pose high risks in the context of its consumer protection remit.
High street payday lender storeBy 2015 it had already imposed a cap on interest rates and fees on short term loans, known as payday lending, and this will be reviewed in the second half of 2017.
However, the ongoing investigation has also been looking at retail bank loans, arranged overdrafts, credit cards and home-collected credit, catalogue credit, some rent-to-own, pawn-broking, guarantor and logbook loans.
This has encompassed not only charges and interest rates but also competition issues in co-operation with the Competition and Markets Authority (CMA).
Whether there will be further regulation on lending businesses remains to be seen.

The potential effects on business

The FCA is concerned about the affordability of credit and about borrowers’ ability to repay in the context of high interest charges.
In March this year it proposed new rules to help credit card customers in persistent debt, defined as those who have paid more in interest and charges than they have repaid of their borrowing over an 18-month period. Proposals include options for repaying the balance more quickly, for example by reducing, waiving or cancelling any interest or charges.
Jonathan Davidson, Director of Supervision – retail and authorisations at the FCA, said in a speech in March: “the use of consumer credit in the UK has become so ubiquitous that 60% of adults now have credit cards and 40% are defined as overdraft users…… borrowing in the UK is simply more common, and more socially acceptable, than in many other large economies.” He added that “use of debt to meet unexpected emergencies is also widespread.”
In his view this was a risk that had to be managed. He argued that in some cases firms were making profits even when customers defaulted on loans and said that fair treatment of customers should be a core part of lenders’ business philosophy.
We would argue that some lenders are lending with the intention of triggering a default and incorporating terms that make a default highly beneficial to the lender.
Despite any moral or ethical issues the FCA is dealing with, its remit is consumer protection in what is essentially a free market consumer-driven economy in which businesses and their success depend on the sale of their goods and services in a highly competitive environment.
This applies particularly, but not only, for those businesses, many of them SMEs, that cater to the retail market.
Often, their sales success will depend upon the consumers’ ability to access credit to make purchases, for example for larger items such as household white goods and vehicles.
Arguably, limiting the supply of credit to consumers would make it more difficult for these businesses to survive.
So, is there a fundamental conflict at the heart of the FCA’s existence between ensuring fair charging for consumer credit and the needs of businesses operating in an economy that relies on credit being available?

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Access to skilled workers and the EU referendum

worried businessmanA key issue for business in the June referendum on whether the UK should remain in or leave Europe is to consider the consequences that a “leave” vote could have on the free movement of labour.
Restricted access to skilled workers in the absence of suitably qualified UK candidates could have a big impact on small business’ ability to prosper and grow.
The two main issues are availability of skilled people and the cost of wages.
At the moment UK businesses have access to skilled people from across the EU and this has been crucial to many firms, in particular engineering firms and metal fabricators, where a UK shortage has meant having to recruit experienced engineers and welders from former Soviet bloc countries in Eastern Europe.
There have been limited Government initiatives to boost apprenticeship numbers – the latest being to impose a 0.5% apprenticeship levy from 2017 on the payrolls of all businesses with a wage bill of more than £3 million. Others include offering small grants to smaller businesses to encourage them to take on apprentices.
However, after years of a lack of investment in training and skills, reducing the shortage of suitably qualified UK staff will take years and that assumes a serious commitment to training a future work force.
In an extremely turbulent and competitive global economic market businesses cannot wait that long.

Regulations, visas and a restricted labour market?

A second consideration is what would happen if, in the event of a majority vote for Brexit, recruitment were to be somehow restricted to UK natives in such a way that companies would have to provide evidence of a lack of suitable candidates before being permitted to recruit overseas.
Again agile and responsive 21st businesses may not be able to wait that long.
The scarcity of skilled candidates in UK means that businesses will find themselves competing for them which in turn will drive up wages putting further pressure on already tight margins.
The UK is still not investing anywhere near enough in training and skills for its own people. There is no denying that we have centres of excellence in universities and enterprise areas that can currently access capabilities from Europe, but these are not enough to support a dynamic and efficient economy.
Brexit would most likely result in businesses being constrained by having limited access to trained and skilled staff which in turn will push up wages for those with the skills and the necessary gap will not be filled fast enough to prevent a decline in capacity. Essentially the skilled work will move outside UK, to where the skilled workers are.
(Image courtesy of Vlado at FreeDigitalPhotos.net)