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Banks, Lenders & Investors Finance Rescue, Restructuring & Recovery

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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Banks, Lenders & Investors Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

From little acorns……..

 

Our regular readers will know that we continue to liberally apply a pinch of salt to reports on the solidity of the much-heralded economic recovery for several reasons.

Firstly, most national news emanates from London and there is still a great gulf between the capital and the rest of the country. Much of London’s optimism is down to the enormous rise in the value of property which has contributed to London home owners feeling wealthier.

Secondly, a little-noticed report in late April in the Daily Telegraph noted the latest data from the Bank of England’s quarterly report showing that business lending, especially to smaller and medium-sized businesses, has continued to decline for the sixth successive quarter.

Thirdly, there is the evidence of our own eyes and ears. We are hearing that small and micro businesses are still facing tough trading conditions. Most are having to work hard for the money they make as well as dealing with continued uncertainty and experiencing the frustration of a long wait for the decision on every contract they pitch for.

Finally, the greatest impediment to recovery and growth remains a fear of interest rates. While they will inevitably rise, the concerns are threefold: 1. the ability to service them, 2. the impact on consumer spending and 3. whether banks and other secured lenders will call in their loans like they have in the recovery phase after previous recessions.

Interestingly, David Boyle, writing in the Business Guardian this week points out that talk of rebalancing the economy (from London to the regions and from financial to manufacturing sectors) seems to have morphed into little more than reducing the trade deficit.

He argues that far more attention needs to be paid to putting money into what he calls “ultra-micro-projects” perhaps by using existing resources such as waste land, unoccupied people and buildings for innovative small businesses that would bring money into the community.

It may not be glamorous, nor is it attractive to the policy makers, but given that the so-called recovery is taking place in a situation where there is still a large amount of business and consumer debt perhaps his idea has some merit?