Introduction / About the Money Advice Trust Introductory Comment Responses to individual questions
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2 Page 2 Page 3 Page 4 Page 6 Contents Introduction / About the Money Advice Trust Introductory Comment Responses to individual questions
3 The Money Advice Trust is a charity founded in 1991 to help people across the UK tackle their debts and manage their money with confidence. The Trust s main activities are giving advice, supporting advisers and improving the UK s money and debt environment. In 2016, our National Debtline and Business Debtline advisers provided help to 158,980 people by phone and 37,790 through our webchat services. In addition, we received 1,236,760 visits to our websites. Wiseradviser provided 8,600 training places to 860 free-to-client organisations across the UK. We delivered training and consultancy to more than 2,300 staff in 53 organisations in Our Innovation Grants funded four advice projects to support hard-to-reach people and improve the quality and range of money and debt advice across the UK. We use the intelligence and insight gained from these activities to improve the UK s money and debt environment by contributing to policy developments and public debate around these issues. Please note that we consent to public disclosure of this response.
4 We welcome the opportunity to comment on the FCA s proposals on assessing creditworthiness in consumer credit. We support the FCA s approach to clarifying the meaning of affordability and to make the definition explicit within the rules. It is very welcome that the FCA is to make it clear within the rules that creditworthiness includes both the risk to the lender and affordability for the borrower. We are concerned that the guidance as it stands may not be clear enough to enable lenders to make an informed judgment. There needs to be a balance between sensible requirements on lenders to assess affordability and the risk that more people will lose access to credit. There is clearly a dilemma between putting in place more stringent requirements on lending small amounts to higher-risk groups, and protecting people who should not have access to this credit because they cannot afford to pay it back. We worry that the unintended consequence of these proposals is that more people are refused credit or are pushed into using more high-cost forms of credit. There needs to be an adequate safety net for people who cannot afford to take out credit and are ineligible to do so under the creditworthiness rules. We are not convinced that the factors the FCA propose firms should have regard to when considering proportionality in assessing creditworthiness are sufficiently comprehensive. Failure to pay certain types of lending such as guarantor loans and rent-to-own may have much more severe consequences for the individual borrower than others. We would like to see the rules on guarantor lending strengthened to protect the guarantor before the loan is granted. The FCA should strengthen the guidance to lenders so that lenders must check affordability and ability to repay before increasing a borrower s limit on their card. Firms should not be allowed to raise credit limits automatically and should obtain explicit consent for the rise in the limit from the borrower first. We expect the outcomes of the FCA credit card market study consultation on persistent debt and the banking review into authorised and unauthorised overdrafts to be part of the wider picture in relation to looking at how the product design can influence good outcomes for consumers, of which the creditworthiness rules form a supporting role.
5 It is less than satisfactory that there are three main competing sources of CRA data which can mean that for firms to obtain a complete picture of a consumer s financial obligations; all three CRA accounts need to be checked. Certain types of debt are not included in the CRA files, so the picture will not be complete. We would support a regulatory solution where the FCA establishes a central database and controls the implementation and reporting and monitoring functions from a single comprehensive entity. It should be mandatory for all lenders to use the database for lending decisions.
6 We have no comments to make on the proposed changes to the scope of the creditworthiness rules, which all seem sensible. We welcome the short timescale for the proposed transitional arrangements which will allow the new strengthened rules to take effect very quickly upon implementation. We welcome the FCA approach to clarifying the meaning of affordability and to make the definition explicit within the rules. It is very welcome that the FCA is to make it clear within the rules that creditworthiness includes both the risk to the lender and affordability for the borrower. There may be some confusion over definitions. In particular, in relation to an open-end agreement where a firm is required to consider affordability in terms of the risk to the customer of not being able to make repayments: as they fall due over the life of the credit agreement, and within a reasonable period in the case of an open-end agreement. The interpretation of a reasonable period in these circumstances may be difficult for individual companies, particularly in relation to credit card debt where The FCA credit card market study has seen ample evidence of people paying the minimum payment over many years. We are concerned that the proposals need to be proportionate. It is always going to be difficult to judge where it is reasonable under the circumstances not to carry out a review of income and expenditure. We are concerned that the guidance is not clear enough to enable lenders to make an informed judgment. There needs to be a balance between sensible requirements on lenders to assess affordability and the risk that more people will lose access to credit. Perhaps the use of illustrative examples in guidance to the rules could help lenders to make an appropriate judgment in each case.
7 From the plans as outlined in the paper, it appears that people on higher incomes will still be able to borrow substantial amounts without income and expenditure checks because of their level of income will act as a sufficient buffer. There is a possibility that the additional requirements to evidence income and expenditure will push up the costs of lending in the high cost credit market. There is clearly a dilemma between putting in place more stringent requirements on lending small amounts to higher risk groups, and protecting people who should not have access to this credit because they cannot afford to pay it back. The paper makes the point that where income must be checked, then non-discretionary expenditure must also be considered, including priority debt payments. We would only make the point that an illustrative but non-exhaustive list might be useful to demonstrate to lenders what types of expenditure are considered essential outgoings and what might constitute a priority debt. This should also make clear when household income and household expenditure need to be taken into account rather than individual income. Will the effect of these proposals be that more people are refused credit or be pushed into more high-cost forms of credit? For example, we are concerned that proposals need to take account of the increasing numbers of people who experience fluctuating incomes due to zero hours contracts, seasonal work, self-employment and so on. Will the proposals result in a further exclusion from mainstream credit for these groups? There needs to be an adequate safety net for people who cannot afford to take out credit and are ineligible to do so under the creditworthiness rules. The local welfare assistance schemes that replaced the Social Fund in England have not provided an adequate substitute for grants and interest-free loans for people on benefit-level incomes. These schemes now appear to have been substantially hollowed out by many local authorities. 1 We appreciate that the FCA is well aware of the risk of more people falling through the cracks without having recourse to adequate alternatives e.g. for the purchase of essential household goods. Credit unions and other not-for profit lenders are equally bound by affordability rules and are unable to provide credit to those who cannot afford to pay. An urgent policy solution is required. We are not convinced that the factors the FCA propose firms should have regard to when considering proportionality in assessing creditworthiness are sufficiently comprehensive. The factors listed include a requirement to have regard to other potential consequences of non-payment. However, most of the other factors in the list relate to the amount of credit, the size of the loan or length of time it runs. We wonder if too much emphasis is being placed upon these elements in comparison to the higher risk that is run by certain borrowers in taking out more high-risk products. 1
8 Failure to pay certain types of lending may have much more severe consequences for the individual borrower than others. We would take it that this would apply particularly where there is a guarantor loan, or a loan secured by way of a bill of sale whereby the loan could entail the loss of an asset. Rent to own agreements may be for relatively small amounts but as they are high-interest hire-purchase type agreements, the consequences of non-payment entails the loss of the goods, which are often for essential household items or a vehicle to get to work. In addition, there are significant implications concerning guarantor loans in relation to financial abuse and the possibility of undue influence. This element makes this type of credit potentially the source of particular consumer detriment, particularly for the guarantor. We are not convinced that there are adequate safeguards in place for this type of lending. Open-end and running-account credit In relation to the proposals for open-end credit such as credit cards, we would repeat our concerns set out above in relation to the definition of reasonableness in assessing a reasonable period. The proposals should be clearer as to what the assumed reasonable period is considered to be. Should firms be looking at the same set period or would this vary according to the firm s own internal lending policies? We wonder if the FCA should go further and designate that the credit limit should reflect what could be reasonably paid back in full over a particular time period such as 5 years? We also query whether lenders are able to make a balanced decision without the full picture in relation to all the debts someone might have (including priority debts not typically recorded on a credit reference file). As far as we understand, neither personal nor household Income is recorded on a credit reference file. This means further information is required in relation to income which does not lend itself to the current, often automated, assessment process. The recent Citizens Advice report Stuck in debt 2 presents evidence that suggests: 1 in 5 people struggling with credit card debts had their credit limit raised without them requesting it - showing that lenders were increasing people's access to debt without the proper affordability checks. We support the conclusion in the report that it is essential that lenders carry out thorough affordability checks before giving people more credit by increasing their credit limits. The FCA should strengthen the guidance to lenders so that lenders must check affordability and ability to repay before increasing a borrower s limit on their card. We have repeatedly put forward the view that firms should not be allowed to raise credit limits automatically and should obtain explicit consent for the rise in the limit from the borrower first. 2
9 It may be that how the affordability assessment is conducted is not the primary issue when looking at open-ended credit, but the product design itself. We would once again urge the FCA to look at the product design of open-ended credit such as overdrafts and credit cards and consider whether the products are designed in a way that is likely to have a preventative effect in relation to balances being able to spiral and grow to an unsustainable level. The outcome of the FCA Credit card market study consultation on persistent debt and earlier intervention remedies will clearly be definitive here. The forthcoming FCA work as part of the retail banking review on authorised and unauthorised overdraft products, announced in the feedback statement on high-cost credit will also be instrumental. Guarantor loans We have long argued that the rules in relation to guarantor loans should be strengthened to protect the guarantor before the loan is granted. As we have said, we are not convinced that there are adequate safeguards in place for this type of lending. In our response to the recent FCA high cost credit review, 3 we stated that we would strongly support a further investigation into guarantor lending. This could perhaps be done by way of a thematic review with the aim of evaluating whether the product is fit for purpose as it stands given the relatively high possibility for consumer detriment, particularly for vulnerable people. We also believe that the FCA should look at whether the guarantor was vulnerable and how potential coercion, financial abuse and undue influence could affect their agreement to act as guarantor. Consideration should be given to what measures are in place to make sure guarantor lenders evaluate these risks before granting loans. We also suggest that the rules should be changed to ensure that potential guarantors are directed to seek free, independent advice before signing up. There should be clear information for both the guarantor and the borrower to make it clear what the responsibilities are before taking out the credit. Peer-to-peer lending We cannot comment on the proposals in relation to peer-to-peer lending in any detail as we are not so familiar with the product, although a few cases are beginning to come through our Business Debtline service. However, we welcome the requirement on platforms to carry out creditworthiness assessments as this should enhance consumer protection. These proposals would appear to be eminently sensible in strengthening the requirements on firms in relation to policies and procedures and the maintenance of records for individual customers. These should help to evidence that a firm has clear and effective policies, and that these are kept under frequent review at a senior level responses/Money%20Advice%20Trust%20response%20to%20the%20FCA%20Call%20for%20input%20High %20cost%20credit%20consultation%20paper.pdf
10 We would imagine that firms will have specific comments to make on how these requirements will work in practice. We agree that there are concerns about how credit reference agency (CRA) data is currently supplied and used. It is less than satisfactory that there are three main competing sources of CRA data which can mean that for firms to obtain a complete picture of a consumer s financial obligations; all three CRA accounts need to be checked. It is also problematic that the data can overlap and be recorded inconsistently, using different product categorisations. This can therefore give a misleading picture of the financial obligations that a person may have. Certain types of debt are not included in the CRA files, so the picture will not be complete. It is clearly difficult for a lender to solely rely upon CRA data for the assessment of affordability where someone has particular priority debts such as rent, court fines, utilities or council tax. We have expressed our reservations in the past about including debts like council tax, rent and utility debts on credit reports. This is because such debts are very prone to reporting error due to housing benefit or council tax support problems, or changes in government policy in relation to benefits, and with over or under-estimated utility bills. Such errors can unfairly affect a consumer s credit record, through no fault of their own. Individual and household income sources or levels are not recorded on CRA records, so a CRA files cannot be used to indicate income for creditworthiness assessments. We have repeatedly raised the issue of real-time reporting in the context of high-cost shortterm credit in previous consultations. There is currently a variety of industry-based schemes that all have different rules and processes. This means coverage is neither comprehensive, nor is it compulsory for lenders to join a particular scheme. This should not be left as an optional business decision for individual lenders. We would support exploring a regulatory solution where the FCA establishes a central database and controls the implementation and reporting and monitoring functions from a single comprehensive entity. It should be mandatory for all lenders to use the database for lending decisions. Ultimately, we would like to see a comprehensive real-time database of lending supervised by the FCA which all lenders are required to use, that records all loans, and helps deal with the problem of multiple lending to people who cannot afford to pay. Whilst a real-time database is not in itself an all-encompassing solution to this problem, it would be a step in the right direction.
11 We would point out that HM Treasury is proposing that there is a single, central official register maintained at the High Court for goods mortgages (which will modernise and replace bills of sale). 4 We support this approach and believe it could stand as an example model for informing future developments. We would also mention the model of recording court judgments maintained by Registry Trust as the official keeper of the Register of judgments, orders and fines in England and Wales. 5 We would welcome initiatives to overcome the barriers to data accuracy and the development of new reporting products in the absence of a commitment by the FCA to commission such a comprehensive single database. We do not have any further comments on the proposed changes at this stage. We do not have any comments on the potential costs of the proposals as this will be an area that concerns firms predominately. We would see clear benefits for the consumers by taking these proposals forward. However, we have some reservations that the proposals go far enough, which we have set out in our responses to the questions above. We do not have any comments to make in relation to the equality and diversity implications of the proposals. We would only point out that the principle that consumers should take responsibility for their financial decisions may rely too much on the concept of the ideal or rational consumer. Most people will not behave in this way, and do not have the degree of financial knowledge required to make objectively rational choices. We believe that firms should take much more of the responsibility in relation to product design that may be designed specifically to confuse or entail consumers take out an agreement that is not in their best interests. It is not the fault of the consumer for failing to be financially sophisticated in such circumstances as the knowledge is entirely weighted towards the firm. This section of the paper is also silent on how people in vulnerable circumstances are specifically affected by these proposals, as particular aspects of vulnerability could affect anyone at any time and need to be factored into product design and the creditworthiness rules
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13 The Money Advice Trust 21 Garlick Hill London EC4V 2AU Tel: Fax:
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