The Financial Conduct Authority (FCA) has warned high-cost lenders about “irresponsible” repeat lending to customers who may be taking on extra debt to manage existing financial difficulties.
A research published by the UK financial watchdog revealed that for nearly all firms profitability increases for subsequent loans, in many cases substantially.
FCA said it’s concerned about some companies not doing enough to highlight the risks of further borrowing to customers – including the potential costs of taking on more debt than they can afford.
High-cost credit customers are more likely to be vulnerable with poor credit histories and low financial resilience, the City regulator said.
What’s more, nearly half of the 250,000 people surveyed for the review said they regretted their decision to borrow more money, and for some products this rose to over 60%.
The review which was published before the coronavirus pandemic showed an increase in customers’ anxiety as some reported financial difficulties — including missing payments and prioritising repayment of debt over other expenses.
FCA also raised red flags over pop-up ads and marketing materials on consumers’ personal accounts, that could encourage them to take on more debt than they can afford.
The report also found that some firms were recommending that customers could use additional borrowing to fund a holiday, and reinforced the message by including imagery of exotic locations.
In light of the findings, the FCA has said it expects firms to review their lending practices and marketing materials, and make any necessary changes to improve customer outcomes as it restarts lending after the coronavirus pandemic saw lending paused briefly.
Some companies also appeared to use “nudge” techniques, conveying a message that re-lending is common and part of normal behaviour, the FCA said.
Jonathan Davidson, executive director of supervision, retail and authorisations at the FCA, said: “We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer.
“Before the pandemic we saw increasing numbers of complaints about high-cost lenders’ re-lending practices, which showed that firms had failed to adequately assess affordability, and they were not re-lending in a way that was sustainable for customers,” Davidson added.
The findings of the report add renewed pressure to an industry that has seen many firms such as Wonga, The Money Shop and CashEuroNet UK collapse following an increase in customer complaints about the lack of proper affordability checks.
Last week, the FCA published a guidance consultation on the fair treatment of customers, setting out its expectation that firms should exercise particular care where consumers have characteristics of vulnerability.