THE FINANCIAL Conduct Authority (FCA) has warned lenders that it will take action against firms who sell products to vulnerable consumers.
In a speech to the Credit Summit on Thursday, Jonathan Davidson, executive director of supervision – retail and authorisations at the FCA, said there are worrying numbers of households who are too deeply in debt.
He said one in five mortgages today are interest-only mortgages, many of which were made at the height of the credit boom to borrowers with little equity in their homes and not a lot of disposable income. These mortgages will not mature until about 2032.
In addition, some customers are vulnerable to changes in their circumstances and the external economic environment, meaning it is uncertain whether they can afford loans in the future.
“A business model that is predicated on selling products to customers who can’t afford to repay them is not acceptable,” Davidson stated. “We will take action against firms who run their businesses this way.”
He said the £14.8m fine paid by rent-to-own firm BrightHouse last year shows how seriously the regulator takes the issue.
“And it’s not just unacceptable, it is unsustainable – the reputational damage of running a business of this kind will see confidence, and customers, drain away,” he argued.
Davidson urged lenders to think strategically about the issues facing customers, such as the potential for further rises in interest rates and spikes in the cost of living.
He also stressed the importance of affordability checks, as oppose to simple backward-looking credit checks.
“Our rules set this out; that you need to consider the potential for credit to adversely impact the customer’s financial situation – in other words, that the debt will be affordable,” he explained.
Finally, Davidson said lenders should embrace a healthy forward-looking and customer-focused culture, for example encouraging staff to be curious and questioning about the business model.
“A key observation and concern for us is that there are some business models for which customers who can’t afford to repay the principal are profitable, sometimes very profitable,” Davidson said. “This can lead to outcomes which are unhealthy for the customers.”
On a more positive note, Davidson reassured the industry that consumer debt in the UK has not reached levels that are likely to be harmful to lenders.
He also said there has been progress by the sector in addressing conduct issues and that “by and large you do a good job for us, your customers”.
“We all want the same thing – a healthy, sustainable market that serves the consumers who buy from it,” he concluded.