The Financial Conduct Authority (FCA) has warned that repeat borrowing from high-cost credit providers could indicate serious financial difficulty, as it called out poor practices among some lending firms.
A review carried out by the City watchdog of the borrowing history of 250,000 consumers found that nearly half regretted borrowing more money.
It criticised high-cost lenders who use online accounts and apps to encourage their customers to borrow more, and use marketing messages to emphasise the ease and benefits of taking on more debt. In some cases, these lenders appeared to be using so-called ‘nudge’ techniques by promoting a message that repeat borrowing is the norm.
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“We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer,” said Jonathan Davidson, the FCA’s executive director of supervision, retail and authorisations.
“Before the pandemic we saw increasing numbers of complaints about high-cost lenders’ relending practices, which showed that firms had failed to adequately assess affordability, and they were not relending in a way that was sustainable for customers.
“We expect firms to review their relending practices in light of our findings as they start to lend again, and to make any necessary changes to improve customer outcomes. We will continue working with firms to raise standards, and we will continue to take action where we see harm.”
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The report advised that lenders should be more aware of the financial wellbeing of their most vulnerable customers, which include high-cost credit customers and borrowers with poor credit history, who may be borrowing money to pay down existing debt.
In these cases, the lender should consider the customer’s overall financial situation and whether forbearance or debt advice might be more appropriate than additional lending, the FCA noted.
“We are closely engaged with firms to understand the impacts of the pandemic on consumers,” added Davidson.
“Where consumers are experiencing payment difficulties, we encourage them to contact their credit provider as soon as possible and explain their situation and get the help that lenders have agreed to provide.”