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The FCA initiates action on rent-to-buy and overdraft charges

Today’s announcement that the Financial Conduct Authority (FCA) is initiating action to curb the excessive costs of rent-to-buy products and is investigating ways of containing overdraft costs comes as welcome news to the circa three million people in the UK who are forced to rely on high cost credit. As with its regulation of pay day lenders, however, the FCA has to navigate a careful route between making such products more fairly priced whilst not restricting their availability in a way that forces more people to use the unregulated debt market.

Rent-to-buy is a product that enables people to buy household appliances like fridge-freezers over, typically, one to three year periods. During this time the borrowers pay a weekly or monthly charge - in effect renting the product. On completion of the loan term ownership of the appliance is then secured. Rent-to-buy is akin to ‘hire purchase’- a product that has been around for decades. The problem is that the APR on these deals plus the related charges (e.g. for delivery and installation) can result in the eventual cost of the products being three- to five-times the price charged by the shops. Around 400,000 people have such rent-to-buy products and unsurprisingly a large proportion are those in low income households. Placing interest and total cost caps on these products would match the type of action the FCA has taken, with notable success, against pay day lenders.

Action on the costs of unauthorised overdrafts is, arguably, trickier. Let’s first make clear these are, as the name highlights, not the same as ordinary authorised overdrafts. The latter are agreed in advance with your bank and set out the exact amount by which your account can become overdrawn. The charges are explicit too as the bank has to provide details of these to its customers. By contrast an unauthorised overdraft has not been pre-approved by the bank. Those who, in effect, borrow money in this way are normally subject to higher interest and other charges than those applied to authorised overdrafts. In 2016 the banks made £2.3 billion from overdraft charges, with around a third of this resulting from unauthorised overdrafts.

The action required to deal with the problem of such overdraft costs - particularly for low income households – needs careful consideration. Placing caps on charges may make the banks more inclined to block unauthorised overdrafts or at least be more restrictive about access to them. After all such lending is potentially risky and could result in losses being incurred by the banks. But curbing unauthorised overdrafts may just force those desperate for funds to borrow elsewhere on less attractive terms and in ways that will damage their credit ratings. I would therefore expect the FCA’s policy response to include some restrictions on the charges levied by the banks allied with making these charges simpler and clearer to the public. Additionally technology could be increasingly harnessed (SMS messaging etc.) to ensure that customers are aware of the balance on their bank accounts and the charges that will arise if further transactions trigger or increase an overdraft.

The regulation of financial services products is not easy. Many issues are the result of the low incomes of households, something the regulators can do virtually nothing about. Education on financial management is freely available - but the take-up of this by low income households seems, on the basis of emerging research, to be worryingly low. Coming down hard on high-cost credit might seem like the way to crack the problem – but many of those who use such sources of credit would be forced to use even less attractive ways to borrow money.

Martin Upton

Director, True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

31st May 2018

True Potential PUFin is based at the Open University Business School in Milton Keynes, UK

True Potential PUFin is the first and only personal finance research centre in the UK that has an active teaching programme freely available to the public. Supported by the University’s excellence in delivering distance learning, the Centre is uniquely positioned to develop the public’s financial capability and to research the impact and effectiveness of its education programme.

True Potential PUFin is supported by a five-year programme of financial support provided by True Potential LLP.

The views of True Potential PUFin academics do not necessarily reflect the views of True Potential LLP.

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