National advice charity Citizens Advice (CitA) has accused consumer credit firms, particularly credit card providers, of lending irresponsibly.
Gillian Guy, Chief Executive of Citizens Advice, said that it was “clear that irresponsible lending is contributing to the rising levels of consumer debt.”
She added that:
“Our evidence shows that people who are unable to pay off their credit card debts are having their credit limit raised without them requesting it – which risks pushing them further into debt.
“It’s essential that lenders carry out thorough affordability checks before giving people more credit so that borrowers aren’t led deeper and deeper into debt.
“With prices rising faster than wages, household finances are increasingly stretched meaning debts that seem affordable now may be unmanageable in future. The FCA should step in to protect borrowers by banning credit card companies from automatically raising credit card limits and making lenders support customers who are starting to struggle.”
The CitA press release calls on the Financial Conduct Authority (FCA) “to make sure people aren’t being offered unaffordable debt”. The charity is concerned by Bank of England figures that show a 9.8% increase in consumer borrowing in the year to August 2017, and by its own research that reveals one in five people who were struggling with card debts had received an increase in their credit limit without having asked for one.
In August 2017, the FCA chief executive warned that “maintaining the status quo is not an option.” Andrew Bailey went on to say that his organisation would be consulting on significant new requirements for the credit sector in spring 2018.
This came only days after Alex Brazier, Executive Director, Financial Stability at the Bank of England, warned in a speech about the risks to the wider economy that the rise in personal debt could pose.
Mr Brazier commented:
“Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing.”
Back in July, the FCA proposed a series of new rules regarding remuneration for the consumer credit sector, after finding in a thematic review that “some firms have inadequate systems and controls to manage the risks of staff incentives.” It believes that the main risks that could arise from having a high-risk remuneration system, and from not managing this effectively, are:
- Customers receiving inaccurate or misleading information on the costs, benefits, risks, disadvantages and other features of credit products
- Customers being put under pressured to take out inappropriate or unaffordable products
- Customers in default or in arrears not being treated considerately
A recent bulletin from the Financial Ombudsman Service highlighted examples of consumers having complaints against credit firms upheld where the firm had failed to carry out sufficient affordability checks, or where they had increased the level of available credit even though they were aware the individual was in financial difficulty.
FCA rules state that, except in certain limited circumstances, lenders need to carry out creditworthiness checks on their customers.
The two key elements of a creditworthiness assessment are the customer’s ability to make the required repayments over the term of the agreement (or for a reasonable period where the term is open-ended) and the potential for the customer’s commitments under the credit agreement to have an adverse impact on their financial situation.
Checks may need to take into account:
- The type of credit being offered
- The amount to be borrowed
- The total cost of the credit
- The customer’s financial position at the time of the application
- The customer’s previous credit history, including any evidence of current or previous financial difficulties
- The customer’s existing financial commitments, such as repayments on other credit, rent, council tax and utilities
- Future commitments of the customer that can reasonably be foreseen at the time of the application
- Future changes in customer circumstances which can be reasonably foreseen, and which would have a significant adverse impact on their financial situation
- Any evidence that the customer would be classed as a ‘vulnerable customer’, particularly if they display evidence of mental capacity problems
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.