The FDA’s planned reforms to credit regulations: how will they protect consumers?

Lenders who supply high risk credit to consumers have been under fire for many years. Some, including payday loan companies, have been accused of “legalised loan sharking” and studies have shown that it can even impact the health of their customers. In light of this, the Financial Conduct Authority (FDA) has released a new report which highlights the problems in the financial services industry and how they can be addressed.

The recommendations include:

• Clamping down on “doorstep lenders”
• Changing the way that banks apply overdraft fees – the agency said there’s a need for “fundamental reform” in the way banks lend to consumers. This would include a ban on fixed fees for overdrafts, including those that are unarranged
• Using mobile alerts to warn consumers before fees or charges are applied to accounts.
• Stopping the inclusion of the phrase “available funds” and ensuring that banks make it clear to customers that overdrafts are credit and that they’re borrowing funds
• Imposing a cap of rent-to-own prices.

Andrew Bailey, the FCA’s chief executive, said the proposals would “benefit overdraft and high-cost credit users, rebalancing in the favour of the customer. He added: Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place.

“However, we believe more fundamental change is needed in the way banks charge customers for overdrafts. Given the size of the market our work here will be completed as part of our wider review into retail banking.”

The proposals have been welcomed by consumer groups. Gillian Guy, chief executive of Citizens Advice, said: “The FCA should reconsider their decision not to consult on a cap in this market. If they fail to act to protect these consumers, the ball will be firmly in the government’s court. It must show it is genuine in its commitment to making markets work for everyone, and put pressure on the regulator or legislate to give people the protection they need.”

Joanna Elson, chief executive of the Money Advice Trust, said the FCA’s plans  to cap on rent-to-own prices “could make a significant difference to thousands of people”. She added: “The regulator should keep the impact of its new measures in other sectors, such as doorstep lending, under review – and be prepared to reconsider the case for further cost caps.”