The UK’s main regulator for consumer credit, the Financial Conduct Authority, is planning a review of the high cost credit industry – specifically rent-to-own, unauthorised overdrafts and car finance.
The review follows the strong enforcement in the payday loans industry, something that has seen a daily price cap of 0.8%, stricter criteria to become a lender or broker and subsequently around 500,000 less loans funded per year.
The payday loans industry looks set for implosion following the increase in claims for miss-sold loans. The market leader, Wonga.com, has paid out over £220 million in compensation in the last 4 years and recently announced that it was going into administration.
According to paydaybadcredit.co.uk, the rise in miss-sold loans results from individuals who were granted loans despite having poor credit, existing debt problems, being unemployed and lenders failing to show any affordability metrics. Any customer that was sold a high cost loan and defaulted as a result, may be eligible for a claim of up to £500.
With the FCA pleased with its review of the payday loans industry, it is now setting its sights on other high cost areas. This includes unauthorised overdrafts which can cost individuals £100 for borrowing £100 over a 30-day period, almost 5 times the cost of a payday loan. Banks have previously justified such prices on the condition that the borrower is using money without permission and no checks are carried out.
The regulator is looking at introducing a price cap or increasing communication between the credit card provider and the customer – something that has slowly caught on with the increase in warnings via text message.
The rent to own market is not currently under kind of regulated price cap. This type of borrowing involves consumers renting household products and appliances on credit, such as TVs, fridges and washing machines, with the individual eventually owning the product by the end of the loan term.
In terms of cost, the FCA is concerned that customers can pay up to £2,000 for a washing machine that could be purchased outright from a local provider for around £300.
Some MPs argue that regulation could wipe out rent to own and catalogue companies altogether, but
some persist that the payday market has shown that an industry can still operate, even with higher barriers
The FCA’s investigation will also review the car finance industry which it is considers expensive and could
be subject to tougher regulation.
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