Read what we are doing to assess creditworthiness, address harm in motor finance, study the credit information market, review the Consumer Credit Act and consider alternatives to high-cost credit.
Assessing creditworthiness
Across the sector we see harm when firms do not properly assess whether a consumer can afford to repay a loan.
On 1 November 2018, new rules[1] came into force to make clear how we expect firms to assess creditworthiness for consumer credit. These changes should help ensure that consumers are protected from unaffordable lending.
Motor finance
In March 2019, we published the final report[2] on our review of the motor finance sector. We found that the widespread use of commission models which allow brokers discretion to set the customer interest rate can lead to conflicts of interest which lenders are not controlling adequately. We estimate that this could lead to customers paying around £300m more for their motor finance per year.
We are assessing the options for intervening to address this harm. This could include strengthening our existing rules or other steps such as banning certain types of commission model or limiting broker discretion.
Credit Information Market Study
We launched our Credit Information Market Study[3] in June 2019. Firms use credit information when assessing credit risk and affordability. Therefore, it can affect how likely consumers are to be able to access a range of financial services, including mortgages, loans and credit cards and, in some cases, how much they pay for them. This is significant as, according to our Financial Lives Survey, nearly 4 in 5 adults hold at least one credit or loan product. Further, those vulnerable customers for whom a lender’s decision is more finely balanced are most likely to be affected if the credit information market is not working well.
Reflecting the concerns that have been identified, the market study will focus on the following themes:
- the purpose, quality and accessibility of credit information
- market structure, business models and competition
- consumers’ engagement and understanding of credit information and how it impacts their behaviour
In exploring these themes, we will assess how the sector is working now and how it may develop in the future. The study will also look at how the markets for credit information work in some other countries and what the UK market might learn from them.
Guarantor loans
For guarantor loans, we know from supervisory engagement that many guarantors make at least one loan repayment and the proportion of guarantors making payments is growing. We are exploring whether this might indicate that the loan might not be affordable for the borrower. We are also seeking to establish whether potential guarantors have enough information to understand the likelihood and implications of the guarantee being enforced.
Reform of the Consumer Credit Act
In March 2019, we presented to Parliament our final report[4] on our review of the retained provisions of the Consumer Credit Act 1974 (CCA). The report considered the issue required by legislation, namely whether the repeal of the CCA would adversely affect the appropriate degree of protection for consumers.
In June 2022, the Treasury committed[5] to reform the CCA in order to modernise the consumer credit regime to cut costs for businesses and simplify rules for consumers whilst maintaining appropriate consumer protection. The reforms will build on the recommendations of the FCA’s Report. In December 2022, the Treasury published a consultation[6] for input on the strategic direction of the reform.
Alternatives to high-cost credit
In our report in July 2019[7] we set out the harm we had identified to some consumers who do not have access to mainstream credit due to:
- lower cost credit not always being available to those who need it
- consumers’ lack of awareness of the credit and non-credit alternatives that do exist
The report sets out the work we have done to improve:
- the availability of lower cost credit by supporting providers of lower cost credit to maximise their potential for growth
- consumer awareness of both credit and non-credit alternatives through the provision of relevant and timely information
It also sets out the work we will continue to do as well as recommending actions by others.
Credit is not the right option for all consumers. Instead, we want consumers to be readily able to access the solution most appropriate in their circumstances.
