At London’s March 2018 Credit Summit, Jonathan Davidson, Director of Supervision – Retail and Authorisations at the FCA spoke about “getting affordability right in consumer credit”.
Increase in finance purchase agreements
39 million of people in the UK now have a loan of some kind, whether for a car, computer, furniture or have raised cash through borrowing, perhaps to cover a drop in income.
The number of car finance agreements has nearly doubled in ten years, to around 2.3m in 2017. However, the motor industry was praised by Mr Davidson, as he acknowledged the sustainability of ‘PCP contracts’ which don’t require the customer to repay the whole cost of the car during the life of the loan, and provide flexibility at the end of the agreement as customers have the option to return the car, purchase it, or use the equity in it to purchase a new one.
Other borrowing sectors were more of a concern.
Debt levels among 25-34 year olds
The current generation of 25-34 year olds is borrowing significantly more in relation to their income level. More people in this group than previous generations have gone to university, so how much this has distorted figures is unclear – but 30% have a Student Loan, 19% have no savings, 30% have saved less than £1,000, and 36% have been overdrawn in the last year.
20% of mortgages are interest-only and will mature in around 2032, leaving thousands at risk of losing their homes (read our February 2018 article).
Vulnerability to changes
While most borrowers live comfortably within their means, 10% of UK adults say they would be unable to cope with payment increases of less than £50. Interest rate increases may be imminent, and the cost of living has recently spiked through a falling pound and rising import costs of food and energy. Statistics show that over the last year the cost of these staples have risen faster than wages.
Changing face of employment
There has been a 45% increase in self-employed people since 2000, and there are now more than 900,000 people with zero-hours contracts.
Credit card debt
Four million credit cards account are now ‘persistently in debt’ – meaning that borrowers are paying more in interest and charges than they have repaid of their borrowing over 18 months.
Mortgage lenders are required to assess income and expenditure, and test the affordability of loans should interest rates rise. However, the FCA has noted a trend among households that are, on average, £1,100 more in debt one year after taking out a mortgage.
Excessive debt levels led to the 2008 financial crisis during which many lenders suffered massive credit losses, causing some to collapse. Today’s consumer debt level is close to that peak, and Mr Davidson called for firms to develop a sustainable long-term strategy for assessing the long term affordability of customers’ financial commitments for all types of credit provision, not just mortgage lending.
A history of repaying debts does not assess the long term affordability of a debt. The ‘have it now’ attitude of the young, in particular, is part of a shifting pattern of savings, borrowing and consumption.
FCA rules already require lenders to consider the potential for credit to adversely impact a customer’s financial situation and to ensure the debt will be affordable. As a consequence of this, the rent-to-own provider, BrightHouse, was ordered to pay over £14.8 million in redress to 249,000 of its customers in October 2017, when it was found by the FCA to have entered into lending agreements which may not have been affordable.