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Law360, London (August 6, 2020, 12:27 PM BST) -- The Financial Conduct Authority urged lenders on Thursday to assess whether their customers need to take out additional loans, after raising concerns that vulnerable consumers are repeatedly taking on high-cost credit.
Some borrowers who already have loans are falling into financial hardship after taking out more credit from lenders offering high-cost products, the FCA has warned. (AP Photo/Veronique de Viguerie)
The FCA said that it is concerned that lenders are encouraging consumers to borrow more through online apps and marketing. Some finance firms are encouraging borrowers to shoulder additional debt to take a holiday, backing up the offer with images of exotic locations.
The watchdog said that it is concerned about the failure of lenders to balance these messages with the risks of taking out unaffordable debt.
"We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer," Jonathan Davidson, executive director of supervision at the FCA, said. "We expect firms to review their re-lending practices in light of our findings as they start to lend again, and to make any necessary changes to improve customer outcomes."
The watchdog said that up to 60% of consumers that it spoke to regretted their decision to borrow extra money on top of an initial credit product. The FCA reviewed the borrowing history of 250,000 customers, as well as a sample of loan books and marketing materials from lenders.
Lenders must assess whether further borrowing is in a customer's best interest, the regulator said. Forbearance or debt advice may be more appropriate than additional lending.
The FCA said that lenders must treat customers more fairly as the sector begins to lend again and the economic fallout from the coronavirus crisis eases. This could be crucial, as customers who borrow high-cost credit are more likely to be vulnerable and have poor credit histories.
"Before the pandemic we saw increasing numbers of complaints about high-cost lenders' re-lending practices, which showed that firms had failed to adequately assess affordability, and they were not re-lending in a way that was sustainable for customers," the regulator said.
Investment platform AJ Bell said on Thursday that a crackdown on poor practices is good news for consumers, particularly during the coronavirus crisis.
"Those in debt should be offered help," Laura Suter, personal finance analyst at AJ Bell, said. "Anyone who is struggling to repay their debt or is continually borrowing should be offered debt advice … rather than just denied lending by the debt company — as this will only push them into even more unscrupulous hands."
The watchdog has introduced payment freezes and loan holidays on high-cost credit products during the pandemic. Freezes were introduced by the FCA in as it sought to provide temporary relief measures to help consumers facing default as the lockdown began to bite.
--Editing by Ed Harris.
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