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FCA regulations 2018: Why high-cost financial products may be getting the axe

The Financial Conduct Authority has confirmed that it will be investigating the high-cost credit industry, which includes rent to own, catalogue buying and overdrafts.
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The City regulator has been responsible for regulating the UK’s consumer credit industry since 2014, starting officially in January 2015 and taking over from the Office of Fair Trading.

The FCA has already made significant strides in the payday loans industry – a sector that has been heavily criticised by the media and press. The watchdog introduced new regulation including a daily price cap of 0.8% per day, limiting what lenders could charge and adding a maximum one-off default fee of £15.

Existing lenders and brokers were also subject to a stricter authorisation process to continue trading – something that led to the significant exit of loan providers and introducers.

Prior to 2015, there were around 200 payday lenders and hundreds of brokers. Fast forward to today, there are around 50 lenders and a few dozen successful brokers.

Reforms such as this have led to a noticeable decrease in the number of loans issued, from around 1.2 million in 2013 to 780,00 in 2017. Reports now show fewer complaints and greater consumer confidence in the sector. The FCA’s recent review stated that it is happy with the regulation of payday loans and will not review this again until 2020.

However, it confirmed there was more work to do in other high-cost industries. Currently, the cost of unauthorised overdrafts from banks and credit cards is significantly higher than payday loans. Unauthorised overdrafts can cost an individual between £6 per day or £90 per month, which is one of the costliest forms of credit available.

The rent to own market is not currently subject to any price caps. This type of product involves consumers renting household products and appliances on credit, such as TVs, fridges and washing machines, with the individuals owning the product by the end of the loan term.

The FCA is aware that customers can eventually pay up to £2,000 for a washing machine that could be bought 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 to entry.

The FCA’s investigation will also look at the car finance industry, which is considered expensive and could be subject to tougher reforms.

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