Lenders face crackdown on high-cost loans

Providers of high-cost credit, ranging from catalogue credit to pawnbroking, could be forced to cut their prices in a drive by the financial regulator to protect vulnerable consumers.

About 400,000 people use high-cost credit deals to buy household appliances and furniture. The level of interest charged means that consumers can end up paying nearly three times the original price. The market is dominated by Brighthouse, Buy as You View and PerfectHome.

The intervention comes after a crackdown on payday lending in January last year. Then the regulator capped costs so that customers would not have to pay back any more than twice the value of the amount borrowed. Now it will look at whether that cap has been effective or has restricted credit, driving customers to illegal loan sharks.

In a separate report, Citizens Advice found there had been no rise in illegal loans as a result of the tougher rules for payday lenders. The group, which helps consumers with debt problems, instead recorded a fall in the number of cases involving illegal loans in the past year.

“There have been improvements in the payday loan market, but people are still experiencing problems with other types of high-cost credit,” Gillian Guy, chief executive of Citizens Advice, said. “Decisive action to tackle payday lenders has paid off and we want to see similar moves for other high-cost credit companies.”

Andrew Bailey, chief executive of the FCA, said: “We have come to the point of reviewing the cap on payday lending, making now the right time to take a broader view of the issues around high-cost credit.” The FCA is examining payday loans, home-collected credit, catalogue credit, rent-to-own schemes to buy goods (once called hire purchase), pawnbroking and guarantor and logbook loans. Overdrafts are also part of the review.

Since taking over as chief executive in the summer, Mr Bailey has raised questions about whether vulnerable customers should be protected more than others. He added yesterday that the FCA recognised that extending credit to people who are more likely to default than the average consumer required a higher price because of the level of risk being taken.

Citizens Advice found that 45 per cent of those who used rent-to-buy schemes were in the bottom fifth of earners, over half had children and 43 per cent had long-term illnesses. Seventy-one per cent said that they used the service because they could not afford to buy products upfront.

The report also found that checks on whether people were able to repay were inadequate. A fifth of rent-to-own clients spent more than a fifth of their income on the purchases. If people fell into arrears, 7 per cent had their goods repossessed even when they had already paid a significant sum for their products, Citizens Advice said.

Brighthouse said that its pricing was “completely transparent” and that all agreements were subject to a 14-day cooling-off period. It also said it had a wide range of options for customers to prevent their debts from spiralling. Buy as You View said it was “a responsible lender” with “stringent affordability checks”. PerfectHome could not be reached for comment.