Cards & Loans

Unsecured consumer credit tops £200bn for first time since 2008 | Business

The amount borrowed by consumers on credit cards, loans and overdrafts has topped £200bn for the first time since the global financial crisis almost a decade ago.

The figures, published by the Bank of England, came as Britain’s financial watchdog announced fresh measures to rein in mounting consumer debt.

The Financial Conduct Authority said it was cracking down on the high cost of overdrafts and would review the booming car loan market. The credit ratings agency Moody’s added its voice to the alarm over household debt on Monday, saying some borrowers would struggle to repay their debt as the economy weakened, and inflation ate into their salaries.

New figures from the Bank of England showed unsecured consumer credit, which includes credit cards, car loans and overdrafts, grew by 10% in the year to June, to £200.9bn. The last time outstanding debt was above £200bn was December 2008. The amount then fell in subsequent years before gradually building up again since 2014.

As households grapple with rising living costs, charities and policymakers have raised concerns that consumers are increasingly turning to loans amid worrying signs of a return to reckless lending by the banks.

Outlining the FCA’s latest intervention, its chief executive, Andrew Bailey, said charges imposed on customers falling into unauthorised overdrafts would be overhauled. Research by the consumer group Which? has found that the cost of borrowing £100 through an unauthorised overdraft for 28 days from some high street banks is as high as £90. This is up to four times the maximum charges allowed on a payday loan.

In a paper published on Monday, the FCA said that one in six people with debt on credit cards, personal lending and car loans – 2.2 million – were in financial distress. They are more likely to be younger, have children, be unemployed and less educated than other consumers.

Particularly vulnerable are those using “rent to own” loans to buy white goods such as fridges. The FCA has already imposed a cap on the rates that payday lenders can charge and, after reviewing the impact of this restriction, has decided to keep it in place. The cap has “delivered substantial benefits to consumers”, the regulator said, finding that 760,000 borrowers were saving a total of £150m a year.

Bailey said: “High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers.”

But there was more to be done. “In particular, the nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option,” Bailey said. “We are now working to resolve these issues while preserving the parts of the market that consumers find useful.”

The FCA’s action comes after the Bank told banks it would conduct health checks on their exposure to car loans, credit cards and personal loans.

The Bank’s latest figures on consumer credit showed the pace of growth did ease off slightly in June, with borrowing rising by £1.5bn in the month after a £1.8bn rise in May.

Ruth Gregory, UK economist at the consultancy Capital Economics, said the fact consumer credit was still up by 10% on the year would be concerning for the Bank.

“This will clearly do nothing to allay policymakers’ fears that unsecured credit is growing too quickly,” she said.

“But this at least suggests that households remain confident enough in their financial position to increase borrowing to help smooth consumption, as their real incomes are temporarily squeezed by higher inflation.”

Unsecured lending

In signalling a clampdown on unauthorised overdraft charges, the FCA is going further than the Competition and Markets Authority, which, in its review of the sector last year, called for more transparency.

Gareth Shaw, Which? money expert, said the FCA “must act swiftly to crack down on these exorbitant fees and to restrict unarranged overdraft charges to the same level as for arranged overdrafts, as further delay will only cost consumers”.

It is not clear whether a cap could be imposed in the way that payday lending charges were capped in 2015: interest and fees on all high-cost, short-term credit loans are now capped at 0.8% a day of the amount borrowed.

The FCA said on Monday its regulation of the sector meant payday lenders were much less likely to lend to customers who could not afford to repay and that debt charities were seeing far fewer clients with debt problems linked to high-cost, short-term credit.

The Money Advice Trust, which runs the National Debtline, said the intervention in payday lending had worked.

“The FCA is right to now turn its attention to other forms of high-cost credit, as well as unauthorised overdrafts, which have become a common feature of the problems that debt charities help people to resolve,” said Jane Tully, director of external affairs at the charity.

The FCA will also review financing for cars, where lending is growing at 15% a year.

The regulator is looking at whether firms take the right steps to ensure that they lend responsibly, are managing the risk that car prices could fall and are taking account for that in their loan terms.

In April, the FCA announced measures to help people in persistent credit card debt, including waiving or cancelling interest and charges if customers cannot afford to curb their liabilities through a repayment plan

UK Finance, the body which represents the industry, said its members were committed to lending responsibly. “With the current prudential regulatory focus on rising consumer credit, it is understandable that the FCA will also want to look closely at firms’ assessment of how customers can repay if economic circumstances change,” said Eric Leenders.

In its update on the UK credit market on Monday, Moody’s downgraded the outlook on bonds backed by credit card customers, buy-to-let mortgages and car loans.

Greg Davies, Moody’s assistant vice president, commented: “Household debt is high and still growing, leaving consumers vulnerable to an economic downturn, while higher inflation, weaker wage growth and levels of indebtedness leaves those in lower-income brackets the most exposed.”

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