On 6 August 2020, the FCA published the findings of its review into relending by firms that offer high-cost credit. The review, which was completed prior to the coronavirus pandemic, highlights concerns about poor practices by some firms and notes that nearly half of consumers regretted borrowing more money. As firms in this sector begin to lend again, the FCA sets out its expectations on how they must treat consumers.

Key points from the review include:

• High-cost credit customers are more likely to be vulnerable, have low financial resilience and poor credit histories.
• The FCA expects firms not to encourage refinancing of credit agreements where the customer’s commitments are not sustainable. It also expects firms to only agree to refinance if they reasonably believe that it is not against the customer’s best interests to do so. During its review, the FCA has seen that this is not always the case.
• The level of debt and repayments can increase significantly, to the point where it is no longer affordable or sustainable for some customers. The FCA reminds firms of its Dear CEO letter from October 2018 sent to all high cost short term credit firms (but which equally applies to other firms in the high-cost lenders portfolio). In that letter, the FCA highlighted the risks in relation to repeat borrowing given that it could indicate a pattern of dependency on credit that is harmful to the borrower. The FCA reminds firms that rigorous affordability assessments are key to avoiding harm in this area, and they should ensure that they are making proportionate and responsible assessments of the sustainability of borrowing. Further, firms must not encourage a customer to refinance a regulated credit agreement if the result would be that the customer’s commitments are not sustainable.
• When considering an application for refinancing where the firm is aware that the customer is a regular user and appears dependant on high-cost credit the FCA expects the firm to assess the customer’s best interests. The firm does this by considering the customer’s overall financial situation and whether forbearance or debt advice might be more appropriate than additional lending.
• There has been some debate in the high cost short term credit market about how the FCA’s creditworthiness rules should apply to repeat lending. Other than for rollovers, the FCA rules do not expressly prevent firms from issuing more than a particular number of loans to a customer. However, firms do still need to comply with the FCA’s creditworthiness rules in doing so, including assessing the affordability risk to the borrower. This is a view shared by the Financial Ombudsman Service.
• Having looked at customer lending journeys the FCA is concerned that some customers may be suffering harm because of over indebtedness and it expects firms to review their lending practices and operations to ensure they are appropriately discharging their obligations to lend responsibly.
• The FCA expects to see marketing content which contains all relevant information and is sufficient to support customers, so they can make informed decisions about whether to apply for additional borrowing. The FCA does not think firms should encourage relending where the firm knows, or has reason to believe, that the agreement would be unsuitable for that customer in the light of their financial circumstances or any other relevant matters that the firm is aware of. The FCA does not think all firms currently achieve these objectives and expects them to do more in this space.
• To be clear, fair and not misleading, the FCA thinks customers would benefit from prompts to enable them to fully understand the proposition they are entering into, and to stop and think about whether applying for further borrowing is right for them. The FCA expects firms to take action to ensure marketing material is more balanced. It expects firms to consider whether their marketing is omitting information which would be important for their customers.
• In addition to the broader concerns with firms’ financial promotions to existing customers, a small number of firms are failing to meet some specific requirements for financial promotions as set out in CONC 3.
• The FCA found that where customers refinance, some firms make an early settlement charge. Such charges include an element intended to compensate a firm where the loan is settled early as well as additional interest accruing up to the settlement date. There are 2 main elements to an early settlement charge which can result in customers being charged a sum up to the value of 58 days interest. These are set out in the Consumer Credit (Early Settlement) Regulations 2004 (2004 Regulations). When firms make an early settlement charge as part of a refinancing, the charge is added to the new loan and so interest is charged on this charge. If the credit is refinanced several times then the costs compound.
• The FCA believes that some firms require or encourage a customer to serve notice that they wish to settle their existing loan early when they are refinancing their existing debt. If the customer does not give notice, then there is no ability to recover 28 days interest under the 2004 Regulations. Customers do not need to give notice that they wish to settle their existing loan early when refinancing. Firms should not seek to exploit these regulations by insisting that the customer gives notice if not necessary.
• The FCA expects firms to stop requiring or encouraging the borrower to serve the statutory notice when refinancing immediately. This will remove the ability of firms to charge the 28/13-day element of the early settlement charge. In respect of the 30-day charge for loans lasting over 12 months, the FCA recognises that this is provided for in the 2004 Regulations. However, it is unlikely that the lender incurs the same costs (if any) on a refinance compared to the first loan. The FCA therefore asks firms to consider if whether applying this charge is appropriate on a refinancing. The FCA has seen several instances of this charge being made on frequent refinancing with the same customer and which may lead to over-recovery.

The FCA expects firms to review their relending operations in the light of its findings and make any necessary changes to improve customer outcomes.