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FCA investigates second charge and subprime lenders for targeting unaffordable borrowers

  • 17/04/2019
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FCA investigates second charge and subprime lenders for targeting unaffordable borrowers
The Financial Conduct Authority (FCA) is to investigate parts of the second charge and subprime credit markets which it believes are designed to benefit from consumers going into arrears.


It raised concerns that the business models of some retail lending products, including some subprime credit and second charge mortgage products, “are designed to benefit from consumers not repaying their debts”.

“For example, firms may make profits from consumers who do not or cannot repay in full and on time,” the regulator continued.

“We will carry out work to identify these business models and the consequences for consumers and use our findings to identify what action we may need to take.”


Business models rely on arrears

The regulator announced its concerns about the sector in its business plan published today, and the action will continue an intervention in the second charge sector over the last two years.

Early last year the FCA sent a Dear CEO letter to all second charge providers calling on them to address poor lending practices.

This followed a meeting in which it summoned lenders to its office for a workshop on lending practices.

As part of the review process, Shawbrook pulled products and admitted it was overhauling its lending approach.

The FCA will carry out diagnostic work to understand whether there are business models in the retail lending sectors that rely on consumers who cannot afford to repay.

“We want to understand whether the causes and consequences of these business models exploit consumer biases and cause harm,” it said.

“This work will include consumer research to understand the consumer behaviours that drive demand-side pressures,” it added.

It expects to complete this work in 2020/21.


Review second charge complaints

In a section outlining the outcome indicators it uses to assess potential consumer harm, the FCA highlighted its Mortgage Lending and Administration Report monitoring consumers in arrears.

Product sales data also shows how many consumers are on the lenders’ Standard Variable Rate, indicating they could potentially choose a different product and pay less.

“We will also review the number of complaints to firms and notifications from firms about second charge lenders to monitor how they are treating these consumers,” the FCA continued.

“Firms’ poor lending decisions and consumers’ poor borrowing decisions can lead to consumers suffering financial distress and affecting other parts of their lives.”

The regulator added that it requires firms to undertake robust affordability assessments before they make a lending decision, but it acknowledged that consumers can get into financial difficulty because of factors neither they nor the firms could have reasonably foreseen.

“This makes it difficult to rely on arrears data to show whether a product was unaffordable from the outset,” it said.

“Such data can, however, provide an initial indication that we can then test by assessing a firm’s policies and procedures and lending decisions.

“Through our Financial Lives Survey, we will continue to measure levels of over-indebtedness,” it added.



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